**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-QSB**

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**x**                              QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**FOR THE QUARTERLY PERIODENDED JUNE 30, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

 

**Commission File Number000-50842**

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**Earth Biofuels, Inc.**

(Exact name of small business issuer specified in itscharter)

 

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| **Delaware**                                                    |   | **71-0915825**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification Number) |
|                                                            |   |                                  |

 

**3001 Knox Street, Suite403**

**Dallas, TX 75205**

(Address of principal executive offices)

** **

**(214) 389-9800**

(Issuer’s telephone number)

 

Check whether the issuer (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes x    No o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o    No x

As of August 14, 2006, there were 215,037,018 shares of the registrant’scommon stock outstanding.

TransitionalSmall Business Disclosure Format (check one):    Yes o    Nox

 

 

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**EARTHBIOFUELS, INC.**

**TABLEOF CONTENTS**

**FORM10-QSB QUARTERLY REPORT**
| **PART I FINANCIAL  INFORMATION** |   |                                                                                                                         |
|-----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|
| ** **                        |   |                                                                                                                         |   |   |
| Item 1.                           |   | Financial Statements                                                                                                         |   |   |
|                              |   |                                                                                                                         |   |   |
|                              |   | Consolidated Balance Sheets at  June 30, 2006 (unaudited) and December 31, 2005                          |   |   |
|                              |   |                                                                                                                         |   |   |
|                              |   | Consolidated  Statements of Operations for the Three and Six Months Ended  June 30, 2006 and 2005 (unaudited) |   |   |
|                              |   |                                                                                                                         |   |   |
|                              |   | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2006  and 2005 (unaudited)           |   |   |
|                              |   |                                                                                                                         |   |   |
|                              |   | Notes to Consolidated  Financial Statements (unaudited)                                                                      |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 2.                           |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 3.                           |   | Controls and  Procedures                                                                                                     |   |   |
|                              |   |                                                                                                                         |   |   |
| **PART II  OTHER INFORMATION**    |   |                                                                                                                         |
| ** **                        |   |                                                                                                                         |   |   |
| Item 1.                           |   | Legal Proceedings                                                                                                            |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 2.                           |   | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                 |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 3.                           |   | Defaults upon Senior  Securities                                                                                             |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 4.                           |   | Submission of Matters  to a Vote of Security Holders                                                                         |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 5.                           |   | Other Information                                                                                                            |   |   |
|                              |   |                                                                                                                         |   |   |
| Item 6.                           |   | Exhibits                                                                                                                     |   |   |
|                              |   |                                                                                                                         |   |   |
| Signatures                        |   |                                                                                                                         |   |   |

 

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**EARTH BIOFUELS, INC.**

CONSOLIDATEDBALANCE SHEETS

(UNAUDITED)

 
| ** **                                                                                                                                                                            |   | **June 30,  2006** |       | **December 31,  2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
| **ASSETS**                                                                                                                                                                            |   |                    |       |                        |   |   |
| Current Assets                                                                                                                                                                        |   |                    |       |                        |   |   |
| Cash and cash  equivalents                                                                                                                                                            |   | $                       | 385,822    |                        | $      | 82,093 |   |   |
| Trade accounts  receivable, net                                                                                                                                                       |   | 405,149                 |       | 253,376                     |   |   |
| Accounts  receivable — tax credits                                                                                                                                               |   | —                  |       | 374,381                     |   |   |
| Advances to  related parties                                                                                                                                                          |   | 160,253                 |       | —                      |   |   |
| Inventory                                                                                                                                                                             |   | 174,035                 |       | 131,391                     |   |   |
| Loan costs                                                                                                                                                                            |   | 975,000                 |       | —                      |   |   |
| Prepaid expenses  & other current assets                                                                                                                                          |   | 1,935,619               |       | 40,401                      |   |   |
| Total Current  Assets                                                                                                                                                                 |   | 4,035,878               |       | 881,642                     |   |   |
| Property and  equipment, net                                                                                                                                                          |   | 11,568,241              |       | 455,419                     |   |   |
| Investment                                                                                                                                                                            |   | 375,000                 |       | —                      |   |   |
| Investment -  related party                                                                                                                                                           |   | 100,000                 |       | —                      |   |   |
| Advances on  investments                                                                                                                                                              |   | 12,695,000              |       | —                      |   |   |
| Goodwill                                                                                                                                                                              |   | 3,981,280               |       | 3,981,280                   |   |   |
| Other assets                                                                                                                                                                          |   | 383,171                 |       | 261,384                     |   |   |
| Total Assets                                                                                                                                                                          |   | $                       | 33,138,571 |                        | $      | 5,579,725 |   |   |
|                                                                                                                                                                                  |   |                    |       |                        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                        |   |                    |       |                        |   |   |
| Current  Liabilities                                                                                                                                                                  |   |                    |       |                        |   |   |
| Accounts payable  and accrued liabilities                                                                                                                                             |   | $                       | 1,575,242  |                        | $      | 763,215 |   |   |
| Shares payable                                                                                                                                                                        |   | 25,000                  |       | 4,210,248                   |   |   |
| Payables to  related parties                                                                                                                                                          |   | —                  |       | 1,442,569                   |   |   |
| Property, sales  and payroll taxes payable                                                                                                                                            |   | 12,643                  |       |                        |   |   |
| Payable from  asset acquisition                                                                                                                                                       |   | 1,100,054               |       | —                      |   |   |
| Short term  convertible debt, net of debt discount of $14,067,132                                                                                                                     |   | 3,575,371               |       | —                      |   |   |
| Derivative  liability                                                                                                                                                                 |   | 27,922,792              |       | —                      |   |   |
| Other current  liabilities                                                                                                                                                            |   | —                  |       | 98,021                      |   |   |
| Total Current  Liabilities                                                                                                                                                            |   | 34,198,459              |       | 6,526,696                   |   |   |
|                                                                                                                                                                                  |   |                    |       |                        |   |   |
| Stockholders’  Deficit                                                                                                                                                           |   |                    |       |                        |   |   |
| Common stock,  $.001 par value, 250,000,000 shares authorized, 195,113,882 and 161,591,036  shares issued and outstanding at June 30, 2006 and  December 31, 2005 |   | 195,114                 |       | 161,591                     |   |   |
| Additional  paid-in capital                                                                                                                                                           |   | 28,618,789              |       | 9,499,709                   |   |   |
| Deferred  compensation                                                                                                                                                                |   | —                  |       | (98,500                     | )      |   |
| Accumulated  deficit                                                                                                                                                                  |   | (29,873,791             | )          | (10,509,771                 | )      |   |
| Total  Stockholders’ Deficit                                                                                                                                                     |   | (1,059,888              | )          | (946,971                    | )      |   |
| Total  Liabilities and Stockholder’s Deficit                                                                                                                                     |   | $                       | 33,138,571 |                        | $      | 5,579,725 |   |   |
|                                                                                                                                                                                       |        |                         |            |                             |        |  |  |  |  |  |

See accompanying notes to consolidated financial statements

 

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**EARTH**BIOFUELS, INC.****

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(UNAUDITED)
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** **  | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                  |       |                                                |        |                                              |       |   |   |   |   |
| Sales revenue                              |       | $                                                   | 2,395,552   |                                              | $          | 440,742 |   | $ | 3,895,890 |   | $ | 672,523 |   |
| Energy production  credits                 |       | 512,371                                             |        | —                                            |       | 898,152 |   | — |   |
| Total revenues                             |       | 2,907,923                                           |        | 440,742                                           |       | 4,794,042 |   | 672,523 |   |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Cost of sales                              |       | 2,619,431                                           |        | 370,137                                           |       | 4,386,687 |   | 554,901 |   |
| Gross profit                               |       | 288,492                                             |        | 70,605                                            |       | 407,355 |   | 117,622 |   |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Share-based  compensation                  |       | 5,348,690                                           |        | —                                            |       | 9,964,640 |   | — |   |
| Other selling, general  and administrative |       | 4,609,592                                           |        | 140,365                                           |       | 6,588,242 |   | 228,964 |   |
| Depreciation and  amortization             |       | 6,761                                               |        | 695                                               |       | 11,358 |   | 1,290 |   |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Net loss from  operations                  |       | (9,676,551                                          | )           | (70,455                                           | )          | (16,156,885 | ) | (112,632 | ) |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Other income (expense)                     |       |                                                |        |                                              |       |   |   |   |   |
| Interest income                            |       | 9,143                                               |        | —                                            |       | 9,143 |   | — |   |
| Loss on derivatives                        |       | (400,862                                            | )           | —                                            |       | (400,862 | ) | — |   |
| Interest expense                           |       | (2,801,030                                          | )           | —                                            |       | (2,801,030 | ) | — |   |
| Other expenses                             |       | (14,386                                             | )           | —                                            |       | (14,386 | ) | — |   |
| Total other income  (expense)              |       | (3,207,135                                          | )           | —                                            |       | (3,207,135 | ) | — |   |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Net loss                                   |       | $                                                   | (12,883,686 | )                                                 | $          | (70,455 | ) | $ | (19,364,020 | ) | $ | (112,632 | ) |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Net loss per common  share:                |       |                                                |        |                                              |       |   |   |   |   |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Basic and diluted:                         |       |                                                |        |                                              |       |   |   |   |   |
| Net loss                                   |       | $                                                   | (0.07       | )                                                 | $          | (0.00 | ) | $ | (0.11 | ) | $ | (0.00 | ) |
|                                       |       |                                                |        |                                              |       |   |   |   |   |
| Weighted average  shares:                  |       |                                                |        |                                              |       |   |   |   |   |
| Basic and diluted                          |       | 188,630,446                                         |        | 146,100,000                                       |       | 177,804,694 |   | 146,100,000 |   |

See accompanying notes to consolidated financial statements

 

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**EARTH BIOFUELS, INC.**

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(UNAUDITED)
| ** **                                                     | ** ** | **Six Months Ended June 30,** | ** **  |
|----------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                     | ** ** | **2006**                                          | ** **  | **2005** | ** ** |
| **Cash Flows from Operating  Activities:**                     |       |                                              |        |   |   |
| Net Loss                                                       |       | $                                                 | (19,364,020 | ) | $ | (112,632 | ) |
| Non-cash Items  Included in Net Loss:                          |       |                                              |        |   |   |
| Depreciation                                                   |       | 11,358                                            |        | 1,290 |   |
| Loss on  derivatives                                           |       | 400,862                                           |        | — |   |
| Share-based  interest expense                                  |       | 25,000                                            |        | — |   |
| Debt discount  amortization                                    |       | 2,549,502                                         |        | — |   |
| Deferred  compensation                                         |       | 98,500                                            |        | — |   |
| Shares issued  for employee compensation                       |       | 688,000                                           |        | — |   |
| Shares issued  for services                                    |       | 9,276,640                                         |        | — |   |
| Changes in  assets and liabilities:                            |       |                                              |        |   |   |
| Decrease  (increase) in:                                       |       |                                              |        |   |   |
| Trade accounts  receivable                                     |       | 222,608                                           |        | (59,341 | ) |
| Notes receivable                                               |       | (100,156                                          | )           | — |   |
| Inventory                                                      |       | (42,644                                           | )           | 20,826 |   |
| Prepaid expenses  & other current assets                   |       | (401,192                                          | )           | — |   |
| Other Assets                                                   |       | (21,631                                           | )           | — |   |
| Increase  (decrease) in:                                       |       |                                              |        |   |   |
| Accounts payable  and accrued expenses                         |       | 843,866                                           |        | (35,038 | ) |
| Property, sales  and payroll taxes payable                     |       | —                                            |        | 9,041 |   |
| Income taxes  payable                                          |       | —                                            |        | 5,823 |   |
| Related party  advances                                        |       | (1,141,822                                        | )           | 254,345 |   |
| Net cash provided by  (used in) operating activities           |       | (6,927,554                                        | )           | 84,314 |   |
|                                                           |       |                                              |        |   |   |
| **Cash Flows From Investing  Activities:**                     |       |                                              |        |   |   |
| Cash paid for  investment                                      |       | (375,000                                          | )           | — |   |
| Cash paid for  investment in related party                     |       | (100,000                                          | )           | — |   |
| Cash paid for advances  on investments                         |       | (12,695,000                                       | )           | — |   |
| Cash paid for purchases  of fixed assets                       |       | (2,866,794                                        | )           | (109,981 | ) |
| Net cash used in  investing activities                         |       | (16,036,794                                       | )           | (109,981 | ) |
|                                                           |       |                                              |        |   |   |
| **Cash Flows From Financing  Activities:**                     |       |                                              |        |   |   |
| Proceeds from issuance  of common stock                        |       | 6,743,077                                         |        | — |   |
| Proceeds from issuance  of short term convertible debt         |       | 17,500,000                                        |        | — |   |
| Capital contributions                                          |       | —                                            |        | 50,000 |   |
| Cash paid for debt  issuance cost                              |       | (975,000                                          | )           | — |   |
| Net cash provided by  financing activities                     |       | 23,268,077                                        |        | 50,000 |   |
|                                                           |       |                                              |        |   |   |
| Net increase (decrease)  in cash                               |       | 303,729                                           |        | 24,333 |   |
|                                                           |       |                                              |        |   |   |
| Cash and cash  equivalents                                     |       |                                              |        |   |   |
| Beginning of  period                                           |       | 82,093                                            |        | 10,903 |   |
| End of period                                                  |       | $                                                 | 385,822     |   | $ | 35,236 |   |
|                                                           |       |                                              |        |   |   |
| **Supplemental Cash Flow  Disclosures:**                       |       |                                              |        |   |   |
| Cash paid for  income taxes                                    |       | $                                                 | —      |   | $ | — |   |
| Cash paid for  interest                                        |       | —                                            |        | — |   |
|                                                           |       |                                              |        |   |   |
| Non-cash activity:                                             |       |                                              |        |   |   |
| Value of shares issued  to acquire assets of Southern Biofuels |       | 7,157,333                                         |        | — |   |
| Value of shares  issued to acquire Distribution Drive          |       | 4,210,248                                         |        | — |   |
| Debt discount related to beneficial conversion features        |       | 1,610,000                                         |        | — |   |

See accompanying notes to consolidated financial statements

 

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**EARTH BIOFUELS,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.**              BASIS OFPRESENTATION

The unaudited consolidated financial statements ofEarth Biofuels, Inc. (“Earth” or the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statedand the rules of the Securities and Exchange Commission (“SEC”), and should beread in conjunction with the audited financial statements and notes theretocontained in Earth’s latest Annual Report on Form 10-KSB filed with theSEC.  In the opinion of management, alladjustments, consisting of normal recurring adjustments, necessary for a fairpresentation of financial position and the results of operations for theinterim period presented have been reflected herein.  Notes to the financial statements which wouldsubstantially duplicate the disclosures contained in the audited financialstatements for the most recent fiscal year 2005 as reported in the Form10-KSB, have been omitted.  The resultsof operations for the three and six month period ended June 30, 2006are not necessarily indicative of the results to be expected for the full year.

