** **

**UNITED STATESSECURITIES 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

**FORTHE QUARTERLY PERIOD ENDED September 30, 2006**

**OR**

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

**CommissionFile Number 000-50842**

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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, Suite 403Dallas, 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 October 10, 2006, there were219,032,668 shares of the registrant’s common stock outstanding.

Transitional Small Business Disclosure Format (checkone):   Yes  o   No  x

 

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**EARTH BIOFUELS, INC.**

**TABLE OF CONTENTS**

**FORM 10-QSB QUARTERLY REPORT**
| **PART I FINANCIAL INFORMATION** |
|----------------------------------|
| ** **                       | ** ** | ** ** |
| Item 1.                          |   | Financial Statements |
|                             |   |   |
|                             |   | Consolidated  Balance Sheets at September 30, 2006 (unaudited) and  December 31, 2005 |
|                             |   |   |
|                             |   | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2006 and 2005 (unaudited) |
|                             |   |   |
|                             |   | Consolidated Statements of Stockholders’ Equity (Deficit)  For the Nine Months Ended September 30, 2006 and December 31, 2005 |
|                             |   |   |
|                             |   | Consolidated Statements of Cash Flows for the Nine  Months Ended September 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.                          |   | 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                       |   |   |

 

 

2

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**EARTH BIOFUELS, INC.**

CONSOLIDATEDBALANCE SHEETS

(UNAUDITED)
| ** **                                                                                                                                                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                           |       |                         |       |                        |       |
| Current Assets                                                                                                                                                                       |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                           |       | $                            | 41,609     |                        | $          | 82,093 |   |
| Trade accounts  receivable, net                                                                                                                                                      |       | 1,905,379                    |       | 253,376                     |       |
| Accounts  receivable — tax credits                                                                                                                                              |       | —                       |       | 374,381                     |       |
| Marketable  securities, net                                                                                                                                                          |       | 890,050                      |       | —                      |       |
| Inventory                                                                                                                                                                            |       | 252,638                      |       | 131,391                     |       |
| Prepaid expenses  & other current assets                                                                                                                                         |       | 20,506,719                   |       | 40,401                      |       |
| Notes receivable                                                                                                                                                                     |       | 803,550                      |       | —                      |       |
| Notes receivable  from related parties                                                                                                                                               |       | 2,960,621                    |       | —                      |       |
| Total Current  Assets                                                                                                                                                                |       | 27,360,566                   |       | 881,642                     |       |
| Property and  equipment, net                                                                                                                                                         |       | 15,090,606                   |       | 455,419                     |       |
| Investment -  related party                                                                                                                                                          |       | 100,000                      |       | —                      |       |
| Investments                                                                                                                                                                          |       | 41,531,996                   |       | —                      |       |
| Deferred  financing fees                                                                                                                                                             |       | 2,588,703                    |       | —                      |       |
| Other assets                                                                                                                                                                         |       | 413,106                      |       | 261,384                     |       |
| Goodwill                                                                                                                                                                             |       | 3,981,280                    |       | 3,981,280                   |       |
| Total Assets                                                                                                                                                                         |       | $                            | 91,066,257 |                        | $          | 5,579,725 |   |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Liabilities                                                                                                                                                                  |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                     |       | $                            | 3,946,203  |                        | $          | 763,215 |   |
| Accrued  liabilities                                                                                                                                                                 |       | 2,834,656                    |       | —                      |       |
| Shares payable                                                                                                                                                                       |       | —                       |       | 4,210,248                   |       |
| Payables to  related parties                                                                                                                                                         |       | 3,037,217                    |       | 1,442,569                   |       |
| Current portion  of convertible promissory notes, net of discount of $6,431,122                                                                                                      |       | 2,702,212                    |       | —                      |       |
| Other current  liabilities                                                                                                                                                           |       | —                       |       | 110,664                     |       |
| Total Current  Liabilities                                                                                                                                                           |       | 12,520,288                   |       | 6,526,696                   |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Long-term convertible  promissory notes, net of discount of $35,797,232                                                                                                              |       | 8,869,434                    |       | —                      |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Stockholders’ Equity  (Deficit)                                                                                                                                                 |       |                         |       |                        |       |
| Preferred stock,  $.001 par value, 15,000,000 shares authorized, 0 shares issued and  outstanding at September 30, 2006 and December 31, 2005                                        |       | —                       |       | —                      |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Common stock, $.001 par  value, 400,000,000 shares authorized, 203,976,749 and 161,591,036 shares  issued and outstanding at September 30, 2006 and December 31, 2005 |       | 203,976                      |       | 161,591                     |       |
| Additional  paid-in capital                                                                                                                                                          |       | 98,190,803                   |       | 9,499,709                   |       |
| Deferred  compensation                                                                                                                                                               |       | —                       |       | (98,500                     | )          |
| Other  comprehensive income                                                                                                                                                          |       | (124,854                     | )          | —                      |       |
| Accumulated  deficit                                                                                                                                                                 |       | (28,593,390                  | )          | (10,509,771                 | )          |
| Total  Stockholders’ Equity (Deficit)                                                                                                                                           |       | 69,676,535                   |       | (946,971                    | )          |
| Total Liabilities and Stockholders’ Equity (Deficit)                                                                                                                            |       | $                            | 91,066,257 |                        | $          | 5,579,725 |   |

 

See accompanying notes to consolidated financialstatements

 

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**EARTH BIOFUELS, INC.**

CONSOLIDATED STATEMENTSOF OPERATIONS

(UNAUDITED)
| ** **                                                                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales revenue                                                                                  |       | $                                                        | 9,382,652  |                                                    | $          | 392,564 |   | $ | 13,278,542 |   | $ | 1,065,087 |   |
| Energy production  credits                                                                     |       | 919,809                                                  |       | —                                                  |       | 1,817,961 |   | — |   |
| Total revenues                                                                                 |       | 10,302,461                                               |       | 392,564                                                 |       | 15,096,503 |   | 1,065,087 |   |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of sales                                                                                  |       | 9,862,837                                                |       | 403,921                                                 |       | 14,249,523 |   | 958,822 |   |
| Gross profit (loss)                                                                            |       | 439,624                                                  |       | (11,357                                                 | )          | 846,980 |   | 106,265 |   |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation (including  share based compensation of $6,776,290 and $16,740,900, respectively) |       | 8,093,976                                                |       | —                                                  |       | 19,515,791 |   | — |   |
| Other selling, general  and administrative                                                     |       | 4,789,378                                                |       | 454,417                                                 |       | 9,920,369 |   | 683,381 |   |
| Depreciation and  amortization                                                                 |       | 261,701                                                  |       | 877                                                     |       | 273,059 |   | 2,167 |   |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss from  operations                                                                      |       | (12,705,431                                              | )          | (466,651                                                | )          | (28,862,239 | ) | (579,283 | ) |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Other income (expense)                                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest income                                                                                |       | 33,124                                                   |       | —                                                  |       | 37,807 |   | — |   |
| Interest expense,  including penalties                                                         |       | (6,291,509                                               | )          | —                                                  |       | (9,081,955 | ) | — |   |
| Gain on derivatives                                                                            |       | 22,805,483                                               |       | —                                                  |       | 22,404,621 |   | — |   |
| Loss on marketable  securities                                                                 |       | (401,637                                                 | )          | —                                                  |       | (401,637 | ) | — |   |
| Other                                                                                          |       | (13,953                                                  | )          | 3,362                                                   |       | (34,463 | ) | 3,362 |   |
| Total other income                                                                             |       | 16,131,508                                               |       | 3,362                                                   |       | 12,924,373 |   | 3,362 |   |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss)                                                                              |       | $                                                        | 3,426,077  |                                                    | $          | (463,289 | ) | $ | (15,937,866 | ) | $ | (575,921 | ) |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) per  common share:                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                                          |       | $                                                        | 0.02       |                                                    | $          | (0.06 | ) | $ | (0.09 | ) | $ | (0.12 | ) |
| Diluted                                                                                        |       | $                                                        | 0.01       |                                                    | $          | (0.06 | ) | $ | (0.08 | ) | $ | (0.12 | ) |
|                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average  shares:                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                                          |       | 201,310,426                                              |       | 7,458,696                                               |       | 183,701,363 |   | 4,734,615 |   |
| Diluted                                                                                        |       | 229,520,149                                              |       | 7,458,696                                               |       | 195,722,678 |   | 4,734,615 |   |