**2.**              ASSET ACQUISITIONS

On April 27, 2006, Earth acquiredapproximately eight acres of land in Durant, Oklahoma for $175,000 inanticipation of Earth’s plans to build an ethanol production facility.  The land is immediately adjacent to Earth’sexisting biodiesel production facility such that the two facilities will beable to share the rail access at the site. In addition, during the quarter ended June 30, 2006 plantequipment acquisitions were made in the amount of $1,197,000.

**3.**              INVESTMENTS

Advances on Investments is comprised of Earth’sfunding of its ownership interests in investments that have not closed as ofJune 30, 2006.  Accordingly, these amounts are reported asnon-current.  After these investments are closed, Earth will eitherconsolidate the entities, recording minority interest, or record its interestson the equity method, as appropriate. Because certain other investors will not contribute cash or otherassets, or cash or assets in proportion to their ownership interest, Earth willrecognize either losses on minority interest or loss on equity investments, asappropriate.

Investment is comprised of a $250,000 escrow paymentfor an asset purchase that did not close subsequent to June 30, 2006and has since been returned.  The remaining $125,000 is an equityinvestment with less than a 5% ownership interest.  Earth will account forthe equity investment under the equity method.

Investment — related party is an equity investmentwith less than 5% ownership interest.  The Chief Executive Officer ofEarth is also the Chairman of the Board for the investee company.  Earthwill account for this investment under the equity method.

**4.**              SHORT TERMCONVERTIBLE DEBT AND WARRANTS

On May 4, 2006, the Company issued a $1.0million convertible, secured promissory note which bears interest at 7% and ispayable within thirty days upon demand by the holder.  The note is convertible into shares of theCompany common stock at a conversion price of $1.086 per share.  In connection with this note, the Companyalso issued the holder of the note a warrant to purchase 920,810 shares of itscommon stock.  The warrant is exercisableat the lesser of $2.00 per share or 80% of the average trading price of theCompany’s common stock for the thirty trading days prior to the exercise of thewarrant.  The warrant is exercisableuntil May 31, 2011.  At thedate of issuance, the warrants were valued at a relative fair value of$791,394, and Earth recognized a beneficial conversion feature (“BCF”) in theamount of $208,606 based on the intrinsic value of the conversion feature.  Due to the on demand repayment terms, thedebt discount of $1,000,000 was fully amortized to interest expense as ofJune 30, 2006.  Earth analyzedthe notes and warrants for derivative accounting treatment under SFAS No. 133and EITF 00-19 (see Derivatives footnote below).

On May 26, 2006, the Company entered into asecurities purchase agreement, pursuant to which the Company issued $5 millionprincipal amount of 8% senior convertible promissory notes to a singleinstitutional investor.  The notes carryan 8% coupon, payable quarterly, and may be redeemed by the Company at par atany time prior to their initial maturity date in August 2006.  The notes are not convertible until afterAugust 2006, at which time the maturity date may be extended toNovember 2006 at the holder’s option. The notes are convertible into the Company’s common stock at aconversion price equal to the greater of $1.00 per share or 75% of the weightedaverage price per share of our common stock on a five-day volume weightedaverage prior to closing.  The Companyalso issued five-year warrants to purchase 750,000 shares of 

6

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common stock to theinvestor and five-year warrants to purchase 18,750 shares of common stock tothe Company’s placement agent, both at an exercise price of $3.84 pershare.  Due to the conversion featuresbeing convertible into an indeterminate number of shares, Earth analyzed thenotes and warrants for derivative accounting treatment under SFAS No. 133and EITF 00-19 (see Derivatives footnote below).

On June 2, 2006, the Company issuedconvertible note with a principal amount of $500,000 to one individual.  The note bears interest at 8% per year, whichis payable on July 28, 2006, August 28, 2006,January 28, 2007 and April 28, 2007.  The note has a maturity date ofApril 28, 2007.  The note isconvertible into shares of the Company’s common stock at a conversion priceequal to the lesser of $0.50 per share or 70% of the weighted average price pershare of our common stock.  Due to theconversion into an indeterminate number of shares, Earth analyzed the note forderivative accounting treatment under SFAS 133 and EITF 00-19 (see Derivativesfootnote below).

On June 7, 2006, the Company entered into asecurities purchase agreement, pursuant to which the Company issued $10 millionaggregate principal amount of senior convertible notes to four institutionalinvestors.  The notes carry an 8% coupon,payable quarterly, and may be redeemed by the Company at par at any time priorto their initial maturity date in September 2006.  The notes are not convertible until afterSeptember 2006, at which time the maturity date may be extended toDecember 2006 at the holder’s option. The notes are convertible into the Company’s common stock at aconversion price equal to the greater of $1.00 per share or 70% of the weightedaverage price per share of our common stock on a five-day volume weightedaverage prior to closing.  The Companyalso issued five-year warrants to purchase an aggregate of 1,500,000 shares ofcommon stock to the investors and five-year warrants to purchase 45,000 sharesof common stock to the Company’s placement agent, at an exercise price of $2.93per share.  Due to the conversionfeatures being convertible into an indeterminate number of shares, Earthanalyzed the notes and warrants for derivative accounting treatment under SFASNo. 133 and EITF 00-19 (see Derivatives footnote below).  Due to the conversion features beingconvertible into an indeterminate number of shares, Earth analyzed the notesand warrants for derivative accounting treatment under SFAS 133 and EITF 00-19(see Derivatives footnote below).

In connection with the 8% senior convertible notesissued in May and June 2006, Earth incurred loan costs in the amount of$975,000 which will be amortized over the term of the convertible notes.

Earth will use the debt proceeds, in concert withother funds, for the acquisition of an ethanol production plant, two biodieselproduction facilities and for other general corporate purposes, includingworking capital to support growth and capital expenditures associated with newproject development.

**5.**              EQUITY TRANSACTIONS

On April 28, 2006, the Company entered intoa securities purchase agreement, pursuant to which the Company issued 6,400,000shares of the Company’s common stock to accredited investors, in considerationfor the payment of approximately $3.2 million. The Company will use the proceeds, in concert with other funds, toacquire a 50% equity interest in an entity which will own and operate a plannedethanol plant in New Orleans, Louisiana. The purchase agreement provides for an additional issuance of 6,400,000shares of the Company’s common stock, if the Company has not timely consummatedthe acquisition of the equity interest in a planned New Orleans ethanolplant.  Contemporaneously with theexecution and delivery of the securities purchase agreement, the Companyentered into a registration rights agreement, pursuant to which the Companyagreed to provide certain registration rights with respect to the shares ofcommon stock issued pursuant to the securities purchase agreement.

On June 12, 2006, the Company issued 125,000 shares ofthe Company’s common stock in connection with the Company’s April 20, 2006acquisition of a 25% limited partnership interest in Trucker’s Corner,L.P.  In addition, Trucker’s Cornerreceived $1,100,000 from the Company and 25,000 shares of Apollo Resources’common stock from Apollo Resources.

On June 12, 2006, the Company issued 537,500 shares ofthe Company’s common stock to Biodiesel Venture, L.P. and 537,500 shares of theCompany’s common stock to Willie H. Nelson in connection with a sublicenseagreement entered into on April 1, 2006 with Biodiesel Venture, L.P., pursuantto which Biodiesel Venture granted us an exclusive sublicense to use thetrademark “BioWillie” which is licensed to Biodiesel Venture pursuant to amaster license with Mr. Nelson, the owner of the trademark.

During the quarter ending June 30, 2006, the Companyissued 231,250 shares of the Company’s common stock in repayment of a loanincluding accrued and unpaid interest thereon.

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During the quarter ending June 30, 2006, the Companyissued 160,000 shares of the Company’s common stock to employees for servicesrendered and 1,430,274 shares of the Company’s common stock to for consultingservices, of which 600,000 the Company issued to Herb Meyer, a member of theCompany’s Board of Directors, under his consulting agreement.

During the quarter ending June 30, 2006, the Companyissued 5,799,088 for net proceeds of approximately $2.9 million in connectionwith private placement transactions.

The shares were valued at market, totaling $6,182,290,with $4,660,690 recognized as share based compensation expense and theremaining $1,521,600 recognized as Prepaid expense reflecting shares issuedprior to services having been completed. For the same period, Earth issued 160,000 shares for employeecompensation.  The shares were valued atmarket, totaling $688,000 of share-based compensation expense.

**6.**              ADVANCES

On April 24, 2006, Earth entered into aletter of intent with HPS Development, L.L.C., which contemplates a jointventure in which a newly created limited liability company (New OrleansFacility) will own and operate a fuel ethanol distillery located on theMississippi River in Plaquemines Parish, Louisiana, approximately nine milessoutheast of New Orleans.

On May 2, 2006, Earth entered into a letterof intent with Vertex Energy, L.P., which contemplates a joint venture in whicha newly created company will own and operate a biodiesel production facility onthe Houston Ship Channel in Houston, Texas. The fuel produced by this facility will be sold under the “BioWillie”brand name to local markets and other areas of Texas.  As contemplated by the letter of intent,Vertex Energy will acquire a 49% interest in the newly created company inexchange for contributing to the new operating company real property andimprovements, including an existing chemical processing facility.  Earth will acquire a 51% interest in theoperating company in exchange for the payment of $2,500,000 and the issuance of1,500,000 shares of our common stock to Vertex Energy.  The facility will then be converted into abiodiesel production facility.  Pursuantto the letter of intent dated May 2, 2006, we have deposited $500,000of the purchase price with Vertex Energy. The deposit will reduce the purchase price payable at closing or will berefunded by Vertex if we cannot agree on definitive documents.  In the event the parties execute definitivedocuments and the transaction closes, the letter of intent provides that VertexEnergy will have an option, exercisable on the 180th day after the closing, torequire us to repurchase the 1,5000,000 shares of our common stock issued toVertex Energy in the closing for a purchase price of $2,000,000.  Earth’s rights and obligations set forth inthe non-binding letter of intent are subject to the negotiation and executionof definitive documentation.  Earth canmake no assurances that the final terms of the transaction will conform to theterms of the letter of intent or that the parties will even enter intodefinitive documents.

On June 7, 2006, Earth entered into a letterof intent with Earth Ethanol, Inc., one of our wholly owned subsidiaries, DFIGroup, Inc. and Albermarle Bio-Refinery, Inc., which contemplates a jointventure in which Albermarle Bio-Refinery will convert into a limited liabilitycompany and own and operate an ethanol facility in Martin County, NorthCarolina.  In connection with thenon-binding letter of intent, we have loaned an aggregate of $2,000,000 toAlbermarle Bio-Refinery, Inc. as of the quarter ended June 30, 2006for the purposes of acquiring 51% investment in a 50-million gallon ethanolproduction plant in Jamesville, NC.  Thenote bears interest at 4.85% and matures one year from the date of thenote.  Principal and accrued interest aredue at maturity.  Upon the closing of thetransaction, the notes will automatically convert into equity of the newoperating company and the purchase price payable by us will be reduced by theamount of any remaining principal and accrued and unpaid interest.

On June 13, 2006, Earth entered into a newletter of intent with HPS Development, which replaced the April letter ofintent in its entirety and made a deposit in the amount of $7,000,000.  As contemplated by the letter of intent, HPSDevelopment will acquire a 50% interest in the newly created limited liabilitycompany in exchange for contributing to the new operating company real propertyand improvements, including a currently idle ethanol distillery.  Earth will acquire a 50% interest in theoperating company in exchange for the payment of $50,000,000 and the issuanceof 5,829,005 shares of our common stock to HPS Development.

During the second quarter endedJune 30, 2006, Earth and Trucker’s Corner signed a memorandum ofagreement whereby Earth contributed as capital an amount of $1,120,000.  Trucker’sCorner owns and operates Carl’s Corner, a retail service station in Texas.  Also, during the second quarter endedJune 30, 2006, Earth and Eastern Shelf Partners signed an acquisitionand development agreement whereby Earth made a deposit in the amount of$2,075,000 to acquire natural gas properties.

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**7.**              RELATED PARTYTRANSACTIONS

InJune 2006, the Company paid approximately $2.1 million to Eastern ShelfPartners, LLC to acquire a working interest in a series of oil and natural gasinterests, pursuant to an acquisition, exploration and development agreemententered into on June 22, 2006 between Eastern Shelf and Apollo Resources,International, Inc., our majority stockholder. Pursuant to the agreement, the parties have agreed to jointly acquire,explore, develop and produce certain oil and natural gas leases, fee interestsand other oil and natural gas related mineral interests and properties locatedin Texas.

On June 9, 2006, the Company entered into aconsulting agreement with Herbert E. Meyer, a member of the Company’s Board ofDirectors, pursuant to which Mr. Meyer agreed to provide consulting servicesrelating to energy policies, strategic planning, and such other matters as thatthe Company may request.  In exchange forsuch services, the Company issued Mr. Meyer, 600,000 shares of its commonstock.  The agreement has a two-year termbut is terminable by the Company upon thirty days written notice.