 

See accompanying notes to consolidated financialstatements

 

4

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**EARTHBIOFUELS, INC.**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ DEFICIT****(UNAUDITED)  
| ** **                                                                                                                            | ** ** | **Members’  Capital** | ** ** | **Prefered  Stock** | ** ** | **Common  Stock  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid   In Capital** | ** ** | **Other  Comprehensive  Income** | ** ** | **Accumulated  Deficit** | ** ** | **Totals**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------|------------|---------------------------|------------|-------------------|------------|---------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------|------------|
| **Balance December 31, 2004**                                                                                                         |       | $                          | 60,000     |                | $          | —                    |       | —            |       | $                                           | —     |                             | $          | —                   |       | $           | —     |   | $ | (56,199 | ) | $ | 3,801 |   |
| Members contributions                                                                                                                 |       | 260,000                    |       | —              |       | —                    |       | —            |       | —                                      |       | —                           |       | —                   |       | 260,000     |       |
| Recapitalization                                                                                                                      |       | (320,000                   | )          | —              |       | 146,100,000               |       | 146,100           |       | $                                           | 173,900    |                             | —     |                     | —     |        | —     |   |
| Shares issued for cash                                                                                                                |       | —                     |       | —              |       | 251,036                   |       | 251               |       | 109,549                                     |       | —                           |       | —                   |       | 109,800     |       |
| Shares issued for  services                                                                                                           |       | —                     |       | —              |       | 15,240,000                |       | 15,240            |       | 9,216,260                                   |       | (98,500                          | )          | —                   |       | 9,133,000   |       |
| Net loss                                                                                                                              |       | —                     |       | —              |       | —                    |       | —            |       | —                                      |       | —                           |       | (10,453,572              | )          | (10,453,572 | )          |
| **Balance December 31, 2005**                                                                                                         |       | $                          | —     |                | $          | —                    |       | 161,591,036       |       | $                                           | 161,591    |                             | $          | 9,499,709                |       | $           | (98,500    | ) | $ | (10,509,771 | ) | $ | (946,971 | ) |
| ** **                                                                                                                            | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **                | ** ** | ** **        | ** ** | ** **                                  | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **  | ** ** |
| Shares issued for cash                                                                                                                |       | —                     |       | —              |       | 6,728,946                 |       | 6,729             |       | 1,071,866                                   |       | —                           |       | —                   |       | 1,078,595   |       |
| Shares issued for  services                                                                                                           |       | —                     |       | —              |       | 7,879,131                 |       | 7,879             |       | 34,922,585                                  |       | —                           |       | —                   |       | 34,930,464  |       |
| Shares issued for  investments                                                                                                        |       | —                     |       | —              |       | 24,777,626                |       | 24,777            |       | 23,505,557                                  |       | —                           |       | —                   |       | 23,530,334  |       |
| Unrealized loss on  marketable securities                                                                                             |       | —                     |       | —              |       | —                    |       | —            |       | —                                      |       | (124,854                         | )          | —                   |       | (124,854    | )          |
| Amortization of Deferred  compensation                                                                                                |       | —                     |       | —              |       | —                    |       | —            |       | —                                      |       | 98,500                           |       | —                   |       | 98,500      |       |
| Net Changes in discounts  on convertible debt and reversal of derivative liabilities and related  discounts from retirements of debts |       | —                     |       | —              |       | 3,000,000                 |       | 3,000             |       | 27,437,622                                  |       | —                           |       | —                   |       | —      |       |
| Net loss                                                                                                                              |       | —                     |       | —              |       | —                    |       | —            |       | —                                      |       | —                           |       | (15,937,866              | )          | (18,083,619 | )          |
| ** **                                                                                                                            | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **                | ** ** | ** **        | ** ** | ** **                                  | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **  | ** ** |
| **Balance September 30, 2006**                                                                                                        |       | $                          | —     |                | $          | —                    |       | 203,976,749       |       | $                                           | 203,976    |                             | $          | 96,437,339               |       | $           | (124,854   | ) | $ | (26,447,637 | ) | $ | 70,068,8245 |   |

 

See accompanying notes to financial statements.

 

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**EARTH BIOFUELS, INC.**

CONSOLIDATED STATEMENTSOF CASH FLOWS

(UNAUDITED)
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** **  |
|---------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                    | ** ** | **2006**                                                | ** **  | **2005** | ** ** |
| **Cash Flows from Operating  Activities:**                    | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| Net Loss                                                      |       | $                                                       | (15,937,866 | ) | $ | (575,921 | ) |
| Non-cash Items  Included in Net Loss:                         |       |                                                    |        |   |   |
| Depreciation                                                  |       | 273,059                                                 |        | 2,167 |   |
| Minority interest                                             |       | —                                                  |        | (3,362 | ) |
| Amortization of  debt issuance costs                          |       | 172,626                                                 |        | — |   |
| Gain on  derivative                                           |       | (22,404,621                                             | )           | — |   |
| Realized losses  on marketable securities                     |       | 334,710                                                 |        | — |   |
| Debt discount  amortization                                   |       | 6,499,534                                               |        | — |   |
| Amortization of  deferred compensation                        |       | 98,500                                                  |        | — |   |
| Shares issued  for employee compensation and other services   |       | 16,740,900                                              |        | — |   |
|                                                          |       |                                                    |        |   |   |
| Changes in  assets and liabilities:                           |       |                                                    |        |   |   |
| Decrease  (increase) in:                                      |       |                                                    |        |   |   |
| Trade accounts  receivable                                    |       | (1,652,003                                              | )           | (137,891 | ) |
| Accounts  receivable — tax credits                       |       | 374,381                                                 |        | — |   |
| Notes receivable                                              |       | (3,764,171                                              | )           | — |   |
| Inventory                                                     |       | (121,247                                                | )           | 3,962 |   |
| Prepaid expenses  & other current assets                  |       | (2,374,206                                              | )           | — |   |
| Other assets                                                  |       | (151,722                                                | )           | — |   |
| Increase  (decrease) in:                                      |       |                                                    |        |   |   |
| Accounts payable  and accrued expenses                        |       | 1,820,039                                               |        | 108,237 |   |
| Property, sales  and payroll taxes payable                    |       | (12,643                                                 | )           | 27,194 |   |
| Related party  advances                                       |       | 1,594,447                                               |        | 113,058 |   |
| Other  liabilities                                            |       | (110,739                                                | )           | 190 |   |
| Net cash used in operating  activities                        |       | (18,620,722                                             | )           | (462,366 | ) |
|                                                          |       |                                                    |        |   |   |
| **Cash Flows From Investing  Activities:**                    | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| Purchases of marketable  securities                           |       | (1,349,614                                              | )           | — |   |
| Cash paid for  investment in related party                    |       | (100,000                                                | )           | — |   |
| Cash paid on  investments                                     |       | (25,845,996                                             | )           | — |   |
| Cash paid for purchases  of fixed assets                      |       | (5,550,914                                              | )           | (229,280 | ) |
| Net cash used in  investing activities                        |       | (32,846,524                                             | )           | (109,981 | ) |
|                                                          |       |                                                    |        |   |   |
| **Cash Flows From Financing  Activities:**                    | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| Proceeds from issuance  of common stock                       |       | 1,078,595                                               |        | 461,000 |   |
| Proceeds from issuance  of convertible debt                   |       | 74,900,054                                              |        | — |   |
| Repayments of  convertible debt                               |       | (21,100,054                                             | )           | — |   |
| Capital contributions                                         |       | —                                                  |        | 260,000 |   |
| Cash paid for debt  issuance cost                             |       | (3,451,833                                              | )           | — |   |
| Net cash provided by  financing activities                    |       | 51,426,762                                              |        | 721,000 |   |
|                                                          |       |                                                    |        |   |   |
| Net increase (decrease)  in cash                              |       | (40,484                                                 | )           | 29,354 |   |
| Cash and cash  equivalents:                                   |       |                                                    |        |   |   |
| Beginning of  period                                          |       | 82,093                                                  |        | 10,903 |   |
| End of period                                                 |       | $                                                       | 41,609      |   | $ | 40,257 |   |
| **Supplemental Cash Flow  Disclosures:**                      | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| Cash paid for  income taxes                                   |       | $                                                       | —      |   | $ | — |   |
| Cash paid for  interest                                       |       | 272,332                                                 |        | — |   |
|                                                          |       |                                                    |        |   |   |
| Non-cash activity:                                            |       |                                                    |        |   |   |
| Value of shares issued  in connection with conversion of debt |       | 1,500,000                                               |        | — |   |
| Value of shares issued to acquire assets of Southern Biofuels |       | 7,157,333                                               |        | — |   |