On April 20, 2006, theCompany acquired a 25% limited partnership interest in Trucker’s Corner, L.P.in exchange for a capital contribution of $1.1 million in cash, 125,000 sharesof the Company’s common stock and 25,000 shares of Apollo Resources commonstock.  Willie H. Nelson, who serves onthe Company’s board of directors, is also a limited partner of Trucker’sCorner.

On April 1, 2006, theCompany entered into a sublicense agreement with Biodiesel Venture, L.P.,pursuant to which Biodiesel Venture granted the Company an exclusive sublicenseto use the trademark “BioWillie” which is licensed to Biodiesel Venturepursuant to a master license with Mr. Nelson, the owner of the trademark. Thesublicense has a two-year term and is renewable by the Company for foursuccessive two-year terms (for a total term of ten years) so long as theCompany is in compliance with the terms of the sublicense.  In connection with the sublicense, in June2006, the Company issued 537,500 shares of its common stock to each of BiodieselVenture and Mr. Nelson.  During the termof the sublicense, the Company has agreed to pay to each of Biodiesel Ventureand Mr. Nelson annual royalties of $0.01 per gallon of biodiesel fuel brandedwith the BioWillie trademark that the Company sell, with a minimum annualroyalty of $150,000 payable to each of Biodiesel Venture and Mr. Nelson.  Mr. Nelson, who serves on the Company’s boardof directors, is a limited partner of Biodiesel Venture and is the sole ownerand manager of the general partner of Biodiesel Venture.

In connection with theApril BioWillie sublicense, the sublicense agreement entered into in May of2005 between the Company’s wholly owned subsidiary, The Wing Sail Company d/b/aDistribution Drive, and Biodiesel Venture was terminated.

Advances to related party consists of Notes Receivablefrom Trucker’s Corner and Blue Wireless of $100,155.56 and $60,175respectively.

During the second quarter of 2006, Earth purchased1,666,667 shares of Blue Wireless & Data, Inc., a wireless communicationscompany, representing approximately **10**%of the issued and outstanding common stock, for $100,000.  Earth’s Chief Executive Officer is also theChairman of the Board of Blue Wireless.

In January 2006 the Company entered into anintercompany credit agreement with Apollo Resources pursuant to which ApolloResources may make advances to the Company in connection with amounts theCompany owes to Apollo Resources for fees, expenses and costs it incurs on ourbehalf.  Any advances made will bearinterest at 7%.  As ofJune 30, 2006, the Company did not have an outstanding balance underthis credit agreement.

Effective October 17, 2005 the Companyleased a truck stop in Grenada, Mississippi from RBB Properties, LLC which iscontrolled by R. Bruce Blackwell, a member of the Company’s Board ofDirectors.  The lease has a five-yearterm, and requires lease payments of $10,000 per month.  The Company is responsible for operations andrepair and maintenance of the facility.

The Company also leases a retail fuel center andconvenience store and an office building in Byram, Mississippi from R. BruceBlackwell.  Pursuant to these leases, theCompany pays an aggregate of $6,834 on a month to month basis.

On March 31, 2006, we entered into a mergeragreement with Southern Bio Fuels, Inc. and certain other parties affiliatedwith Southern Bio Fuels.  Pursuant to themerger agreement, on April 3, 2006, Southern Bio Fuels merged withand into the Company, with the Company being the surviving corporation.  In connection with the merger, the Company 

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paid $2,200,000 in cashand issued 2,933,333 shares of its common stock to the sole stockholder ofSouthern Bio Fuels.  Upon completion ofthe merger, we acquired the sole asset of Southern Bio Fuels, a biodiesel refinerythat was formerly located in Pearl, Mississippi and that has been relocated tothe our premises in Durant, Oklahoma. Dean Blackwell, an indirect equity owner of Southern Bio Fuels, is thebrother of Bruce Blackwell, a member of the Company’s Board of Directors.  The consideration was determined through arm’slength negotiation of the parties involved, and a portion of the cashconsideration was provided by a loan from Apollo Resources International, Inc.,the Company’s majority stockholder.

In connection with the Southern Bio Fuels merger, onMarch 2, 2006, the Company issued to Southern Bio Fuels a note with aprincipal amount of $850,000 and bearing interest at 7.25% per year.  The Company’s obligations under this notewere guaranteed by Dennis G. McLaughlin, III, the Company’s Chief ExecutiveOfficer.  The note matured onMarch 13, 2006 and was paid in full at that time.  On March 31, 2006, the Companyissued another note to Southern Bio Fuels with a principal amount of $1,100,000and bearing interest at 7.25% per year. The note matured on June 29, 2006.  The Company’s obligations under these noteswere guaranteed by the Company’s Chief Executive Officer and Tommy Johnson andBruce Blackwell, each of which serve on the Company’s board of directors.  On July 12, 2006, the Company repaidthis note.

**8.**              DERIVATIVES

The Company evaluatedthe application of  Statement ofFinancial Accounting Standards (“SFAS”) No. 133, “*Accounting for Derivative Instruments and Certain Hedging Activities*”(“SFAS No. 133”), and EITF 00-19 for convertible debt issued in the first andsecond quarters of fiscal 2006, as well as warrants issued in connectionwith the debt offerings.  Based on theguidance in SFAS No. 133 and EITF 00-19, the Company concluded all of theseinstruments were required to be accounted for as derivatives during the secondquarter of fiscal 2006.  SFAS No.133 and EITF 00-19 require the Company to bifurcate and separately account forthe conversion features of the convertible debt as embedded derivatives.  Pursuant to SFAS No. 133, the Companybifurcated the conversion features from the convertible debt because theeconomic characteristics and risks of the conversion features were determinedto not be clearly and closely related to the economic characteristics and risksof the debt.  In addition, onMay 26, 2006, the Company issued convertible debt that wasconvertible into an indeterminate number of shares.  As a result, the conversion features andwarrants associated with the convertible debt were determined to be derivativesunder SFAS No. 133 and EITF 00-19 on that date. The convertible debt and warrants issued prior and subsequent toMay 26, 2006 were also tainted under EITF 00-19 due to theuncertainty that the Company had sufficient authorized and unissued shares available to settle theconvertible debt and warrant contracts and after considering all othercommitments that could require our issuance of stock during the contractperiod.  The Company determined that theconversion features and the warrants met the attributes of a liability andtherefore recorded the fair value of the conversion features and the warrantsas current liabilities.  The Company isrequired to record the fair value of the conversion features and the warrantson its balance sheet at fair value with changes in the values of thesederivatives reflected in the consolidated statement of operations as “Gain(loss) on embedded derivative liability.”

The impact of the application of SFAS No. 133 and EITF00-19 on the balance sheet as of June 30, 2006 is as follows:
| ** **                                                                                                | ** ** | **May 26,  2006** | ** ** | **June 30,  2006** | ** ** | **Gain (loss)** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------|------------|
| Convertible debt                                                                                          |       | $                      | 20,389,299 |                    | $          | 18,664,029           |       | $ | 1,725,270 |   |
| Warrants                                                                                                  |       | 9,313,424              |       | 9,258,763               |       | 54,661               |       |
| Loss recognized  upon initial fair value of derivative instruments in existence on May 26, 2006 |       | (2,180,793             | )          | —                  |       | (2,180,793           | )          |
| Total                                                                                                     |       | $                      | 27,521,930 |                    | $          | 27,922,792           |       | $ | (400,862 | ) |

 

The Company uses theBlack Scholes valuation model for calculation of the value of derivativeliabilities.  The Company uses volatilityrates based upon the closing stock price of its common stock.  The Company use a risk free interest ratewhich is the U. S. Treasury bill rate for securities with a maturity thatapproximates the estimated expected life of a derivative or security.  The Company uses the closing market price ofits common stock on the date of issuance of a derivative or at the end of aquarter when a derivative is valued at fair value.  The volatility factor used in the BlackScholes pricing model has a significant effect on the resulting valuation ofthe derivative liabilities on the balance sheet.  The volatility has ranged from 143% to 491%during the period from May 26, 2006 to June 30, 2006.  The initial volatility for the calculation ofthe embedded and freestanding derivatives ranged from 143% to 491%.  The following table shows the volatility,risk free rate and market price used in the calculation of the Black Scholescall value for derivatives beginning May 26, 2006 throughJune 7, 2006 and at June 30, 2006.

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| ** **                                            | ** ** | **Issue Date** | ** ** | **Volatility** | ** ** | **Risk Free   Rate** | ** ** | **Market Price** | ** ** | **Term in Years** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| At  May 26, 2006 for:                       |       |                |       |           |       |                           |       |                  |       |                        |       |
| 1Q 2006  convertible debt                        |       | 1/27/2006           |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 0.92       |   |
| 1Q 2006  convertible debt                        |       | 1/30/2006           |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 0.92       |   |
| 1Q 2006  convertible debt                        |       | 3/29/2006           |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 0.92       |   |
| 1Q 2006  convertible debt                        |       | 3/31/2006           |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 0.92       |   |
|                                                  |       |                |       |           |       |                           |       |                  |       |                        |       |
| 2Q 2006  convertible debt                        |       | 5/4/2006            |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 1          |   |
| 2Q 2006  convertible debt                        |       | 5/26/2006           |       | 159            | %          | 5.0                            | %          | $                     | 3.24       |                        | 0.25       |   |
| 2Q 2006  warrants                                |       | 5/4/2006            |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 5          |   |
| 2Q 2006  warrants                                |       | 5/26/2006           |       | 491            | %          | 5.0                            | %          | $                     | 3.24       |                        | 5          |   |
| At Issuance date  for:                                |       |                |       |           |       |                           |       |                  |       |                        |       |
|                                                  |       |                |       |           |       |                           |       |                  |       |                        |       |
| 2Q 2006  convertible debt                        |       | 6/2/2006            |       | 487            | %          | 4.98                           | %          | $                     | 2.51       |                        | 0.92       |   |
| 2Q 2006  convertible debt                        |       | 6/7/2006            |       | 163            | %          | 5.05                           | %          | $                     | 2.60       |                        | 0.25       |   |
| 2Q 2006  warrants                                |       | 6/7/2006            |       | 483            | %          | 5.05                           | %          | $                     | 2.60       |                        | 5          |   |
|                                                  |       |                |       |           |       |                           |       |                  |       |                        |       |
| Prices and  average rates at June 30, 2006: |       |                |       |           |       |                           |       |                  |       |                        |       |
| June 30, 2006                               |       |                |       | 379            | %          | 5.2                            | %          | $                     | 2.92       |                        |       |   |

 

**9.**              SUBSEQUENT EVENTS

OnJuly 10, 2006, the Company entered into a securities purchaseagreement, pursuant to which the Company issued, on July 11, 2006, asenior convertible note with a principal amount of $5.0 million to oneinstitutional investor.  The note carriesan 8% coupon, payable quarterly, and may be redeemed by the Company at par atany time prior to their initial maturity date in October 2006.  The note is not convertible by the holderuntil after October 2006, at which time the maturity date may be extendedto January 2007 at the holder’s option. The notes are convertible into the Company’s common stock at a conversionprice equal to the greater of $1.00 per share or 75% of the weighted averageprice per share of our common stock on a five-day volume weighted average priorto closing.  The Company also issuedfive-year warrants to purchase an aggregate of 1,500,000 shares of common stockto the investor and five-year warrants to purchase 15,000 shares of commonstock to the Company’s placement agent, both at an exercise price of $2.50 pershare.  On July 24, 2006, theCompany used a portion of the net proceeds from its July 24, 2006offering to repay in full the remaining unpaid principal and accrued and unpaidinterest on the note issued on July 11, 2006.

OnJuly 12, 2006, subsequent to majority shareholder approval, Earthfiled an amendment to its certification of incorporation with the Secretary ofState of Delaware in which the number of authorized shares of common stock wasincreased from 250,000,000 to 400,000,000 shares.

OnJuly 13, 2006, holders of convertible notes issued during Januarythrough June of 2006, exercised their conversion option and the Companyissued an aggregate of 3,000,000 shares of common stock in exchange for theconversion of notes with an aggregate principal amount of $1.5 million.

OnJuly 24, 2006, the Company entered into a securities purchaseagreement pursuant to which the Company issued $52.5 million aggregate seniorconvertible notes that are due in 2011 to eight institutional  investors. The notes initially carry an 8% coupon, payable quarterly, and areconvertible into shares of common stock at $2.90 per share.  In 2007, the coupon may decline to 6%upon the Company achieving certain financial milestones.  The notes will begin to amortize in equal, quarterlypayments beginning in 2007.  Inconnection with the issuance of the notes, the Company also issued five-yearwarrants to purchase 9,051,725 shares of common stock to the investors andfive-year warrants to purchase 1,357,759 shares of common stock to the Company’splacement agent, at $2.90 per share.  TheCompany used the net proceeds from this offering to repay in full the remainingunpaid principal and accrued and unpaid interest on our $20.0 million aggregateprincipal amount of senior convertible promissory notes issued in May, June andJuly 2006, and expects to use the remaining proceeds from the offering forits program of building and acquiring interests in biodiesel and ethanolproduction facilities, and for other general corporate purposes.

OnJuly 31, 2006, Earth commenced production of biodiesel fuel from itsproduction facility located in Durant, Oklahoma.  Earth plans to sell the fuel produced by thisfacility under its brand name “BioWillie” to local markets in Oklahoma andTexas.

 

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion and analysis should be readin conjunction with the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section and audited consolidated financialstatements and related notes thereto included in our Annual Report on Form10-KSB and with the unaudited consolidated financial statements and relatednotes thereto presented in this Quarterly Report on Form 10-QSB.