 

 

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**EARTH BIOFUELS, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.****              BASIS OFPRESENTATION**

Theunaudited consolidated financial statements of Earth Biofuels, Inc. (“Earth” orthe “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States and the rules of the Securities andExchange Commission (“SEC”), and should be read in conjunction with the auditedfinancial statements and notes thereto contained in Earth’s latest AnnualReport on Form 10-KSB filed with the SEC.  In the opinion of management,all adjustments, consisting of normal recurring adjustments, necessary for afair presentation of financial position and the results of operations for theinterim period presented have been reflected herein.  Notes to thefinancial statements which would substantially duplicate the disclosurescontained in the audited financial statements for the most recent fiscalyear 2005 as reported in the Form 10-KSB, have been omitted.  Theresults of operations for the three and nine month periods endedSeptember 30, 2006 are not necessarily indicative of the results tobe expected for the full year.

***Background*****— Earth Biofuels, Inc., (“Earth”) wasincorporated in the state of Nevada on July 15, 2002. On September 13, 2005,Earth issued 146,100,000 shares of common stock to Apollo ResourcesInternational, Inc., a Utah corporation, in exchange for 80% of the outstandingshares of common stock of Earth Biofuels, Inc., a Mississippi corporation. OnOctober 7, 2005, Earth Biofuels, Inc. (the Mississippi company) changed itsname to Earth Biofuels Operating, Inc. Effective November 14, 2005, thedomicile of the Company was moved to Delaware by means of a merger of Earthwith and into Earth Biofuels, Inc., a Delaware corporation.

Theconsolidated financial statements include the accounts of Earth Biofuels, Inc,Earth Biofuels Operating, Inc., (“EBO”) which is the main operating subsidiaryand its wholly owned subsidiaries Durant Biofuels, LLC., and The  Wing Sail Company d/b/a Distribution Drive,Inc. All significant intercompany transactions and balances have beeneliminated in consolidation.

***Nature of Operations*****- The principal business of Earth is theproduction, supply and distribution of pure biodiesel fuel (B100) for saledirectly to wholesalers and to be used as a blend stock to make B20, apetroleum diesel-based alternative fuel. The company utilizes vegetable oilssuch as soy and canola oil as raw material (feedstock) for the production ofbiodiesel fuel.

***Accountingfor Stock-Based Compensation —*** On April 27, 2006,our Board of Directors and a majority of our stockholders acted by unanimouswritten consent to approve and adopt our 2006 Stock Option and Award Plan. Theplan is intended to aid in maintaining and developing a management team,attracting qualified officers and employees capable of assisting in our futuresuccess, and rewarding those individuals who have contributed to our success.It is designed to aid in retaining the services of executives and employees andin attracting new personnel when needed for future operations and growth and toprovide such personnel with an incentive to remain our employees, to use theirbest efforts to promote the success of our business, and to provide them withan opportunity to obtain or increase a proprietary interest in us through thegranting of stock options and/or stock awards.  Eligible award recipientsare employees and directors of our company and our subsidiaries and other individualswho are not employed by us as determined by the administrator of theplan.  The maximum number of shares of our common stock which may beissued under the plan may not exceed 5,000,000 shares, subject to certainadjustments.

During the quarterending  September 30, 2006, the Companyissued 2,082,867 restricted shares of the Company’s common stock to employeesfor services rendered and 6,430,000 restricted shares of the Company’s commonstock for consulting services, of which 400,000 the Company issued to HerbMeyer, a member of the Company’s Board of Directors, under his consultingagreement.  There have been no stockoptions granted as of September 30, 2006.

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***Accountingfor Derivatives****** —*** Statementof Financial Accounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), as amended, requires allderivatives to be recorded on the balance sheet at fair value. Thesederivatives, including embedded derivatives in our structured borrowings, are separatelyvalued and accounted for on our balance sheet. Fair values for exchange-tradedsecurities and derivatives are based on quoted market prices. Where marketprices are not readily available, fair values are determined using market basedpricing models incorporating readily observable market data and requiringjudgment and estimates.

In September 2000,the Emerging Issues Task Force (“EITF”) issued EITF Issue 00-19, “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock,” (“EITF 00-19”) which requires freestanding contracts thatare settled in a company’s own stock, including common stock warrants, to bedesignated as an equity instrument, asset or a liability. Under the provisionsof EITF 00-19, a contract designated as an asset or a liability must be carriedat fair value on a company’s balance sheet, with any changes in fair valuerecorded in Ener1’s results of operations. A contract designated as an equityinstrument must be included within equity, and no fair value adjustments arerequired. In accordance with SFAS 133 and EITF 00-19, we determined thatseveral of the outstanding warrants to purchase our common stock and theembedded conversion feature and certain other features of several of our financialinstruments should be separately accounted for as assets or liabilities. Ourfinancial statements for the six and nine months ended September 30, 2006reflect the fair value of these warrants and the conversion and other embeddedderivatives features on our balance sheet and the unrealized changes in thevalues of these derivatives in our consolidated statements of operations as“Gain (loss) on derivative liability.” As the notes which included derivatives were paid or converted duringthe quarter, there is no derivative liability at September 30, 2006.

***NetLoss Per Share Data —***Basic and diluted net loss percommon share are presented in conformity with the SFAS No. 128, “Earnings PerShare”. Diluted net loss per share is the same as basic net loss per share asthe inclusion of outstanding warrants until their exercise would beanti-dilutive.  Share and per-share datapresented throughout the financial statements and notes reflect a 6-for-1forward split that the Company declared in November, 2005.

***Reclassifications —*** Certain previouslyreported amounts have been reclassified to conform to the current presentation.

***Use of Estimates*** —The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

**2.**              **MARKETABLESECURITIES**

Earth’s investments consist primarily of availablefor sale securities totaling $698,000, and trading securities for approximately$192,000. In accordance with SFAS No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities”, securities are marked to market with gains andlosses being reflected as unrealized for available for sale securities, andrealized gains or losses for trading securities.

**3.****              PROPERTY ANDEQUIPMENT**

Property and equipmentare recorded at cost. Expenditures that substantially increase the useful livesof the property and equipment are capitalized, whereas costs incurred tomaintain the appearance and functionality of such assets are charged to repairand maintenance expense. Reviews are performed regularly to determine whether factsor circumstances exist that indicate the carrying values of our property andequipment are impaired. We assess the recoverability of our property andequipment by comparing the projected future undiscounted net cash flowsassociated with these assets to their respective carrying amounts. Impairment,if any, is based on the excess of the carrying amount over the estimated fairmarket value of the assets.

OnApril 27, 2006, Earth acquired approximately eight acres of land inDurant, Oklahoma for $175,000 in anticipation of Earth’s plans to build anethanol 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 thequarter ended September 30, 2006, plant equipment acquisitions were made inthe amount of $3,323,335, and $5,550,914 for the nine months ended September30, 2006.

OnMay 4, 2006, we acquired approximately 4.5 acres of land inGreenville, Mississippi adjacent to the Mississippi River for approximately$275,000.  The property includes bulk storage tanks with a capacity ofapproximately one million gallons, barge loading/unloading facilities, and afuel truck rack.  We plan to utilize the property for the construction ofa biodiesel production plant.

**4.****              INVESTMENTS**

Investmentsare comprised mainly of $41,281,996 in Earth’s funding of its ownershipinterests in investments that have not closed as ofSeptember 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 investorswill not contribute cash or other assets, or cash or assets in proportion totheir ownership interest, Earth will recognize either losses on minorityinterest or loss on equity investments, as appropriate.

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**Letters of Intent -**OnApril 24, 2006, Earth entered into a letter of intent with HPSDevelopment, L.L.C., which contemplates a joint venture in which a newlycreated limited liability company (New Orleans Facility) will own and operate afuel ethanol distillery located on the Mississippi River in Plaquemines Parish,Louisiana, approximately nine miles southeast of New Orleans. As contemplatedby the letter of intent, HPS Development will acquire a 50% interest in thenewly created limited liability company in exchange for contributing to the newoperating company real property and improvements, including a currently idleethanol distillery.  Earth will acquire a 50% interest in the operatingcompany in exchange for the payment of $50,000,000 and the issuance of5,829,005 shares of our common stock to HPS Development.  As of September 30, 2006 total advances were$27,066,996.

OnMay 2, 2006, Earth entered into a letter of intent with VertexEnergy, L.P., which contemplates a joint venture in which a newly createdcompany will own and operate a biodiesel production facility on the HoustonShip Channel in Houston, 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.  Earthwill acquire a 51% interest in the operating company in exchange for thepayment of $2,500,000 and the issuance of 1,500,000 shares of our common stockto Vertex Energy.  As of September 30, 2006 total investment/advances were$4,320,000 relating to Vertex, which represent the issue of shares and adeposit of $500,000.

OnMay 5, 2006, Earthsigned a letter of intent to acquire a biodiesel production facility fromSystems Management Solutions, Inc.  Thefacility, located near San Antonio, Texas, currently supplies most of itsproduction of biodiesel to us, and is in the process of expanding itsproduction capacity.  The facility’s current biodiesel production capacityis 6 MMGPY.  We plan to sell the fuel produced by this facility under ourbrand name “BioWillie” to local markets and other areas of Texas. TheFinal agreement was executed on October 5th, 2006.

OnJune 7, 2006, Earth entered into a letter of intent with EarthEthanol, Inc., one of our wholly owned subsidiaries, DFI Group, Inc. andAlbermarle Bio-Refinery, Inc., which contemplates a joint venture in whichAlbermarle Bio-Refinery will convert into a limited liability company and ownand operate an ethanol facility in Martin County, North Carolina.  Inconnection with the non-binding letter of intent, we have loaned an aggregateof $2,000,000 to Albermarle Bio-Refinery, Inc. as of the quarter endedSeptember 30, 2006 for the purposes of acquiring 51% investment in a50-million gallon ethanol production plant in Jamesville, NC.  The notebears interest at 4.85% and matures one year from the date of the note. Principal and accrued interest are due at maturity.  Upon the closing ofthe transaction, 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.  As of September 30, 2006 total advances were$5,150,000.

OnSeptember 21, 2006, Earth invested$5 million for an equity interest in a newly-formed company named “BiodieselInvestment Group”. Biodiesel Investment Group and Bunge North America, Inc. (“Bunge”),one of the nation’s leading agribusiness firms, have partnered to start theconstruction of a jointly-owned biodiesel plant with an annual capacity of 45million gallons.  Once completed, the plant will be Illinois’ largestbiodiesel production plant. It is anticipated that the Company will enter intoan off-take agreement with the new Illinois LLC for some portion of thebiodiesel production output of the plant.  The Company plans to market itsshare of the new plant’s production to local and other new markets under its “BioWillie”brand name.

**Investments-** also consist of a $250,000 payment for a 51% interest in anew entity (American Earth Fuels Company, LLC) which started operationssubsequent to September 30, 2006. The remaining $100,000 is a deposit for an asset purchase that did notclose subsequent to September 30, 2006, and is expected to be returned.

**Investment— related party -**consists of an equity investment with lessthan 5% ownership interest in Blue Wireless.  The Chief Executive Officerof Earth is also the Chairman of the Board for the related investment. Earth will account for this investment under the equity method.

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**5.****              CONVERTIBLE DEBT**

OnJuly 10, 2006, Earth enteredinto a securities purchase agreement, pursuant to which the Company issued an8% senior convertible note with a principal amount of $5.0 million to oneinstitutional investor.  The Company also issued five-year warrants topurchase an aggregate of 1,500,000 shares of common stock to the investor andfive-year warrants to purchase 15,000 shares of common stock to the Company’splacement agent, both at an exercise price of $2.50 per share. OnJuly 24, 2006, the Company used a portion of the net proceeds fromits July 24, 2006 offering to repay in full the remaining unpaidprincipal and accrued and unpaid interest on this note.

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, Earth enteredinto a securities purchase agreement pursuant to which the Company issued $52.5million aggregate senior convertible notes that are due in 2011 to eightinstitutional  investors.  The notes initially carry an 8% coupon,payable quarterly, and are convertible into shares of common stock at $2.90 pershare.  In 2007, the coupon may decline to 6% upon the Companyachieving certain financial milestones.  The notes will begin to amortizein equal, quarterly payments beginning in 2007.  In connection withthe issuance of the notes, the Company also issued five-year warrants topurchase 9,051,725 shares of common stock to the investors and five-yearwarrants to purchase 1,357,759 shares of common stock to the Company’splacement agent, at $2.90 per share.  At the date of issuance the warrantshad a relative fair value of $18,808,359, and the company recognized abeneficial conversion feature in the amount of $42,906,599 based on theintrinsic value of the conversion feature. Amortization on the debt discount totaled $678,245 for the quarter endedSeptember 30, 2006.

Earth used the net proceeds from thisoffering to repay in full the remaining unpaid principal and accrued and unpaidinterest on our $20.0 million aggregate principal amount of senior convertiblepromissory notes issued in May, June, and July 2006, and expects to usethe remaining proceeds from the offering for its program of building andacquiring interests in biodiesel and ethanol production facilities, and forother general corporate purposes.

 In connection with the 8% senior convertiblenotes issued in July, 2006, Earth incurred loan costs in the amount of$3,452,000 which will be amortized over the term of the convertible notes.

OnAugust 11, 2006, the Company entered into a securities purchaseagreement pursuant to which the Company issued $1.1 million aggregate seniorconvertible notes that are due in 2011 to two institutional  investors. The notes initially carry an 8% coupon, payable quarterly, and are convertibleinto shares of common stock at $2.90 per share.  In 2007, the couponmay decline to 6% upon the Company achieving certain financialmilestones.  The notes will begin to amortize in equal, quarterly paymentsbeginning in  March, 2007.  In connection with the issuance of thenotes, the Company also issued five-year warrants to purchase 232,759 shares ofcommon stock to the investors at $2.90 per share.