**CautionaryNote Regarding Forward-Looking Statements**

This Form 10-QSB includes “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, as amended, orthe Securities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act.  Allstatements other than statements of historical facts, included in this Form10-QSB that address activities, events or developments that we expect oranticipate will or may occur in the future, including such things as futurecapital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strength, goals,expansion and growth of our business and operations, plans, references tofuture success, reference to intentions as to future matters and other suchmatters are forward-looking statements. These statements are based on certain assumptions and analyses made byus in light of our experience and our perception of historical trends, currentconditions and expected future developments as well as other factors we believeare appropriate in the circumstances. However, whether actual results and developments will conform with ourexpectations and predictions is subject to a number of risks and uncertainties,and other factors, many of which are beyond our control.  Consequently, all of the forward-lookingstatements made in this Form 10-QSB are qualified by these cautionarystatements and we cannot assure you that the actual results or developmentsanticipated by us will be realized or, even if realized, that they will havethe expected consequences to or effects on us, our business or operations.  We have no intention, and disclaim anyobligation, to update or revise any forward-looking statements, whether as aresult of new information, future results or otherwise.

**Overview**

Our principal business is the production, supply anddistribution of pure biodiesel fuel (B100) for sale directly to wholesalers tobe used as a blend stock, such as B20, a petroleum diesel-based alternativefuel.  We utilize vegetable oils such assoy and canola oil as raw material (feedstock) for the production of biodieselfuel.  We are currently focused on ourexpansion strategy of acquiring and constructing biodiesel and ethanolproduction facilities.

Our primary source of revenue is the sale of biodieselfuels and related energy production credits. Our sales revenue is a function of the volume of biodiesel we sell andthe price at which we sell the biodiesel. The volume of our sales is largely dependent upon demand and our abilityto distribute the product. The selling prices we realize for our biodiesel arelargely determined by the market supply and demand for biodiesel, which inturn, is influenced by industry factors over which we have little if anycontrol, such as the price of gasoline and other alternative energysources.  We market our biodieseldirectly to fuel blenders.  Fuel blenderspurchase biodiesel from us, mix it with regular diesel fuels according tospecifications, and deliver the final product to retailers.  Our distribution strategy includes supplyingB100 for storage and blending terminals, controlling the blending point, andobtaining exclusive agreements with terminal chains throughout the UnitedStates.  We have entered into agreementswith oil companies with the capability to deliver to fleet, agricultural andretail fueling terminals, and retail service stations, to expand biodieselconsumption in their local areas.

Our gross profits is derived from our total revenuesless our cost of sales  Our cost of salesis affected by the cost of the biodiesel we purchase from producers.  We purchase biodiesel both on the spot marketand pursuant to fixed supply agreements. The price of our purchases of biodiesel on the open market are affectedby supply and demand for biodiesel fuel and the cost of raw materials used bythe producers from whom we purchase biodiesel, such as soy oil.  We have entered into a nine-month supplyagreement pursuant to which we have agreed to purchase 1,000,000 gallons permonth.  Because we are required topurchase these quantities of biodiesel regardless of our demand for biodieselor ability to distribute the product, our results of operations could bematerially adversely affected if there is a decrease in the demand for ourbiodiesel fuel.  In July 2006 wecommenced production of biodiesel fuel from one of our own productionfacilities in Durant, Oklahoma from which we expect annual production ofapproximately 20 MMGPY.  As we implementour facility construction and expansion strategy, we expect our cost of salesto be impacted by our cost of raw materials used in the production ofbiodiesel.

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**SecondQuarter Highlights**

The following are certain highlights that occurredduring the second quarter:

·                  Our totalrevenue during the three months ended June 30, 2006 was $2.9 millionand related to sales of biodiesel, food and beverages.

·                  We have enteredinto letter of intent and are currently in discussions relating to our entryinto three separate joint ventures to purchase, construct, expand and/orretrofit ethanol facilities in Plaquemines Parish, Louisiana, and in MartinCounty, North Carolina and a biodiesel production facility in Houston,Texas.  Our obligations set forth inthese letters of intent are subject to the negotiation and execution ofdefinitive documentation.  We can make noassurances that the final terms of any of these transaction will conform to theterms of the letters of intent or that the parties will even enter into definitivedocuments.

·                  During thesecond quarter of 2006, we received net proceeds of $14.0 million from theissuance of $15.0 million aggregate principal amount of senior convertiblenotes.  We used the net proceeds from thesale, in concert with other funds, to continue to execute our business plan,specifically the construction or acquisition of additional biodiesel andethanol facilities, and for other general corporate purposes, including workingcapital.  These notes were repaid in fullusing a portion of the net proceeds from our issuance of $52.5 millionaggregate principal amount of senior convertible notes in July 2006.

**RecentDevelopments**

On July 10, 2006, we entered into asecurities purchase agreement, pursuant to which we (1) issued, on July 11, 2006,a senior convertible note with a principal amount of $5.0 million to oneinstitutional investor and (2) warrants to purchase 1,515,000 shares of commonstock at an exercise price of $2.93 per share. On July 24, 2006, we used a portion net proceeds from ourJuly 24, 2006 offering to repay in full the remaining unpaidprincipal and accrued and unpaid interest on the note issued onJuly 11, 2006.

On July 24, 2006, we entered into asecurities purchase agreement, pursuant to which we issued (1) $52.5 millionaggregate principal amount of senior convertible notes that are duein 2011 to eight institutional and accredited investors and (2) warrantsto purchase 9,051,725 shares of our common stock at $2.90 per share that expirein July 2011.  We used the netproceeds from this offering to repay in full the remaining principal andaccrued and unpaid interest on our $20.0 million aggregate principal amount ofsenior convertible promissory notes issued in May, June and July 2006, andexpect to use the remaining proceeds from the offering for our program ofbuilding and acquiring interests in biodiesel and ethanol productionfacilities, and for other general corporate purposes.

On July 31, 2006, we commenced production ofbiodiesel fuel from our production facility located in Durant, Oklahoma.  This facility has an expected annualproduction capacity of approximately 20 MMGPY. We plan to sell the biodiesel produced by this facility under our brandname “BioWillie” to local markets in Oklahoma and Texas.

**CriticalAccounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States, requires management to make estimates andassumptions that affect the amounts reported in the accompanying financialstatements and related footnotes. Management bases its estimates and assumptions on historical experience,observance of industry trends and various other sources of information andfactors.  Estimates are based oninformation available as of the date of the financial statements and,accordingly, actual results could differ from these estimates, sometimesmaterially.  Critical accounting policiesare defined as those that are reflective of significant judgments anduncertainties, and potentially could result in materially different resultsunder different assumptions and conditions. The most critical accounting policies and estimates are described below.

*Revenue Recognition.* The geographic location of our customer baseis primarily in the state of Mississippi and the Dallas, Texas market, althoughmanagement intends to expand operations throughout the Southeastern and SouthwesternUnited States.  Sales are recorded at netrealizable value, net of allowances for returns, upon shipment of products tocustomers.  We record revenue fromfederal incentive programs related to the production of biodiesel when we haveproduced and sold the biodiesel and completed all the requirements of theapplicable incentive program.

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*Business Combinations.*  Business combinations are accounted for usingthe purchase method.  Under the purchasemethod, we report the acquired entities’ assets and liabilities at fair marketvalue as of the date of purchase.  Anyexcess of the fair market value of the consideration given over the fair marketvalue of the net assets acquired is reported as goodwill.  If the fair market value of the considerationgiven is less than the fair market value of the net assets acquired, theresulting excess of fair value of acquired net assets over the cost of theacquired entity is allocated, on a pro rata basis, against certain assetsacquired in the business combination.  Ifany excess over cost remains after reducing certain assets to zero, theremaining excess is recognized as an extraordinary gain.

**Resultsof Operations**

***Six Months EndedJune 30, 2006 Compared to the Six Months EndedJune 30, 2005***

*Revenue. *Totalrevenue for the six months ended June 30, 2006 increased $4.1million, or 613.2%, to approximately $4.8 million from approximately $673,000for the six months ended June 30, 2005.  The increase in total revenue is primarilythe result of increased sales of biodiesel, food and beverages.  During the six months ended June 30, 2006, wesold approximately 970,000 gallons of biodiesel.

*Cost of Sales. *Cost of salesfor the six months ended June 30, 2006 increased $3.8 million, or690.5%, to approximately $4.4million from approximately $555,000for the six months ended June 30, 2005.  Our cost of goods sold is mainly affected bythe cost of vegetable oil, and other raw materials.  The increase in cost of sales isprimarily the result of increased sales of biodiesel, food and beverages.

*Share-Based Compensation. *Share based compensationfor the six months ended June 30, 2006 was approximately $10.0million and related primarily to shares issued to consultants for consultingservices.  The shares issued as share based compensationwere valued at market consistent with SFAS No. 123(R), “*Share-Based Payment*” (“SFAS No. 123(R)”).

*Other Selling, General and AdministrativeExpenses. *Other selling, general andadministrative expenses for the six months ended June 30, 2006 increased$6.6 million from approximately $229,000 for the six months endedJune 30, 2005.  These costsconsist of  $2.1 million of payrollexpenses, $478,000 for travel expenses, $3.3 million of consulting expenses and$380,000 for other operating expenses.

*Depreciation and Amortization*.  Depreciation and amortization for the sixmonths ended June 30, 2006 increased to approximately $11,000 from$1,000 for the six months ended June 30, 2005.  The increase in depreciation and amortizationis primarily related to acquisitions.

*Interest Income.*  Interest income for the six months endedJune 30, 2006 increased to approximately $9,000 from zero for the sixmonths ended June 30, 2005*.*  Interest income related to interest earned onour savings account.

*Loss on Derivatives. *Loss on derivatives for thesix months ended June 30, 2006 increased to approximately $395,000from zero for the six months ended June 30, 2005.  Loss on derivatives related to convertible debt and warrants issued during the quarter.

*Interest Expense.*  Interest expense related to derivatives forthe six months ended June 30, 2006 increased to approximately $2.8million from zero for the six months ended June 30, 2005.  Interestexpense consisted primarily of the amortization of debt discounts associatedwith beneficial conversion features and derivative liabilities totalingapproximately $2.5 million.

***Three Months EndedJune 30, 2006 Compared to the Three Months EndedJune 30, 2005***

*Revenue. *Totalrevenue for the three months ended June 30, 2006 increased $2.5million, or 557.6%, to approximately $2.9 million from $441,000 for the threemonths ended June 30, 2005. The increase in total revenue is primarily the result of increased salesof biodiesel, food and beverages.  Duringthe three months ended June 30, 2006, we sold approximately 615,000 gallons ofbiodiesel.

*Cost of Sales. *Cost of salesfor the three months ended June 30, 2006 increased $2.2 million, or602.7%, to approximately $2.6million from approximately $370,000for the three months ended June 30, 2005.  Our cost of goods sold is mainly affected bythe cost of vegetable oil, and other raw materials.  The increase in cost of sales isprimarily the result of increased sales of biodiesel, food and beverages.

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* *

*Share-Based Compensation. *Share based compensationfor the three months ended June 30, 2006 was approximately $5.3million and related primarily to shares issued to consultants for consultingservices.  The shares issued as share basedcompensation were valued at market consistent with SFAS No. 123(R).

*Other Selling, General and AdministrativeExpenses. *Other selling, general andadministrative expenses for the three months ended June 30, 2006increased $4.6 million from approximately $140,000 for the three months endedJune 30, 2005.  These costsconsist of  $2.0 million of payrollexpenses, $409,000 of travel expenses, $1.3 million of consulting expenses and$775,000 of other operating expenses.

*Depreciation and Amortization*.  Depreciation and amortization for the threemonths ended June 30, 2006 increased to approximately $7,000 from$690 for the three months ended June 30, 2006.  The increase in depreciation and amortizationis primarily related to acquisitions.

*Interest Income.*  Interest income for the three months endedJune 30, 2006 increased to $9,000 from zero for the three monthsended June 30, 2005*.*  Interest income related to interest earned onour savings account.

*Loss on Derivatives.* Loss on derivatives for the three months endedJune 30, 2006 increased to approximately $401,000 from zero for thethree months ended June 30, 2005. Loss on derivatives relatedto convertible debt and warrants issued during the quarter.

*Interest Expense Related toDerivatives.*  Interestexpense related to derivatives for the three months endedJune 30, 2006 increased to approximately $2.8 million from zero forthe three months ended June 30, 2005. Interest expense consistedprimarily of the amortization of debt discounts associated with beneficialconversion features and derivative liabilities totaling approximately $2.5 million.

**Liquidityand Capital Resources**

*Overview. *Our principal sources ofliquidity consist of cash and cash equivalents, cash provided by operations andissuances of debt and equity securities. In addition to funding operations, our principal short-term andlong-term liquidity needs have been, and are expected to be, the debt servicerequirements of our senior convertible notes, the acquisition and constructionof new facilities, capital expenditures and general corporate purposes.  In addition, as our production operationsramp up, we anticipate significant purchases of soy oil, corn and other inputsnecessary for biodiesel and ethanol production.

Net cash used in operating activities was $6.9 millionfor the six months ended June 30, 2006, compared to net cash used inoperating activities of $33,000 for the same period in 2005.  The increase in net cash flow used inoperating activities relates to increasing operating costs as we ramp-up ouroperations, including higher cost of good sold, other selling, general andadministrative expenses and interest expense.

Net cash used in investing activities was $16.0million for the six months ended June 30, 2006, compared to net cashuse in investing activities of zero for the same period in 2005.  The increase in net cash used in investingactivities relates to purchases of fixed assets in the amount of approximately$9.0 million for our Durant, Oklahoma facility and advances of approximately$7.0 million during the six months ended June 30, 2006 related letterof intent we have entered for a joint venture to own and operate a fuel ethanoldistillery located in Plaquemines Parish, Louisiana.

Net cash provided by financing activities was $23.3million for the six months ended June 30, 2006, compared to net cashprovided by financing activities of $50,000 for the same periodin 2005.  Cash flows provided byfinancing activities during the six months ended June 30, 2006 relatedto the issuance of a total of 12,399,088 shares of our common stock for netproceeds of $6.1 million and the issuance of $18.0 aggregate principal amountof promissory notes offset by debt issuance costs of $975,000.