Earthwill use the debt proceeds, in concert with other funds, for the acquisition ofan ethanol production plant, two biodiesel production facilities and for othergeneral corporate purposes, including working capital to support growth andcapital expenditures associated with new project development.

Duringthe second quarter of 2006, Earth receivedproceeds under various convertible notes with warrants totaling approximately$17.5 million.  The conversion featuresand exercise prices were at different variable market prices.  As such, the Company evaluated theapplication of  Statement of Financial Accounting Standards (“SFAS”) No.133, “*Accounting for Derivative Instrumentsand Certain Hedging Activities*”(“SFAS No. 133”), and EITF 00-19 for convertible debt issued in the first,second  and third quarters offiscal 2006, as well as warrants issued in connection with the debtofferings.  Based on the guidance in SFAS No. 133 and EITF 00-19, theCompany concluded that instruments were required to be accounted for asderivatives during the second quarter of fiscal 2006.  SFAS No. 133and EITF 00-19 required the Company to bifurcate and separately account for theconversion features of the convertible debt as embedded derivatives.  Inaddition, on May 26, 2006, the Company issued convertible debt thatwas convertible into an indeterminate number of shares.  As a result, theconversion features and warrants associated with the convertible debt weredetermined to be derivatives under SFAS No. 133 and EITF 00-19 for this debt inthe second quarter also.  The Company determined that the conversionfeatures and the warrants met the attributes of a liability and thereforerecorded the fair value of the conversion features and the warrants as currentliabilities in the second quarter.

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TheCompany recorded the fair value of the conversion features and the warrants onits balance sheet at fair value with changes in the values of these derivativesreflected in the consolidated statement of operations as “Gain (loss) onembedded derivative liability” for the second quarter.  The May 26, 2006 debt was converted on July14, 2006, and the remaining instruments were repaid with the proceeds from theJuly 24, 2006 issues.  Based on thecompanies analysis and application of  Statement of Financial Accounting Standards (“SFAS”)No. 133, “*Accounting for DerivativeInstruments and Certain Hedging Activities*” (“SFAS No. 133”), there were additional derivative liabilitiesnecessary to be recorded for  the thirdquarter security issue totaling $5,000,000, however, the related debt was alsorepaid with the second quarter liabilities and as such all derivativeliabilities were reversed as appropriate. In addition, the remaining discounts were reversed to additional paid incapital for the quarter ended September 30, 2006. See Stockholders’ Equity forfurther discussion of registration rights and evaluation of the Company’sconvertible debts.

**6.**              **STOCKHOLDERS’EQUITY**

***CommonStock and Warrants***

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.

On July21, 2006, Apollo Resources entered into 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 us to grant these Apollo Resources noteholdersregistration rights with respect to the shares of common stock underlying theconvertible notes and options. We have acknowledged and agreed to comply withthe 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 4,000,000 shares of our common stockat an exercise price of $0.25 per share. Mr. Backrow paid us $100,000 for the issuance of this warrant.  We granted Mr. Backrow certain registrationrights with respect to the shares of common stock issuable upon exercise ofthis warrant.

**PrivateOfferings** - On July 24, 2006, Earth entered into a securitiespurchase agreement pursuant to which the Company issued $52.5 million aggregatesenior convertible notes that are due in 2011 to eightinstitutional investors. The notes initially carry an 8% coupon, payablequarterly, and are convertible into shares of common stock at $2.90 pershare.  In connection with the issuanceof the notes, the Company also issued five-year warrants to purchase 9,051,725shares of common stock to the investors and five-year warrants to purchase1,357,759 shares of common stock to the Company’s placement agent, at $2.90 pershare.

OnAugust 11, 2006, Earth enteredinto a securities purchase agreement pursuant to which the Company issued $1.1million aggregate senior convertible notes that are due in 2011 to twoinstitutional investors.  The notes initially carry an 8% coupon,payable quarterly, and are convertible into shares of common stock at $2.90 pershare.  In 2007, the coupon may decline to 6% upon the Companyachieving certain financial milestones.  The notes will begin to amortizein equal, quarterly payments beginning in March, 2007.  In connectionwith the issuance of the notes, the Company also issued five-year warrants topurchase 232,759 shares of common stock to the investors at $2.90 per share.

TheCompany was obligated under a Registration Rights Agreements to file, on the30th day following the agreements a Registration Statement with the SECregistering for resale shares of common stock, and shares of common stockunderlying investor warrants and certain of the placement agent warrants,issued in connection with the private offering. If (i) the Company did not filethe Registration Statement within the time period prescribed, or (ii) theCompany failed to file with the SEC a request for acceleration in accordancewith Rule 461 promulgated under the Securities Act of 1933, within five tradingdays of the date that the Company is notified (orally or in writing, whicheveris earlier) by the SEC that the Registration Statement will not be “reviewed,”or is not subject to further review, or (iii) the Registration Statement filedor required to be filed under the Registration Rights Agreement was notdeclared effective by the SEC on or before 120 days following March 23, 2005,or (iv) after the Registration Statement is first declared effective by theSEC, it ceases for any reason to remain continuously effective as to allsecurities registered there under, or the holders of such securities are notpermitted to utilize the prospectus contained in the Registration Statement toresell such securities, for more than an aggregate of 45 trading days duringany 12-month period (which need not be consecutive trading days) (any suchfailure or breach being referred to as an “Event,” and for purposes of clause

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(i) or(iii) the date on which such Event occurs, or for purposes of clause (ii) thedate on which such five-trading day period is exceeded, or for purposes ofclause (iv) the date on which such 45-trading day-period is exceeded beingreferred to as “Event Date”), then in addition to any other rights the holdersof such securities may have under the Registration Statement or underapplicable law, then, on each such Event Date and on each monthly anniversaryof each such Event Date (if the applicable Event shall not have been cured bysuch date) until the applicable Event is cured and except as disclosed below,the Company is required to pay to each such holder an amount in cash, aspartial liquidated damages and not as a penalty, equal to 1.5% per month of theaggregate purchase price paid by such holder pursuant to the SecuritiesPurchase Agreement relating to such securities then held by such holder. If theCompany fails to pay any partial liquidated damages in full within seven daysafter the date payable, the Company is required to pay interest thereon at arate of 15% per annum (or such lesser maximum amount that is permitted to bepaid by applicable law) to such holder, accruing daily from the date suchpartial liquidated damages are due until such amounts, plus all such interestthereon, are paid in full. The partial liquidated damages are to apply on adaily pro-rata basis for any portion of a month prior to the cure of an Event.

TheRegistration Rights Agreement also provides for customary piggy-backregistration rights whereby holders of shares of the Company’s common stock, orwarrants to purchase shares of common stock, can cause the Company to registersuch shares for resale in connection with the Company’s filing of aRegistration Statement with the SEC to register shares in another offering. TheRegistration Rights Agreement also contains customary representations andwarranties, covenants and limitations.

***Acquisitions***

OnMarch 31, 2006, Earth  entered into a merger agreement with SouthernBio Fuels, Inc. and certain other parties affiliated with Southern BioFuels.  Pursuant to the merger agreement, on April 3, 2006,Southern Bio Fuels merged with and into the Company, with the Company being thesurviving corporation.  In connection with the merger, the Company paid$2,200,000 in cash and issued 2,933,333 shares valued at $7,157,000 of itscommon stock to the sole stockholder of Southern Bio - Fuels.

OnApril 20, 2006, Earth acquired a25% limited partnership interest in Trucker’s Corner, L.P. in exchange for acapital contribution of $1.1 million in cash, 125,000 shares of the Company’scommon stock valued at $1,120,000, and 250,000 shares of Apollo Resourcescommon stock.

Earth Biofuels Technology Company.  OnMay 4, 2006, we agreed with Dr. Miguel Dabdoub to form a technologycompany by the name of  “Earth Biofuels Technology Company, LLC,” to beowned 50% by us and 50% by Dr. Dabdoub.  In exchange for our 50% interest,we paid $225,000 and we issued 1,800,000 shares of our common stock valued at$4,410,000 to Dr. Dabdoub and Apollo Resources issued 100,000 shares of itscommon stock to Dr. Dabdoub.  Dr. Dabdoub, an expert in the field ofbiodiesel production facility technologies, has contributed an exclusivelicense to the technology company to make use of his proprietary technologies,for use in North America.  Accordingly, the purpose of the new entity isto utilize Dr. Dabdoub’s proprietary technologies, to design and constructbiodiesel production facilities, both for us directly and for third parties. Additionally, we will use Mr. Dabdoub’s expertise to assess potentialacquisitions of biodiesel production facilities, and to assist in the duediligence process for our other business opportunities.

On June12, 2006, Earth issued 537,500shares of our common stock to Biodiesel Venture, L.P. and 537,500 shares of ourcommon stock valued at $2,496,000 to Willie H. Nelson in connection with asublicense agreement entered into on April 1, 2006 with Biodiesel Venture,L.P., pursuant to which Biodiesel Venture granted us an exclusive sublicense touse the trademark “BioWillie” which is licensed to Biodiesel Venture pursuantto a master license with Mr. Nelson, the owner of the trademark.

Duringthe third quarter the company issued 1,600,000 in shares with regard to theinvestment in Vertex discussed below under advances. The value of these shareswas $4,320,000 on the date of issuance.

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***Stock based Compensation***

StockAwards and Compensation-During the quarter ending September 30, 2006, theCompany issued 2,082,867 shares of the Company’s common stock to employees forservices rendered and 6,430,000 shares of the Company’s common stock to forconsulting services, of which 400,000 the Company issued to Herb Meyer, amember of the Company’s Board of Directors, under his consulting agreement.

Theshares were valued at market, totaling $19,924,408 with $291,873 recognized asshare based compensation expense and with $18,512,535 recognized as  prepaid expense reflecting shares issued priorto services having been completed, and net of cancellation of shares previouslyissued for services totaling $1,120,000.  For the same period, Earthissued 2,082,867 shares for employee compensation.  The shares were valuedat market, totaling $6,484,417 of share-based compensation expense.

**7.****              RELATED PARTYTRANSACTIONS**

***Acquisitions***

InSeptember 2006, the Company sold Eastern Shelf Partners, LLC (a workinginterest in a series of oil and natural gas interests, pursuant to anacquisition, exploration and development agreement entered into on June 22,2006 between Eastern Shelf and Apollo Resources, International, Inc., ourmajority stockholder) back to the parent company, Apollo.  Pursuant to thearrangement, the parties have agreed to provide for reimbursement of thecompanies interest as of September 30, 2006.

OnApril 20, 2006, Earth acquired a25% limited partnership interest in Trucker’s Corner, L.P. in exchange for acapital contribution of $1.1 million in cash, 125,000 shares of the Company’scommon stock and 250,000 shares of Apollo Resources common stock.  WillieH. Nelson, who serves on the Company’s board of directors, is also a limitedpartner of Trucker’s Corner.  As ofSeptember 30, 2006 the company had made advances totaling $515,738 to thepartnership in connection with the remodeling of the flagship station owned bythe partnership.

OnApril 1, 2006, Earth enteredinto a sublicense agreement with Biodiesel Venture, L.P., pursuant to whichBiodiesel Venture granted the Company 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. The sublicense hasa two-year term and is renewable by the Company for four successive two-yearterms (for a total term of ten years) so long as the Company is in compliancewith the terms of the sublicense.  In connection with the sublicense, inJune 2006, the Company issued 537,500 shares of its common stock to each of BiodieselVenture and Mr. Nelson.  During the term of the sublicense, the Companyhas agreed to pay to each of Biodiesel Venture and Mr. Nelson annual royaltiesof $0.01 per gallon of biodiesel fuel branded with the BioWillie trademark thatthe Company sell, with a minimum annual royalty of $150,000 payable to each ofBiodiesel Venture and Mr. Nelson.  Mr. Nelson, who serves on the Company’sboard of directors, is a limited partner of Biodiesel Venture and is the soleowner and manager of the general partner of Biodiesel Venture.

OnMarch 31, 2006, Earth  entered into a merger agreement with SouthernBio Fuels, Inc. and certain other parties affiliated with Southern BioFuels.  Pursuant to the merger agreement, on April 3, 2006,Southern Bio Fuels merged with and into the Company, with the Company being thesurviving corporation.  In connection with the merger, the Company paid$2,200,000 in cash and issued 2,933,333 shares of its common stock to the solestockholder of Southern Bio Fuels.  Upon completion of the merger, weacquired the sole asset of Southern Bio Fuels, a biodiesel refinery that wasformerly located in Pearl, Mississippi and that has been relocated to the ourpremises in Durant, Oklahoma.  Dean Blackwell, an indirect equity owner ofSouthern Bio Fuels, is the brother of Bruce Blackwell, a member of the Company’sBoard of Directors.  The consideration was determined through arm’s lengthnegotiation of the parties involved, and a portion of the cash considerationwas provided by a loan from Apollo Resources International, Inc., the Company’smajority stockholder.

Inconnection with the Southern Bio Fuels merger, on March 2, 2006, theCompany issued to Southern Bio Fuels a note with a principal amount of $850,000and bearing interest at 7.25% per year.  The Company’s obligations underthis note were guaranteed by Dennis G. McLaughlin, III, the Company’s ChiefExecutive Officer.  The note matured on March 13, 2006 and waspaid 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 onJune 29, 2006.  The Company’s obligations under these notes wereguaranteed by the Company’s Chief Executive Officer and Tommy Johnson and BruceBlackwell, each of which serve on the Company’s board of directors.  OnJuly 12, 2006, the Company repaid this note.

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***Affiliates***

OnJune 9, 2006, Earth enteredinto a consulting agreement with Herbert E. Meyer, a member of the Company’sBoard of Directors, pursuant to which Mr. Meyer agreed to provide consultingservices relating to energy policies, strategic planning, and such othermatters as that the Company may request.  In exchange for such services,the Company issued Mr. Meyer, 400,000 shares of its common stock, for servicesrendered the third quarter of 2006.  The agreement has a two-year term butis terminable by the Company upon thirty days written notice.

Otheradvances to related parties consist of a Note Receivable from Blue Wireless of$471,041.

InJanuary 2006, Earth enteredinto an intercompany credit agreement with Apollo Resources pursuant to whichApollo Resources may make advances to the Company in connection with amountsthe Company owes to Apollo Resources for fees, expenses and costs it incurs onour behalf.  Any advances made will bear interest at 7%.  As ofSeptember 30, 2006, the Company owed Apollo $2,947,217 under this creditagreement.  In addition, the company owedthe Chairman of the Board $90,000.

EffectiveOctober 17, 2005, the Company leased a truck stop in Grenada, Mississippifrom RBB Properties, LLC which is controlled by R. Bruce Blackwell, a member ofthe Company’s Board of Directors.  The lease has a five-year term, andrequires lease payments of $10,000 per month.  The Company is responsiblefor operations and repair and maintenance of the facility.

Earth also leases an office building inJackson, Mississippi from R. Bruce Blackwell.  Pursuant to these leases,the Company pays an aggregate of $6,834 on a month to month basis.