The success of our operations and business growth andexpansion strategy depends upon our ability to raise additional equity and debtfinancing and our ability to generate sufficient cash flow fromoperations.  We expect to continue todevote capital resources to fund our business plan.  In order to support the initiativesenvisioned in our business plan, we intend to raise additional funds throughthe sale of equity, debt or a combination of the two.  Our operating performance and ability toraise additional financing depends on many factors beyond our control, includingthe prevailing economic conditions, state of the capital markets, the marketprice of our common stock and other risks and uncertainties including theprices of various commodities, particularly the prices of ethanol, soybean,corn, natural gas and unleaded gasoline, our dependence 

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on key suppliers andadverse changes in governmental incentives and governmental regulation.  We might not have access to the fundingrequired for the expansion of our business or such funding might not beavailable to us on acceptable terms.  Wemight finance the expansion of our business with additional indebtedness or byissuing additional equity securities. The amount of any additional indebtedness could be substantial.  We could face financial risks associated withincurring additional indebtedness, such as reducing our liquidity and access tofinancial markets and increasing the amount of cash flow required to serviceour debt, or associated with issuing additional stock, such as dilution ofownership and earnings.  An increase inour debt would decrease the amount of funds available for our growth strategy,thereby making it more challenging to implement our strategy in a timelymanner, or at all.  If future cash flowsand capital resources are insufficient to meet our debt obligations andcommitments, we may be forced to reduce or delay activities and capitalexpenditures, obtain additional equity capital or debt financing.  In the event that we are unable to do so, wemay be left without sufficient liquidity and we may not be able to continueoperations.

*Issuance of Equity.*  On March 31, 2006, we entered intoa merger agreement with Southern Bio Fuels, Inc. and certain other partiesaffiliated with Southern Bio Fuels. Pursuant to the merger agreement, on April 3, 2006, SouthernBio Fuels merged with and into our company, with our company being thesurviving corporation.  In connectionwith the merger, we paid $2,200,000 in cash and, on April 3, 2006,issued 2,933,333 shares of our common stock to the sole stockholder of SouthernBio Fuels.  Upon completion of themerger, we acquired the sole asset of Southern Bio Fuels, a biodiesel refinerythat was formerly located in Pearl, Mississippi and that has been relocated tothe our premises in Durant, Oklahoma. Dean Blackwell, an indirect equity owner of Southern Bio Fuels, is thebrother of Bruce Blackwell, who is a member of our Board of Directors.  The consideration was determined through arm’slength negotiation of the parties involved, and a portion of the cashconsideration was provided by a loan from Apollo Resources International, Inc.,our majority stockholder.

On June 12, 2006, we issued 125,000 shares of ourcommon stock in connection with our April 20, 2006 acquisition of a 25% limitedpartnership interest in Trucker’s Corner, L.P. Willie H. Nelson, who serves on our board of directors, is also alimited partner of Trucker’s Corner.

On April 1, 2006, we entered into a sublicenseagreement with Biodiesel Venture, L.P., pursuant to which Biodiesel Venturegranted us an exclusive sublicense to use the trademark “BioWillie” which islicensed to Biodiesel Venture pursuant to a master license with Willie H.Nelson, the owner of the trademark.  Thesublicense has a two-year term and is renewable by us for four successivetwo-year terms (for a total term of ten years) so long as we are in compliancewith the terms of the sublicense.  Inconnection with the sublicense, in June 2006, we issued 537,500 shares of ourcommon stock to each of Biodiesel Venture and Mr. Nelson for a total of 1,075,000shares of our common stock.  During theterm of the sublicense, we have agreed to pay to each of Biodiesel Venture andMr. Nelson annual royalties of $0.01 per gallon of biodiesel fuel branded withthe BioWillie trademark that we sell, with a minimum royalty of $150,000payable to each of Biodiesel Venture and Mr. Nelson. Mr. Nelson, who serves onour board of directors, is a limited partner of Biodiesel Venture and is thesole owner and manager of the general partner of Biodiesel Venture.

On April 28, 2006, we entered into asecurities purchase agreement, pursuant to which we issued 6,400,000 shares ofour common stock to accredited investors, in consideration for the payment ofapproximately $3.2 million.  We will usethe proceeds, in concert with other funds, to acquire a 50% equity interest inan entity which will own and operate a planned ethanol plant in New Orleans,Louisiana.  The purchase agreementprovides for an additional issuance of 6,400,000 shares of our common stock, ifwe have not timely consummated the acquisition of the equity interest in theplanned New Orleans ethanol plant discussed below.  Contemporaneously with the execution anddelivery of the securities purchase agreement, we entered into a registrationrights agreement, pursuant to which we agreed to provide certain registrationrights with respect to the shares of common stock issued pursuant to thesecurities purchase agreement.

On July 13, 2006, holders of convertiblenotes issued during January through June of 2006, exercised theirconversion option and we issued an aggregate of 3,000,000 shares of our commonstock in exchange for the conversion of notes with an aggregate principalamount of $1.5 million.

On July 21, 2006, Apollo Resources enteredinto a securities purchase agreement with Greenwich Power, LLC and GreenwichPower II, LLC, pursuant to which Apollo Resources issued notes exchangeable forshares of our common stock held by Apollo Resources and options to purchase ourcommon stock held by Apollo Resources. In connection with this transaction, Apollo Resources agreed to cause usto grant these Apollo Resources noteholders registration rights with respect tothe shares of common stock underlying the convertible notes and options.  We have acknowledged and agreed to complywith the terms of the registration rights agreements between Apollo and thesenoteholders.  In connection with thistransaction, Lance Backrow, who is the sole manager of both Greenwich Powerentities, purchased a warrant to purchase 

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4,000,000 shares of ourcommon stock at an exercise price of $0.25 per share.  Mr. Backrow paid us $100,000 for the issuanceof this warrant.  We granted Mr. Backrowcertain registration rights with respect to the shares of common stock issuableupon exercise of this warrant.

During the quarter ending June 30, 2006, we issued231,250 shares of our common stock in connection with our repayment of $125,000loan including accrued and unpaid interest thereon.

During the quarter ending June 30, 2006, we issued160,000 shares of our common stock to employees for services rendered and1,430,274 shares of our common stock to for consulting services, of which600,000 were issued to Herb Meyer, a member of our Board of Directors, underhis consulting agreement.

During the quarter ending June 30, 2006, in exchangefor an aggregate approximately $2.9 million, we issued 5,799,088 to variousinvestors pursuant to private placement memorandums.

*Convertible Note Transactions. *In January andMarch of 2006, we issued $1.0 million aggregate principal amount ofconvertible notes to four individuals. Each of the notes bore interest at 8% per year, which was payable onJuly 28, 2006, August 28, 2006, January 28, 2007and April 28, 2007.  The noteshad a maturity date of April 28, 2007.  The notes were convertible into shares or ourcommon stock at a conversion price equal to the lesser of $0.50 per share or70% of the weighted average price per share of our common stock on theconversion date.  We granted thenoteholders certain registration rights with respect to the shares of commonstock underlying the convertible notes. On July 13, 2006, the holders of the notes exercised theiroptions to convert the notes, and we issued an aggregate of 2,000,000 shares ofour common stock to such holders in exchange for the cancellation of the notes.

On May 4, 2006, we issued a $1.0 millionconvertible, secured promissory note which bears interest at 7% and is payablewithin thirty days upon demand by the holder. The note is convertible into shares of our common stock at a conversionprice of $1.086 per share.  In connectionwith this note, we also issued the holder of the note a warrant to purchase920,810 shares of our common stock.  Thewarrant is exercisable at the lesser of $2.00 per share or 80% of the averagetrading price of our common stock for the thirty trading days prior to theexercise of the warrant.  The warrant isexercisable until May 31, 2011. Our obligations under the note and the warrant have been guaranteed byApollo Resources, our majority stockholder. The guarantee is secured by 10,000,000 shares of our common stock heldby Apollo Resources.  We used the netproceeds from the sale, in connection with our biodiesel and ethanol plantacquisition strategy and for other general corporate purposes.  We granted the noteholder certainregistration rights with respect to the shares of common stock underlying theconvertible notes and the warrants.  **The note and corresponding guarantee weresubsequently cancelled by the holder in connection with Apollo Resources’closing on July 21, 2006 of a securities purchase agreement with GreenwichPower.**

On May 26, 2006, we entered into asecurities purchase agreement, pursuant to which we issued $5.0 million principalamount of 8% senior convertible promissory notes to a single institutionalinvestor.  The notes carried an 8%coupon, payable quarterly, and were redeemable by us at par at any time priorto their initial maturity date in August 2006.  The notes were not convertible until afterAugust 2006, at which time the maturity date was extendable toNovember 2006 at the holder’s option. The notes were convertible into our common stock at a conversion priceequal to the greater of $1.00 per share or 75% of the weighted average priceper share of our common stock on a five-day volume weighted average prior toclosing.  We also issued five-yearwarrants to purchase 750,000 shares of common stock to the investor andfive-year warrants to purchase 18,750 shares of common stock to our placementagent, both at an exercise price of $3.84 per share.  We used the net proceeds from the sale, inconnection with our biodiesel and ethanol plant acquisition strategy and forother general corporate purposes.  Wegranted the investor certain registration rights with respect to the shares ofcommon stock issuable upon conversion of the convertible notes and exercise ofthe warrants.  The remaining unpaidprincipal and accrued and unpaid interest on these notes were repaid in full witha portion of the net proceeds from the senior convertible promissory notes weissued in July 2006.

On June 2, 2006, we issued convertible notewith a principal amount of $500,000 to one individual.  The note bore interest at 8% per year, whichwas payable on July 28, 2006, August 28, 2006,January 28, 2007 and April 28, 2007.  The note had a maturity date ofApril 28, 2007.  The note wasconvertible into shares of our common stock at a conversion price equal to thelesser of $0.50 per share or 70% of the weighted average price per share of ourcommon stock.  We used the net proceedsfrom the sale, in connection with our biodiesel and ethanol plant acquisitionstrategy and for other general corporate purposes.  We granted the noteholder certain registrationrights with respect to the shares of common stock underlying the convertiblenotes.  On July 13, 2006, theholder of the note exercised its option to convert the notes, and we issued anaggregate of 1,000,000 shares of our common stock to such holder in exchangefor the cancellation of the note.

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On June 7, 2006, we entered into asecurities purchase agreement, pursuant to which we issued $10 millionaggregate principal amount of senior convertible notes to four institutionalinvestors.  The notes carried an 8%coupon, payable quarterly, and were redeemable by us at par at any time priorto their initial maturity date in September 2006.  The notes were  not convertible until afterSeptember 2006, at which time the maturity date was extendable to December 2006at the holder’s option.  The notes areconvertible into our common stock at a conversion price equal to the greater of$1.00 per share or 70% of the weighted average price per share of our commonstock on a five-day volume weighted average prior to closing.  We also issued to the investors five-yearwarrants to purchase an aggregate of 1,500,000 shares of common stock to theinvestors and five-year warrants to purchase 45,000 shares of common stock toour placement agent, at an exercise price of $2.93 per share.  We used the net proceeds from the sale, inconcert with other funds, to continue to execute our business plan,specifically the construction or acquisition of additional biodiesel andethanol facilities, and for other general corporate purposes, including workingcapital.  We granted the investor certainregistration rights with respect to the shares of common stock underlying theconvertible notes and warrants.  Theremaining unpaid principal and accrued and unpaid interest on these notes wererepaid in full with a portion of the net proceeds from the senior convertiblepromissory notes we issued in July 2006.

On July 10, 2006, we entered into asecurities purchase agreement, pursuant to which we issued, onJuly 11, 2006, a senior convertible note with a principal amount of$5.0 million to one institutional investor. The note carries an 8% coupon, payable quarterly, and may be redeemed byus at par at any time prior to its initial maturity date in October 2006.  The note is not convertible by the holderuntil after October 2006, at which time the maturity date may be extendedto January 2007 at the holder’s option. The note is convertible into our common stock at a conversion priceequal to the greater of $1.00 per share or 75% of the weighted average priceper share of our common stock on a five-day volume weighted average prior toclosing.  We also issued five-yearwarrants to purchase an aggregate of 1,500,000 shares of common stock to theinvestor and five-year warrants to purchase 15,000 shares of common stock toour placement agent, both at an exercise price of $2.50 per share.  On July 24, 2006, we used the netproceeds from its July 24, 2006 offering to repay in full the remainingunpaid principal and accrued and unpaid interest on the note issued onJuly 11, 2006.

On July 24, 2006, we entered into asecurities purchase agreement, pursuant to which we issued $52.5 millionaggregate senior convertible notes that are due in 2011 to eightinstitutional investors.  The notesinitially carry an 8% coupon, payable quarterly, and are convertible intoshares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon our achieving certainfinancial milestones.  The notes willbegin to amortize in equal, quarterly payments beginning in 2007.  We also issued five-year warrants to purchase9,051,725 shares of common stock to the investors and five-year warrants topurchase 1,357,759 shares of common stock to our placement agent, at exerciseprice of $2.90 per share.  We used the netproceeds from this offering to repay in full the remaining unpaid principal andaccrued and unpaid interest on our $20.0 million aggregate principal amount ofsenior convertible promissory notes issued in May, June and July 2006discussed above, and expects to use the remaining proceeds from the offeringfor its program of building and acquiring interests in biodiesel and ethanolproduction facilities, and for other general corporate purposes.  We granted the investor certain registrationrights with respect to the restricted shares of common stock.

As of June 30, 2006 we had total obligationsunder outstanding promissory notes of approximately $16.5 million.  After giving effect to the July 2006convertible note transaction, as of August 14, 2006 we had totalobligations under outstanding promissory notes of $52.5 million.

In January 2006 we entered into an intercompanycredit agreement with Apollo Resources pursuant to which Apollo Resources maymake advances to us in connection with amounts we owe to Apollo Resources forfees, expenses and costs it incurs on our behalf.  Any advances made will bear interest at7%.  As of June 30, 2006, wedid not have an outstanding balance under this credit agreement.