**8.****              SUBSEQUENT EVENTS**

Subsequent to September 30, 2006 Earth renegotiatedthe securities purchase agreement originally entered into on July 24, 2006. Theconversion features and warrant exercise prices were amended to reflect moremarketable rates.  As such, anyderivative issues and re-measurement of beneficial conversion features will beproperly reflected in subsequent periods. The new terms significantly impact the conversion features and relateddebt discounts. Management will evaluate the impact of these changes inconsideration of EITF’s 02-04, 05-07, 00-19 and FAS 133.

The Companyplans to begin acquiring and operating retail service stations through itsmajority-owned subsidiary, American Earth Fuels Company (AEFC). Newly formed inSeptember, 2006 for the purpose of creating the principal distribution channelfor Earth Biofuels and its related companies, AEFC plans to sell biodiesel andethanol fuel products, as well as traditional petroleum fuel products, toconsumers around the nation. Earth Biofuels, the exclusive distributor forBioWillie biodiesel fuel, will distribute BioWillie and ethanol fuel to AEFC’sretail stations as required in order to meet the demands of AEFC’s customers.

Earth has also entered into negotiations to purchasea liquid natural gas production company. This company is the largest producer and wholesaler of vehicle-qualityliquid natural gas in the United States and Mexico. The proposed acquisition iscurrently being evaluated by independent appraisers and will be purchased fromthe parent “Apollo” and other third party investors.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing discussion and analysis should be read in conjunction with the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section and audited consolidated financial statements and related notes theretoincluded in our Annual Report on Form 10-KSB and with the unauditedconsolidated financial statements and related notes thereto presented in thisQuarterly Report on Form 10-QSB.

**Cautionary Note RegardingForward-Looking Statements**

ThisForm 10-QSB includes “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933, as amended, or the Securities Act, andSection 21E of the Securities Exchange Act of 1934, as amended, or the ExchangeAct.  All statements other than statements of historical facts, includedin this Form 10-QSB that address activities, events or developments that weexpect or anticipate will or may occur in the future, including such things asfuture capital 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 oncertain assumptions and analyses made by us in light of our experience and ourperception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate in thecircumstances.  However, whether actual results and developments willconform with our expectations and predictions is subject to a number of risks anduncertainties, and other factors, many of which are beyond our control. Consequently, all of the forward-looking statements made in this Form 10-QSBare qualified by these cautionary statements and we cannot assure you that theactual results or developments anticipated by us will be realized or, even ifrealized, that they will have the 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**

Ourprincipal business is the production, supply and distribution of pure biodieselfuel (B100) for sale directly to wholesalers to be used as a blend stock, suchas B20, a petroleum diesel-based alternative fuel.  We utilize vegetableoils such as soy and canola oil as raw material (feedstock) for the productionof biodiesel fuel.  We are currently focused on our expansion strategy ofacquiring and constructing biodiesel and ethanol production facilities.

Ourprimary source of revenue is the sale of biodiesel fuels and related energyproduction credits.  Our sales revenue is a function of the volume ofbiodiesel we sell and the price at which we sell the biodiesel.  Thevolume of our sales is largely dependent upon demand and our ability todistribute 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 any,control, such as the price of gasoline and other alternative energysources.  We blend and market our biodiesel directly to fuelstations.  Our distribution strategy includes supplying B100 for storageand blending terminals, controlling the blending point, and obtaining exclusiveagreements with terminal chains throughout the United States.  We haveentered into agreements with oil companies with the capability to deliver tofleet, agricultural and retail fueling terminals, and retail service stations,to expand biodiesel consumption in their local areas.

Ourgross profit is derived from our total revenues less our cost of sales. Our cost of sales is affected by the cost of the biodiesel we purchase fromproducers.  We purchase biodiesel both on the spot market and pursuant tofixed supply agreements.  The price of our purchases of biodiesel on theopen market are affected by supply and demand for biodiesel fuel and the costof raw materials used by the producers from whom we purchase biodiesel, such assoy oil.  We have entered into a nine-month supply agreement pursuant towhich we have agreed to purchase 1,000,000 gallons per month.  Because weare required to purchase these quantities of biodiesel regardless of our demandfor biodiesel or ability to distribute the product, our results of operationscould be materially adversely affected if there is a decrease in the demand forour biodiesel fuel.  This purchase contract was cancelled October 1, 2006.In July 2006, we commenced production of biodiesel fuel from one of our ownproduction facilities in Durant, Oklahoma from which we expect annualproduction of approximately 20 MMGPY.  As we implement our facilityconstruction and expansion strategy, we expect our cost of sales to be impactedby our cost of raw materials used in the production of biodiesel.

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**Third Quarter Highlights**

The following are certain highlights that occurredduring the second quarter:

·                  Our totalrevenue during the three months ended September 30, 2006 was $10.3million and related primarily to sales of biodiesel.

·                  We entered intoletters of intent and are currently in discussions relating to our entry intofour separate joint ventures to purchase, construct, expand and/or retrofitethanol facilities in Plaquemines Parish, Louisiana, and in Martin County,North Carolina and biodiesel production facilities in Texas and Illinois. Our obligations set forth in these letters of intent are subject to thenegotiation and execution of definitive documentation.  We can make noassurances that the final terms of any of the transactions will conform to theterms of the letters of intent or that the parties will even enter intodefinitive documents. These negotiations are ongoing as of the end of the thirdquarter.

·                  During the thirdquarter of 2006, we received net proceeds of $53.6 million from theissuance of senior convertible notes.  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.

**Recent Developments**

**Critical Accounting Policies andEstimates**

Ourdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States,requires management to make estimates and assumptions that affect the amountsreported in the accompanying financial statements 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 on information available as of the date ofthe financial statements and, accordingly, actual results could differ fromthese estimates, sometimes materially.  Critical accounting policies aredefined as those that are reflective of significant judgments anduncertainties, and potentially could result in materially different resultsunder different assumptions and conditions.  The most critical accountingpolicies and estimates are described below.

***Revenue Recognition*** —** The geographic location of our customer base is primarily inthe state of Mississippi and the Dallas, Texas market, although managementintends to expand operations throughout the Southeastern and SouthwesternUnited States.  Sales are recorded at net realizable value, net of allowancesfor returns, upon shipment of products to customers.  We record revenuefrom federal incentive programs related to the production of biodiesel when wehave produced, sold, blended the biodiesel, and completed all the requirementsof the applicable incentive program.

***Business Combinations*** —** Business combinations are accounted for using the purchasemethod.  Under the purchase method, we report the acquired entities’assets and liabilities at fair market value as of the date of purchase. Any excess of the fair market value of the consideration given over the fairmarket value of the net assets acquired is reported as goodwill.  If thefair market value of the consideration given is less than the fair market valueof the net assets acquired, the resulting excess of fair value of acquired netassets over the cost of the acquired entity is allocated, on a pro rata basis,against certain assets acquired in the business combination.  If anyexcess over cost remains after reducing certain assets to zero, the remainingexcess is recognized as an extraordinary gain.

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***Accountingfor Stock Based Compensation*** — On April 27, 2006,our Board of Directors and a majority of our stockholders acted by unanimouswritten consent to approve and adopt our 2006 Stock Option and Award Plan. Theplan is intended to aid in maintaining and developing a management team,attracting qualified officers and employees capable of assisting in our futuresuccess, and rewarding those individuals who have contributed to our success.It is designed to aid in retaining the services of executives and employees andin attracting new personnel when needed for future operations and growth and toprovide such personnel with an incentive to remain our employees, to use theirbest efforts to promote the success of our business, and to provide them withan opportunity to obtain or increase a proprietary interest in us through thegranting of stock options and/or stock awards.  Eligible award recipientsare employees and directors of our Company and our subsidiaries and otherindividuals who are not employee by us as determined by the administrator ofthe plan.  The maximum number of shares of our common stock which may beissued under the plan may not exceed 5,000,000 shares, subject to certain adjustments.