In connection with the Southern Bio Fuels merger, on March 2, 2006,we issued a note to Southern Bio Fuels with a principal amount of $850,000 andbearing interest at 7.25% per year.  Ourobligations under this note were guaranteed by Dennis G. McLaughlin, III, ourChief Executive Officer.  The notematured on March 13, 2006 and was paid in full at that time.  On March 31, 2006, we issuedanother note to Southern Bio Fuels with a principal amount of $1.1 million andbearing interest at 7.25% per year.  Thenote matured on June 29, 2006. Our obligations under this note was guaranteed by Mr. McLaughlin, TommyJohnson and Bruce Blackwell, each of which serve on our board ofdirectors.  On July 12, 2006, werepaid this note.

 

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**CapitalExpenditures**

*Eastern Shelf Investment*.  In June 2006, we paid approximately $2.1million to Eastern Shelf Partners, LLC to acquire a working interest in aseries of oil and natural gas interests, pursuant to an acquisition,exploration and development agreement entered into on June 22, 2006 betweenEastern Shelf and Apollo Resources, our majority stockholder.  Pursuant to the agreement, the parties haveagreed to jointly acquire, explore, develop and produce certain oil and naturalgas leases, fee interests and other oil and natural gas related mineralinterests and properties located in Texas.

*Trucker’s Corner. *On April 20,2006, we acquired a 25% limited partnership interest in Trucker’s Corner, L.Pin exchange for a capital contribution of $1.1 million in cash, 125,000 sharesof our common stock and 25,000 shares of Apollo Resources common stock.  Trucker’s Corner owns and operates Carl’sCorner, a retail service station in Texas. Willie H. Nelson, who serves on our board of directors, is also alimited partner of Trucker’s Corner.

*Blue Wireless Investment*. During the second quarter of 2006, we purchased 1,666,667 shares of BlueWireless & Data, Inc., a wireless communications company, representingapproximately 10% of the issued and outstanding common stock, for$100,000.  During the second quarter, weadvanced Blue Wireless approximately $60,000 and, as of August 14, 2006, thisbalance remains outstanding.  Earth’sChief Executive Officer is also the Chairman of the Board of Blue Wireless.

*Durant, Oklahoma Facility. *OnMarch 31, 2006, we entered into a merger agreement with Southern BioFuels, Inc. and certain other parties affiliated with Southern Bio Fuels.  Pursuant to the merger agreement, onApril 3, 2006, Southern Bio Fuels merged with and into our company,with our company being the surviving corporation.  In connection with the merger, we paid $2.2million in cash and, on April 3, 2006, issued 2,933,333 shares of ourcommon stock to the sole stockholder of Southern Bio Fuels.  Upon completion of the merger, we acquiredthe sole asset of Southern Bio Fuels, a biodiesel refinery that was formerlylocated in Pearl, Mississippi and that has been relocated to the our premisesin Durant, Oklahoma.  Dean Blackwell, anindirect equity owner of Southern Bio Fuels, is the brother of Bruce Blackwell,who is a member of our Board of Directors. The consideration was determined through arm’s length negotiation of theparties involved, and a portion of the cash consideration was provided by aloan from Apollo Resources, our majority stockholder.

On April 27, 2006, we acquired approximatelyeight acres of land in Durant, Oklahoma for $175,000 in anticipation of ourplans to build an ethanol production facility. The land is immediately adjacent to our existing biodiesel productionfacility, which commenced production of biodiesel fuel onJuly 31, 2006, such that the two facilities will be able to share therail access at the site.  In addition,during the quarter ended June 30, 2006 we spent approximately $1.2million for plant equipment acquisitions at this facility.  We plan to sell the fuel produced by thisfacility under our brand name “BioWillie” to local markets in Oklahoma andTexas.

*Greenville, Mississippi. *On May 4, 2006,we acquired approximately 4.5 acres of land in Greenville, Mississippi adjacentto the Mississippi River for approximately $275,000.  The property includes bulk storage tanks witha capacity of approximately one million gallons, barge loading/unloadingfacilities, and a fuel truck rack.  Weplan to utilize the property for the construction of a biodiesel productionplant.

*Earth Biofuels Technology Company. *On May 4, 2006,we agreed with Dr. Miguel Dabdoub to form a technology company by the nameof  “Earth Biofuels Technology Company,LLC,” to be owned 50% by us and 50% by Dr. Dabdoub.  In exchange for our 50% interest, we paid$1.8 million and we issued 1,800,000 shares of our common stock to Dr. Dabdouband Apollo Resources issued 100,000 shares of its common stock to Dr.Dabdoub.  Dr. Dabdoub, an expert in thefield of biodiesel production facility technologies, has contributed anexclusive license to the technology company to make use of his proprietarytechnologies, for use in North America. Accordingly, the purpose of the new entity is to utilize Dr. Dabdoub’sproprietary technologies, to design and construct biodiesel productionfacilities, both for us directly and for third parties.  Additionally, we will use Mr. Dabdoub’sexpertise to assess potential acquisitions of biodiesel production facilities,and to assist in the due diligence process for our other businessopportunities.

Dr. Dabdoub, a professor at the University of SãoPaulo, Brazil, holds a number of patents and proprietary technologies relatedto the production and usage of biodiesel fuel. He has played, and continues to play, a key role in the development ofEurope and Brazil’s biodiesel industries by consulting on a number ofhigh-producing facilities, and has worked with several major automobilemanufacturers to develop optimal engine technologies for the utilization ofbiodiesel fuel.

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*PlannedAcquisitions. *We planto grow our ethanol and biodiesel production capacity significantly over thenext several years.  We are currently indiscussions relating to the proposed entry into three separate joint venturesfor the following three sites listed in the table below:
| ** **                        | ** ** | **New Orleans Facility**             | ** ** | **Houston Facility**                       | ** ** | **North Carolina Facility**                                    |
|-----------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|
| Location                          |       | Plaquemines  Parish,  Louisiana      |       | Houston Shipping  Channel,  Houston, Texas |       | Martin County,  North  Carolina                                |
| Ownership                         |       | 50%                                  |       | 51%                                        |       | 51%                                                            |
| Anticipated  closing month        |       | August 2006                     |       | August 2006                           |       | August 2006                                               |
| Purchase Price                    |       |                                 |       |                                       |       |                                                           |
| Cash                              |       | $50,000,000 plus  assumption of debt |       | $2,500,000                                 |       | $25,000,000                                                    |
| Shares of our Common Stock        |       | 5,829,005                            |       | 1,500,000                                  |       | 5% of shares of  common  stock of Earth Ethanol, Inc.          |
| Months scheduled  to be completed |       | 12-14 months                         |       | 1 month                                    |       | Phase I: 12-14  months  Phase II: 6 months after  Phase I |
| Annual capacity  (MMPGY)          |       | 60-80                                |       | 10-20                                      |       | Phase I: 55  Phase II: additional 50-55                        |

 

*NewOrleans Facility*

In April, June and August, we have entered intoletters of intent with HPS Development, L.L.C. which contemplate a jointventure in which a newly created limited liability company will own and operatea fuel ethanol distillery located on the Mississippi River in PlaqueminesParish, Louisiana, approximately nine miles southeast of New Orleans.  As contemplated by the letters of intent, HPSDevelopment will acquire a 50% interest in the newly created limited liabilitycompany in exchange for contributing to the new operating company real propertyand improvements, including a currently idle ethanol distillery.  We will acquire a 50% interest in the operatingcompany for a purchase price consisting of cash in the amount of $50.0 millionand the issuance of 5,829,005 shares of our common stock to HPS Development inaddition to the assumption of a $40.0 million debt obligation to be incurred bythe operating company in connection with the renovation of the facility.

As of August 14, 2007 and pursuant to theletters of intent, we have made cash deposits of portions of the purchase pricein an aggregate amount of $22.0 million with HPS Development in connection withthe renovation of the facility.  Wefunded these cash deposits with net proceeds from our July 2006 offeringof senior convertible promissory notes. We have also committed to making scheduled deposits from August 31 toOctober 30 in the aggregate amount of $28.0 million, of which $15.0 millionwill be deposited into escrow and released to HPS Development upon thesatisfaction of certain warranties of HPS Development regarding renovationcosts and facility performance.

In the event the joint venture does not close byOctober 31, 2006 and HPS Development has acted in good faith, HPSDevelopment is entitled to a break-up fee of $5.0 million, which will bededucted from the aggregate amount of the deposits made by us under the lettersof intent.  HPS Development must repaythe remainder of the deposits to us and may issue us a promissory note toevidence its repayment obligations.  Thenote will be payable quarterly over seven years with no interest, except in thecase of default; provided that HPS Development must use its best efforts tosecure third party financing as soon as reasonably possible to pay off thebalance due to us under the promissory note. If the closing does not occur by October 31, 2006 due to actsor omission of HPS Development or if the parties cannot agree on definitiveagreements and HPS Development has negotiated in bad faith, we are entitled tothe return of all deposits within ninety days. Pursuant to the letters of intent, we have also agreed to raise thefinancing necessary for renovation of the facility in accordance with adevelopment plan.

We anticipate the renovation of this facility willtake 12 to 14 months, after which time we estimate the plant will have anethanol production capacity of 60-80 MMGPY. Our obligations set forth in the letters of intent are subject to thenegotiation and execution of definitive documentation and the parties mayrevise the transaction structure and/or substantially change the terms agreedupon in the previously executed letters of intent discussed above.  We can make no assurances that the finalterms of the transaction will conform to the terms of the letter of intent orthat the parties will even enter into definitive documents.

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*Houston Facility*

On May 13, 2006, we entered into a letter ofintent with Vertex Energy, L.P., which contemplates a joint venture in whichVertex Energy will sell us a 51% interest in its wholly owned subsidiary,Vertex Processing, L.P., which will own and operate a biodiesel productionfacility on the Houston Ship Channel in Houston, Texas.  The fuel produced by this facility will besold under the “BioWillie” brand name to local markets and other areas ofTexas.

As contemplated by the letter of intent, Vertex Energywill contribute to Vertex Processing real property and improvements, includingan existing chemical processing facility. We will acquire a 51% interest in Vertex Processing for a purchase priceconsisting of cash in the amount of $2.5 million and the issuance of 1,500,000shares of our common stock to Vertex Energy. In addition, we have agreed to contribute $850,000 to Vertex Processingto repay in full the outstanding balance of Vertex Energy’s existing $1.5million line of credit and Vertex has agreed to contribute $850,000.  In addition, we have agreed to become anobligor on Vertex Processing’s existing $947,500 bank indebtedness; providedthat our obligation will be limited to our percentage ownership in VertexProcessing.

After we close the transaction, the facility will beconverted to a biodiesel production facility, which we anticipate will takeapproximately one month.  Upon completionof the conversion, we estimate the plant will have a biodiesel productioncapacity of 10-20 MMGPY.

As of August 14, 2006 and pursuant to theletter of intent, we have deposited $500,000 of the purchase price with VertexEnergy.  The deposit will reduce thepurchase price payable at closing.  Tothe extent the deposit has been used for expenditures in connection with theconversion of the facility, we will forfeit the right to repayment of theportion of the deposit already spent on such conversion expenditures.  In the event the parties execute definitivedocuments and the transaction closes, the letter of intent provides that VertexEnergy will have an option, exercisable on the 180th day after the closing, to require us torepurchase the 1,500,000 shares of our common stock issued to Vertex Energy aspart of the purchase price for $2.0 million.

Our rights and obligations set forth in the letter ofintent are subject to the negotiation and execution of definitivedocumentation.  We can make no assurancesthat the final terms of the transaction will conform to the terms of the letterof intent or that the parties will even enter into definitive documents.

*MartinCounty, North Carolina*

On June 7, 2006, we entered into a letter ofintent with and DFI Group, Inc. and Albermarle Bio-Refinery, Inc., whichcontemplates a joint venture in which Albermarle Bio-Refinery will convert intoa limited liability company and own and operate an ethanol facility in MartinCounty, North Carolina.

As contemplated by the letter of intent, AlbermarleBio-Refinery will acquire a 49% interest in the newly created company inexchange for contributing to the converted operating company real property andimprovements, including permits and plans. One of our wholly owned subsidiaries to be formed will acquire a 51%interest in the operating company in exchange for a purchase price consistingof cash in the amount of $25.0 million and the issuance of shares of commonstock of the new subsidiary equal to 5% of the total authorized shares of suchsubsidiary.

A new ethanolproduction facility will be constructed by the new operating company in twophases.  We anticipate that the constructionof phase I of the facility will take approximately 12 to 14 months, after whichtime we estimate the plant will produce approximately 55 MMGPY.  We anticipate that the construction of phaseII will take approximately six months after the completion of phase I, afterwhich time we estimate the plant will produce approximately an additional 55 MMGPY.

In connection with the non-binding letter of intent,we have loaned an aggregate of $5.0 million to Albermarle Bio-Refinery, Inc. asof August 14, 2006 for the purposes of permitting, engineering andsite improvements.  In exchange for theloan, Albermarle Bio-Refinery, Inc. issued us two promissory notes, each ofwhich bears interest at 4.85% and matures one year from the date of thenote.  Principal and accrued interest aredue at maturity.  Upon the closing of thetransaction, the notes will automatically convert into equity of the newoperating company and the purchase price payable by us will be reduced by theamount of any remaining principal and accrued and unpaid interest.

21

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Our rights and obligations set forth in thenon-binding letter of intent are subject to the negotiation and execution ofdefinitive documentation.  We can make noassurances that the final terms of the transaction will conform to the terms ofthe letter of intent or that the parties will even enter into definitivedocuments.

*SanAntonio, Texas Facility*

On May 5, 2006, we signed a letter of intentto acquire a biodiesel production facility from Systems Management Solutions,Inc.  The facility, located near SanAntonio, Texas, currently supplies most of its production of biodiesel to us,and is in the process of expanding its production capacity.  The facility’s current biodiesel productioncapacity is six MMGPY.  We plan to sellthe fuel produced by this facility under our brand name “BioWillie” to localmarkets and other areas of Texas.  Ourobligations set forth in the letters of intent are subject to the negotiationand execution of definitive documentation. We can make no assurances that the final terms of the transaction willconform to the terms of the letter of intent or that the parties will evenenter into definitive documents.

**Off-BalanceSheet Arrangements**

At June 30, 2006, we had no obligations thatwould qualify to be disclosed as off-balance sheet arrangements.

**ITEM 3. CONTROLS AND PROCEDURES**

***Evaluation of DisclosureControls and Procedures***

An evaluation of the effectiveness of our “disclosurecontrols and procedures” (as such term is defined in Rules 13a-15(e) or15d-15(e) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct) was carried out by us under the supervision and with the participation ofour Chief Executive Officer and Chief Financial Officer. Disclosure controlsand procedures are controls and procedures designed to ensure that informationwe are required to disclose be in our reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and include controls andprocedures designed to ensure that information we are required to disclose insuch reports is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were not effective.Specifically, our independent auditors identified deficiencies in our controlsrelated to theidentification and evaluation of potential derivative liabilities, valuationand recording of share-based compensation, and valuation and recording ofbeneficial conversion features associated with convertible debt.  We are continuing our efforts toimprove and strengthen our control processes and procedures to fully remedythese deficiencies and during the three months ended June 30, 2006 have addedadditional accounting staff. Our management and directors will continue to workwith our auditors and other outside advisors to ensure that our controls and proceduresare adequate and effective.

Notwithstanding the materialweaknesses described above, management believes that the consolidated financialstatements included in this Quarterly Report on Form 10-QSB fairly present, inall material respects, our financial position, results of operations and cashflows for the periods presented.

The certifications of ourprincipal executive officer and principal financial officer required inaccordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attachedas exhibits to this Quarterly Report of Form 10-QSB. The disclosures set forthin this Item 3 contain information concerning the evaluation of ourdisclosure controls and procedures and changes in internal control overfinancial reporting, referred to in the certifications. Those certificationsshould be read in conjunction with this Item 3 for a more completeunderstanding of the matters covered by the certifications.

***Changes in InternalControl over Financial Reporting***

There have been no changes in our internal controlover financial reporting (except as noted in this Item 3) that occurred duringour last fiscal quarter that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

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** **

**PART II — OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

H.C. Wainwright & Co., Inc. commenced anarbitration against us on July 20, 2006, asserting a claim for breachof contract relating to a March 7, 2006 letter allegedly appointingH.C. Wainwright our placement agent for a limited time for the sale of oursecurities.  H.C. Wainwright is seekingan award of unpaid commissions, warrants for the purchase our common stock, andattorneys’ fees and costs.  Thearbitration proceeding is at an early stage and no discovery has been taken ordates established.  We are scheduled tofile an answering statement on August 25, 2006.  We deny that we are liable to H.C. Wainwrightfor breach of contract and intend to vigorously defend this claim.

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

On March 31, 2006, we issued 1,800,000shares of our common stock to Dr. Miguel Dabdoub in connection with thepurchase of a membership interest in Earth Biofuels Technology Company,LLC.  These shares were issued inreliance upon the exemption from registration afforded by Section 4(2) of theSecurities Act.

On March 31, 2006, pursuant to the closingof the merger with Southern Bio Fuels, we issued 2,933,333 shares of our commonstock to the sole stockholder of Southern Bio Fuels.  The sale of these shares of our common stockto accredited investors was made in reliance upon the exemption fromregistration afforded by Section 4(2) of the Securities Act of 1933, asamended, or the Securities Act.

On April 28, 2006, we entered into asecurities purchase agreement, pursuant to which we issued 6,400,000 shares ofour common stock to accredited investors, in consideration for the payment ofapproximately $3.2 million.  We will usethe proceeds, in concert with other funds, to acquire a 50% equity interest inan entity which will own and operate a planned ethanol plant in New Orleans,Louisiana.  The purchase agreementprovides for an additional issuance of 6,400,000 shares of our common stock, ifwe have not timely consummated the acquisition of the equity interest in theplanned New Orleans ethanol plant discussed below.  Contemporaneously with the execution anddelivery of the securities purchase agreement, we entered into a registrationrights agreement, pursuant to which we agreed to provide certain registrationrights with respect to the shares of common stock issued pursuant to thesecurities purchase agreement.  The saleof these shares of our common stock to accredited investors was made inreliance upon the exemption from registration afforded by Section 4(2) of theSecurities Act of 1933, as amended, or the Securities Act.

On June 12, 2006, we issued 125,000 shares of ourcommon stock in connection with our April 20, 2006 acquisition of a 25% limitedpartnership interest in Trucker’s Corner, L.P. In addition, Trucker’s Corner received $1.1 million from us and 25,000shares of Apollo Resources’ common stock from Apollo Resources.  Our shares of common stock were issued inreliance upon the exemption from registration afforded by Section 4(2) of theSecurities Act.

On June 12, 2006, we issued 537,500 shares of ourcommon stock to Biodiesel Venture, L.P. and 537,500 shares of our common stockto Willie H. Nelson in connection with a sublicense agreement entered into onApril 1, 2006 with Biodiesel Venture, L.P., pursuant to which Biodiesel Venturegranted us an exclusive sublicense to use the trademark “BioWillie” which islicensed to Biodiesel Venture pursuant to a master license with Mr. Nelson, theowner of the trademark.  These shareswere issued in reliance upon the exemption from registration afforded bySection 4(2) of the Securities Act.

During the quarter ending June 30, 2006, we issued231,250 shares of our common stock in repayment of a loan including accrued andunpaid interest thereon.  These shareswere issued in reliance upon the exemption from registration afforded bySection 4(2) of the Securities Act.

During the quarter ending June 30, 2006, we issued160,000 shares of our common stock to employees for services rendered and1,430,274 shares of our common stock to for consulting services, of which600,000 were issued to Herb Meyer, a member of our Board of Directors, underhis consulting agreement.  These shareswere issued in reliance upon the exemption from registration afforded bySection 4(2) of the Securities Act.

During the quarter ending June 30, 2006, we issued5,799,088 for net proceeds of approximately $2.9 million in connection withprivate placement transactions.  Theseshares were issued in reliance upon the exemption from registration afforded bySection 4(2) of the Securities Act.

23

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During the quarter ending June 30, 2006, we issuedconvertible notes and warrants to institutional investors in reliance upon theexemption from registration afforded by Section 4(2) of the Securities Act. asfollows:

·                  On May 4, 2006,we issued a $1.0 million convertible, secured promissory note, bearing interestat 7%, payable within thirty days upon demand by the holder, and convertibleinto shares of our common stock at a conversion price of $1.086 per share.  We also issued the investor a warrant topurchase 920,810 shares of our common stock, exercisable until May 31, 2001 atthe lesser of $2.00 per share or 80% of the average trading price of our commonstock for the thirty trading days prior to the exercise of the warrant.  We used the net proceeds from the sale inconnection with our biodiesel and ethanol plant acquisition strategy and forother general corporate purposes.  Wegranted the noteholder certain registration rights with respect to the sharesof common stock underlying the convertible note and the warrant.  The note and warrant and a correspondingguarantee given by Apollo Resources, our majority stockholder, weresubsequently cancelled by the holder in connection with Apollo Resources’closing on July 21, 2006 of a securities purchase agreement with GreenwichPower.

·                  On May 26, 2006,we issued $5.0 million principal amount of 8% senior convertible promissorynotes to a single institutional investor. The notes carried an 8% coupon, payable quarterly, and were redeemableby us at par at any time prior to their initial maturity date in August 2006.  The notes were not convertible until afterAugust 2006, at which time the maturity date was extendable to November 2006 atthe holder’s option.  The notes wereconvertible into our common stock at a conversion price equal to the greater of$1.00 per share or 75% of the weighted average price per share of our common stockon a five-day volume weighted average prior to closing.  We also issued five-year warrants to purchase750,000 shares of common stock to the investor and five-year warrants topurchase 18,750 shares of common stock to our placement agent, both at an exerciseprice of $3.84 per share.  We used thenet proceeds from the sale in connection with our biodiesel and ethanol plantacquisition strategy and for other general corporate purposes.  We granted the investor certain registrationrights with respect to the shares of common stock issuable upon conversion ofthe convertible notes and exercise of the warrants.  The remaining unpaid principal and accruedand unpaid interest on these notes were repaid in full with a portion of thenet proceeds from the senior convertible promissory notes we issued in July2006.  The warrants remain outstanding.

·                  On June 2, 2006,we issued a convertible note with a principal amount of $500,000 to oneindividual.  The note bore interest at 8%per year, which was payable on July 28, 2006, August 28, 2006, January 28, 2007and April 28, 2007.  The note had amaturity date of April 28, 2007.  Thenote was convertible into shares of our common stock at a conversion priceequal to the lesser of $0.50 per share or 70% of the weighted average price pershare of our common stock. We used the net proceeds from the sale in connectionwith our biodiesel and ethanol plant acquisition strategy and for other generalcorporate purposes.  We granted the noteholdercertain registration rights with respect to the shares of common stockunderlying the convertible notes.  OnJuly 13, 2006, the holder of the note exercised its option to convert thenotes, and we issued an aggregate of 1,000,000 shares of our common stock tosuch holder in exchange for the cancellation of the note.

·                  On June 7, 2006,we issued $10 million aggregate principal amount of senior convertible notes tofour institutional investors.  The notescarried an 8% coupon, payable quarterly, and were redeemable by us at par at anytime prior to their initial maturity date in September 2006.  The notes were not convertible until afterSeptember 2006, at which time the maturity date was extendable to December 2006at the holder’s option.  The notes wereconvertible into our common stock at a conversion price equal to the greater of$1.00 per share or 70% of the weighted average price per share of our commonstock on a five-day volume weighted average prior to closing.  We also issued to the investors five-yearwarrants to purchase an aggregate of 1,500,000 shares of common stock to theinvestors and five-year warrants to purchase 45,000 shares of common stock toour placement agent, at an exercise price of $2.93 per share.  We used the net proceeds from the sale, inconcert with other funds, to continue to execute our business plan,specifically the construction or acquisition of additional biodiesel andethanol facilities, and for other general corporate purposes, including workingcapital.  We granted the investor certainregistration rights with respect to the shares of common stock underlying theconvertible notes and warrants.  Theremaining unpaid principal and accrued and unpaid interest on these notes wererepaid in full with a portion of the net proceeds from the senior convertible promissorynotes we issued in July 2006.  Thewarrants remain outstanding.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

None.

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** **

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

On June 12, 2006, our board of directorsapproved and recommended to our stockholders an amendment to our certificate ofincorporation to increase the number of authorized shares of our common stockfrom 250,000,000 to 400,000,000.  Also onJune 12, 2006, in accordance with Delaware law and our bylaws, ApolloResources, the holder of a majority of our issued and outstanding shares ofcommon stock, executed a written consent adopting and approving the amendmentto our certificate of incorporation.  Thewritten consent of common stockholders was executed by Apollo Resources which,as of June 12, 2006, held approximately 62% of the shares of commonstock eligible to vote.  The amendment toour certificate of incorporation did not become effective until filing with theSecretary of State of Delaware on July 21, 2006.

**ITEM 5.  OTHERINFORMATION**

***Appointment of NewDirector***

Effective June 12, 2006, our Board ofDirectors appointed Mr. Herbert E. Meyer as a member of our board ofdirectors.  On June 9, 2006, weentered into a consulting agreement with Mr. Meyer, pursuant to which he agreedto provide consulting services relating to energy policies, strategic planning,and such other matters as we may request. In exchange for such services, we issued Mr. Meyer, 600,000 shares ofour common stock.  The agreement has atwo-year term but is terminable by us upon thirty days written notice.

***Approval of 2006 StockOption and Award Plan***

On April 27, 2006, our Board of Directors and amajority of our stockholders acted by unanimous written consent to approve andadopt our 2006 Stock Option and Award Plan. The plan is intended to aid inmaintaining and developing a management team, attracting qualified officers andemployees capable of assisting in our future success, and rewarding thoseindividuals who have contributed to our success. It is designed to aid inretaining the services of executives and employees and in attracting newpersonnel when needed for future operations and growth and to provide suchpersonnel with an incentive to remain our employees, to use their best effortsto promote the success of our business, and to provide them with an opportunityto obtain or increase a proprietary interest in us through the granting ofstock options and/or stock awards. Eligible award recipients are employees and directors of our company andour subsidiaries and other individuals who are not employee by us as determinedby the administrator of the plan.  Themaximum number of shares of our common stock which may be issued under the planmay not exceed 5,000,000 shares, subject to certain adjustments.

**ITEM 6. EXHIBITS**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                   |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          |       | Certificate of Incorporation (incorporated by  reference to Exhibit 3.1 to the Quarterly Report on Form 10-QSB for the  period ending September 30, 2005 filed by Earth Biofuels, Inc. with  the SEC on November 23, 2005).   |
|         |       |                                                                                                                                                                                                                                              |
| 3.2          |       | Certificate of Amendment to Certificate of  Incorporation (incorporated by reference to Exhibit A to the Information  Statement on Schedule 14C filed by Earth Biofuels, Inc. with the SEC on  July 11, 2006).                          |
|         |       |                                                                                                                                                                                                                                              |
| 3.3          |       | Bylaws of Earth Biofuels, Inc. (incorporated by  reference to Exhibit 3.2 to the Quarterly Report on Form 10-QSB for the  period ending September 30, 2005 filed by Earth Biofuels, Inc. with  the SEC on November 23, 2005). |
|         |       |                                                                                                                                                                                                                                              |
| *4.1         |       | Specimen Certificate for shares of Common Stock of  the Earth Biofuels, Inc.                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                              |
| *10.1        |       | Indemnification Agreement dated  September 13, 2005 by and between Meadow Springs, Inc, (as  predecessor to Earth Biofuels, Inc.) and Dennis G. McLaughlin, III.                                                                        |
|         |       |                                                                                                                                                                                                                                              |
| *10.2        |       | Indemnification Agreement dated  September 13, 2005 by and between Meadow Springs, Inc, (as  predecessor to Earth Biofuels, Inc.) and Tommy W. Johnson.                                                                                 |

 

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| *10.3  |   | Indemnification Agreement dated  September 29, 2005 by and between Meadow Springs, Inc. (as  predecessor to Earth Biofuels, Inc.) and William O. Luckett, Jr.                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.4  |   | Indemnification Agreement dated  September 29, 2005 by and between Meadow Springs, Inc. (as  predecessor to Earth Biofuels, Inc.) and Morgan Freeman.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.5  |   | Indemnification Agreement dated  September 29, 2005 by and between Meadow Springs, Inc. (as  predecessor to Earth Biofuels, Inc.) and Bruce Blackwell.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.6  |   | Lease Agreement dated October 2005 by and  between R. Bruce Blackwell and Earth Biofuels, LLC.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.7  |   | Intercompany Credit Agreement dated  January 1, 2006 by and between Earth Biofuels, Inc. and Apollo  Resources International, Inc.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.8  |   | Registration Rights Agreement dated  January 27, 2006 by and between Earth Biofuels, Inc. and Tom Groos.                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.9  |   | Earth Biofuels, Inc. Convertible Promissory Note  dated January 27, 2006 issued by Earth Biofuels, Inc. in favor of  Tom Groos.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.10 |   | Registration Rights Agreement dated  January 30, 2006 by and between Earth Biofuels, Inc. and Marc  Weill.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.11 |   | Earth Biofuels, Inc. Convertible Promissory Note  dated January 30, 2006 issued by Earth Biofuels, Inc. in favor of  Marc Weill.                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.12 |   | Membership Interest Purchase Agreement dated  March 1, 2006 by and between Earth Biofuels, Inc. and Dr. Miguel J.  Dabdoub.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.13 |   | Registration Rights Agreement dated  March 29, 2006 by and between Earth Biofuels, Inc. and Josh Cohen.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.14 |   | Earth Biofuels, Inc. Convertible Promissory Note  dated March 29, 2006 issued by Earth Biofuels, Inc. in favor of  Josh Cohen.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.15 |   | Registration Rights Agreement dated  March 31, 2006 by and between Earth Biofuels, Inc. and Tom Groos.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.16 |   | Earth Biofuels, Inc. Convertible Promissory Note  dated March 31, 2006 issued by Earth Biofuels, Inc. in favor of Tom  Groos.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.17 |   | Letter of Intent dated June 13, 2006 by  and between Earth Biofuels, Inc. and HPS Development, L.L.C.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.18 |   | Agreement dated August 2, 2006 by and  between Earth Biofuels, Inc. and HPS Development, L.L.C.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.19  |   | Securities Purchase Agreement dated  April 28, 2006, by and among Earth Biofuels, Inc. and the buyers  listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  May 10, 2006). |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.20  |   | Registration Rights Agreement dated  April 28, 2006 by and among Earth Biofuels, Inc. and the buyers  listed on the schedule thereto (incorporated by reference to Exhibit 4.2 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  May 10, 2006).  |
|   |   |                                                                                                                                                                                                                                                                                                 |
| *10.21 |   | Registration Rights Agreement dated  May 4, 2006 by and between Earth Biofuels, Inc. and Greenwich  Power, L.L.C.                                                                                                                                                                          |

 

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| *10.22 |   | Convertible Secured Promissory Note-Bridge Loan  dated May 4, 2006 issued by Earth Biofuels, Inc. in favor of  Greenwich Power, L.L.C.                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.23 |   | Warrant to Purchase Shares of Common Stock of Earth  Biofuels, Inc. dated May 4, 2006 issued to Greenwich Power, L.L.C.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.24 |   | Unconditional Guaranty of Payment and Performance  dated May 4, 2006 executed by Apollo Resources International, Inc.  in favor of Greenwich Power, L.L.C.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.25 |   | Letter of Intent dated May 13, 2006 by and  between Earth Biofuels, Inc. and Vertex Energy, LP.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.26  |   | Securities Purchase Agreement dated  May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers  listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  May 31, 2006).   |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.27 |   | Amended and Restated Securities Purchase Agreement  dated May 26, 2006 by and between Earth Biofuels, Inc. and the  purchasers listed on the schedule thereto.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.28  |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated May 26, 2006, issued to Evolution Master Fund,  Ltd. (incorporated by reference to Exhibit 4.3 of the Current Report on Form  8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).                  |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.29 |   | Warrant No. 1r to Purchase Common Stock of Earth  Biofuels, Inc. dated May 26, 2006 issued to Evolution Master Fund,  Ltd.                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.30 |   | Warrant No. 2 to Purchase Common Stock of Earth  Biofuels, Inc. dated May 26, 2006 issued to Cowen & Company  LLC.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.31  |   | 8% Senior Convertible Note dated  May 26, 2006 issued by Earth Biofuels, Inc. in favor of Evolution  Master Fund, Ltd. (incorporated by reference to Exhibit 4.2 of the Current  Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  May 31, 2006).                     |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.32  |   | Registration Rights Agreement dated May  26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed  on the signature pages thereto (incorporated by reference to Exhibit 4.4 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  May 31, 2006). |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.33 |   | Amended and Restated Registration Rights Agreement  dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers  listed on the signature pages thereto.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.34 |   | Registration Rights Agreement dated  June 2, 2006 by and between Earth Biofuels, Inc. and Marc Weill.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.35 |   | Earth Biofuels, Inc. Convertible Promissory Note  dated June 2, 2006 issued by Earth Biofuels, Inc. in favor of Marc  Weill.                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.36 |   | Convertible Promissory Note, dated  May 31, 2006, made by Albemarle Bio-Refinery, Inc. in favor of  Earth Biofuels, Inc.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *10.37 |   | Convertible Promissory Note, dated July 19, 2006,  made by Albemarle Bio-Refinery, Inc. in favor of Earth Biofuels, Inc.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.38  |   | Securities Purchase Agreement dated  June 7, 2006 by and among Earth Biofuels, Inc. and the purchasers  listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006).    |

 

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| 10.39  |   | Registration Rights Agreement dated  June 7, 2006, by and among Earth Biofuels, Inc. and the purchasers  listed on the schedule thereto (incorporated by reference to Exhibit 4.8 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006).                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.40  |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures  International (incorporated by reference to Exhibit 4.6 of the Current Report  on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.41 |   | Warrant No 1r to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures  International.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.42  |   | 8% Senior Convertible Note dated  June 7, 2006 issued by Earth Biofuels, Inc. in favor of Capital  Ventures International (incorporated by reference to Exhibit 4.3 of the  Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.43  |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Castlerigg Master  Investments Ltd. (incorporated by reference to Exhibit 4.5 of the Current  Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006)                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.44  |   | 8% Senior Convertible Note dated  June 7, 2006 issued by Earth Biofuels, Inc. in favor of Castlerigg  Master Investments, Ltd (incorporated by reference to Exhibit 4.2 of the  Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  June 12, 2006).                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.45  |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd for  and on behalf of the Class A Convertible Crossover Segregated Portfolio  (incorporated by reference to Exhibit 4.7 of the Current Report of Form 8-K  filed by Earth Biofuels, Inc. with the SEC on June 12, 2006)    |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.46 |   | Warrant No 1r to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd. for  and on behalf of the Class A Convertible Crossover Segregated Portfolio.                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.47  |   | 8% Senior Convertible Note dated  June 7, 2006 issued by Earth Biofuels, Inc. in favor of Radcliffe  SPC, Ltd. for and on the behalf of the Class A Convertible Crossover  Segregated Portfolio (incorporated by reference to Exhibit 4.4 of the Current  Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006). |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.48 |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company  LLC.                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.49 |   | Warrant No. 1r to Purchase Common Stock of Earth  Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company  LLC.                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.50 |   | Consulting Agreement dated June 9, 2006 by  and between Earth Biofuels, Inc. and Herb Meyer.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.51 |   | Securities Purchase Agreement dated  July 10, 2006 by and between Earth Biofuels, Inc. and the  purchasers signatory thereto.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.52 |   | Registration Rights Agreement dated  July 10, 2006 by and between Earth Biofuels, Inc. and the  purchasers signatory thereto.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.53 |   | 8% Senior Convertible Note dated  July 11, 2006 issued by Earth Biofuels, Inc. to Castlerigg Master  Investments Ltd.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| *10.54 |   | Warrant No. 1 to Purchase Common Stock of Earth  Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master  Investments Ltd.                                                                                                                                                                                                                    |

 

28

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| *10.55 |   | Warrant No. 2 to Purchase Common Stock of Earth  Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master  Investments Ltd.                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.56 |   | Warrant No. 2 to Purchase Common Stock of Earth  Biofuels, Inc. dated July 11, 2006 issued to Cowen & Company  LLC.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.57 |   | Registration Rights Agreement dated  July 21, 2006 by and between Apollo Resources International, Inc.  and Greenwich Power, LLC and acknowledged by Earth Biofuels, Inc.                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.58 |   | Registration Rights Agreement dated  July 21, 2006 by and between Apollo Resources International, Inc.  Greenwich Power II, LLC and acknowledged by Earth Biofuels, Inc.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.59 |   | Registration Rights Agreement dated  July 21, 2006 by and between Earth Biofuels, Inc. and Lance A  Bakrow.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.60 |   | Warrant to Purchase Shares of Common Stock of Earth  Biofuels, Inc. dated July 21, 2006 to Lance A. Bakrow.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.61  |   | Securities Purchase Agreement dated  July 24, 2006 by and among Earth Biofuels, Inc. and the buyers  listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  July 25, 2006).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.62  |   | Registration Rights Agreement dated  July 24, 2006 among Earth Biofuels, Inc. and the buyers listed on  the schedule thereto (incorporated by reference to Exhibit 4.2 of the Current  Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  July 25, 2006).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.63 |   | Lock-Up Letter dated July 24, 2006 from  Apollo Resources International, Inc.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.64 |   | Lock-Up Letter dated July 24, 2006 from  Dennis G. McLaughlin III.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.65 |   | Warrant No. 3 to Purchase Common Stock of Earth  Biofuels, Inc. dated July 24, 2006 by Cowen & Company LLC.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.66  |   | Form of Warrant to Purchase Common Stock of Earth  Biofuels, Inc. dated July 24, 2006 (incorporated by reference to  Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc.  with the SEC on July 25, 2006).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.67  |   | Form of Notes dated as of July 24, 2006  issued by Earth Biofuels, Inc. (incorporated by reference to Exhibit 4.3 on  the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on  July 25, 2006).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.68  |   | Merger Agreement, dated March 31, 2006, by  and between Earth Biofuels, Southern Bio Fuels, Inc., Southern Bio Fuels,  LLC, and the other members and individuals party thereto (incorporated by  reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Earth  Biofuels, Inc. with the SEC on April 10, 2006). |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.69 |   | Securities Purchase Agreement, dated  August 19, 2005, by and among Apollo Resources International, Inc.,  Tommy Johnson, Bruce Blackwell, William H. Webster and Robert Glenn.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.70 |   | Purchase and Sale Agreement dated  February 25, 2005 by and between Earth Biofuels, Inc., R. Bruce  Blackwell, Tommy Johnson, Robert Glenn, William Webster and Apollo Resources  International, Inc.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.71 |   | Promissory Note issued on March 2, 2006 to Southern  Bio Fuels, LLC.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *10.72 |   | Commercial Guaranty made on March 2, 2006 by Dennis  G. McLaughlin, III in favor of Southern Biofuels, LLC.                                                                                                                                                                                                                                       |

 

29

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| *10.73  |   | Promissory Note issued on March 31, 2006 to Southern  Bio Fuels, LLC.                                                                                           |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                            |
| *10.74  |   | Commercial Guaranty made on March 31, 2006 by Dennis  G. McLaughlin, III in favor of Southern Bio Fuels, LLC.                                                   |
|    |   |                                                                                                                                                            |
| *10.75  |   | Commercial Guaranty made on March 31, 2006 by R.  Bruce Blackwell in favor of Southern Bio Fuels, LLC.                                                          |
|    |   |                                                                                                                                                            |
| *10.76  |   | Commercial Guaranty made on March 31, 2006 by Tommy  Johnson in favor of Southern Bio Fuels, LLC.                                                               |
|    |   |                                                                                                                                                            |
| +*10.77 |   | Earth Biofuels, Inc. 2006 Stock Option and Award  Plan effective April 15, 2006.                                                                                |
|    |   |                                                                                                                                                            |
| *10.78  |   | Sublicense Agreement dated April 1, 2006 by and  between Earth Biofuels, Inc. and Biodiesel Venture, L.P.                                                       |
|    |   |                                                                                                                                                            |
| *31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) under the Securities Act of 1934.                                                |
|    |   |                                                                                                                                                            |
| *31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) under the Securities Act of 1934.                                                          |
|    |   |                                                                                                                                                            |
| *32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|    |   |                                                                                                                                                            |
| *32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

----

*                    Filedherewith.

+                    Managementcontract, compensatory plan or arrangement.

 

30

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SIGNATURE

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                                 |   | EARTH BIOFUELS, INC.                           |   |
|---------------------------------|--------|------------------------------------------------|--------|
|                            |   |                                           |   |
| Date: August 18, 2006 |   | /s/ Dennis  G. McLaughlin, III                 |   |
|                            |   | Dennis G. McLaughlin, III                      |   |
|                            |   | Chief Executive Officer                        |   |
|                            |   | (Principal Executive Officer)                  |   |
|                            |   |                                           |   |
| Date: August 18, 2006 |   | /s/ Darren L. Miles                            |   |
|                            |   | Darren L. Miles                                |   |
|                            |   | Chief Financial Officer                        |   |
|                            |   | (Principal Financial and   Accounting Officer) |   |

 

31

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