During the quarterending September 30, 2006, the Company issued 2,082,867 restricted shares ofthe Company’s common stock to employees for services rendered and 6,430,00restricted shares of the Company’s common stock for consulting services, ofwhich 400,000 the Company issued to Herb Meyer, a member of the Company’s Boardof Directors, under his consulting agreement. There have been no stock optionsgranted as of September 30, 2006.

***Accountingfor Derivatives****** —*** Statementof Financial Accounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), as amended, requires allderivatives to be recorded on the balance sheet at fair value. Thesederivatives, including embedded derivatives in our structured borrowings, areseparately valued and accounted for on our balance sheet. Fair values forexchange-traded securities and derivatives are based on quoted market prices.Where market prices are not readily available, fair values are determined usingmarket based pricing models incorporating readily observable market data andrequiring judgment and estimates.

In September 2000,the Emerging Issues Task Force (“EITF”) issued EITF Issue 00-19, “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock,” (“EITF 00-19”) which requires freestanding contracts thatare settled in a company’s own stock, including common stock warrants, to bedesignated as an equity instrument, asset or a liability. Under the provisionsof EITF 00-19, a contract designated as an asset or a liability must be carriedat fair value on a company’s balance sheet, with any changes in fair valuerecorded in Ener1’s results of operations. A contract designated as an equityinstrument must be included within equity, and no fair value adjustments arerequired. In accordance with SFAS 133 and EITF 00-19, we determined thatseveral of the outstanding warrants to purchase our common stock and theembedded conversion feature and certain other features of several of ourfinancial instruments should be separately accounted for as assets orliabilities. Our financial statements for the six and nine months endedSeptember 30, 2006 reflect the fair value of these warrants and the conversionand other embedded derivatives features on our balance sheet and the unrealizedchanges in the values of these derivatives in our consolidated statements ofoperations as “Gain (loss) on derivative liability.”  As the notes which included derivatives werepaid or converted during the quarter, there is no derivative liability atSeptember 30, 2006.

***NetLoss Per Share Data*** — Basic and diluted net loss percommon share are presented in conformity with the SFAS No. 128, “Earnings PerShare”. Diluted net loss per share is the same as basic net loss per share asthe inclusion of outstanding warrants until their exercise would beanti-dilutive.  Share and per-share datapresented throughout the financial statements and notes reflect a 6-for-1forward split that the Company declared in November, 2005.

***Reclassifications*** — Certainpreviously reported amounts have been reclassified to conform to the currentpresentation.

***Use of Estimates*** —The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

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**Results of Operations**

The following table sets forth selected data as apercentage of total revenues (unless otherwise noted) for the periodsindicated.  All information is derivedfrom the accompanying consolidated statements of operations.
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Sales revenue                              |       | 91.1                                                 | %          | 100.0                                               | %          | 88.0 | % | 100.0 | % |
| Energy  production credits                 |       | 8.9                                                  | %          | —                                              |       | 12.0 | % | — |   |
| Total revenues                             |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of sales                              |       | 95.7                                                 | %          | 102.9                                               | %          | 94.4 | % | 90.0 | % |
| Gross profit                               |       | 4.3                                                  | %          | (2.9                                                | )%         | 5.6 | % | 10.0 | % |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Compensation                               |       | 78.6                                                 | %          | —                                              |       | 129.3 | % | — |   |
| Other selling,  general and administrative |       | 46.5                                                 | %          | 115.8                                               | %          | 65.7 | % | 64.2 | % |
| Depreciation and  amortization             |       | 2.5                                                  | %          |                                                |       | 1.8 | % | .2 | % |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss from  operations                  |       | (123.3                                               | )%         | (118.9                                              | )%         | (191.2 | )% | (54.4 | )% |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Other income  (expense)                    |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                            |       | 0.3                                                  | %          | —                                              |       | 0.3 | % | — |   |
| Interest expense                           |       | (61.1                                                | )%         | —                                              |       | (60.16 | )% | — |   |
| Gain on  derivatives                       |       | 221.36                                               | %          |                                                |       | 148.41 | % |   |   |
| Loss on  marketable securities             |       | (3.9                                                 | )%         | —                                              |       | (2.7 | )% | — |   |
| Other expenses                             |       | (0.1                                                 | )%         | .9                                                  | %          | (0.1 | )% | .3 | % |
| Total other  income (expense)              |       | 156.56                                               | %          | .9                                                  | %          | 85.75 | % | .3 | % |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                          |       | 33.26                                                | %          | (118.0                                              | )%         | (105.45 | )% | (54.1 | )% |

 

***Nine Months EndedSeptember 30, 2006 Compared to the Nine Months EndedSeptember 30, 2005***

*Revenue. *Totalrevenue for the nine months ended September 30, 2006 increased $14million, or 1317%, to approximately $15.1 million from approximately $1.1million for the nine months ended September 30, 2005.  Theincrease in total revenue is primarily the result of increased sales ofbiodiesel.  During the nine months ended September 30, 2006, we soldapproximately 7,085,189 gallons of biodiesel.

*Cost of Sales. *Costof sales for the nine months ended September 30, 2006 increased $13.3million, or 1386%, to approximately $14.2 million from approximately $1 millionfor the nine months ended September 30, 2005.  Our cost of goodssold is mainly affected by the cost of biodiesel, vegetable oil, and other rawmaterials.  The increase in cost of sales is primarily the result ofincreased sales of biodiesel.

*Compensation. *Compensation the nine months endedSeptember 30, 2006 was approximately $19.5 million and relatedprimarily to shares issued to consultants for employees and consultingservices.  The shares issued as share based compensation were valued atmarket consistent with SFAS No. 123(R), “*Share-BasedPayment*” (“SFAS No.123(R)”).

*Other Selling, General andAdministrative Expenses. *Other selling, general andadministrative expenses the nine months ended September 30, 2006increased $9.9 million from approximately $683,000 for the nine months endedSeptember 30, 2005.  These costs consist of approximately $946,000for travel expenses, $2.7 million of consulting expenses, $3.5 million in  professional fees, $892,000 in advertisingcosts,  and $1.2 million for other officeoperating expenses.

*Depreciation and Amortization*. Depreciation and amortization for the nine months ended September 30, 2006increased to approximately $273,000 from $2,000 for the nine months endedSeptember 30, 2005.  The increase in depreciation andamortization is related primarily to purchases of plant and equipment.

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*Interest Income.* Interest income the nine months ended September 30, 2006 increased toapproximately $33,000 from zero for the nine months endedSeptember 30, 2005*.* Interest income related to interest earned on our savings account.

*Gain on Derivatives. *Gain on derivatives the nine monthsended September 30, 2006 increased to approximately $22.4 millionfrom zero for the nine months ended September 30, 2005.  Gain onderivatives related to convertible debt and warrants issued during the year.

*Loss on marketable securities.* Losson marketable securities forthe nine months ended September 30, 2006 increased to approximately$402,000 from zero for the three months endedSeptember 30, 2005.  Loss on marketable securities related to mark to market on fuel futures.

*Interest Expense.* Interest expense related to derivatives for the nine months endedSeptember 30, 2006 increased to approximately $9.1 million fromzero for the nine months ended September 30, 2005.  Interestexpense consisted primarily of the amortization of debt discounts associatedwith beneficial conversion features and derivative liabilities.

***Three Months Ended******September 30, 2006 Compared to the Three MonthsEnded September 30, 2005***

*Revenue. *Totalrevenue for the three months ended September 30, 2006 increased $9.9million, or 2524%, to approximately $10.3 million from approxmiately $393,000for the three months ended September 30, 2005.  The increase in totalrevenue is primarily the result of increased sales of biodiesel.  Duringthe three months ended September 30, 2006, we sold approximately 3,312,620gallons of biodiesel.

*Cost of Sales. *Costof sales for the three months ended September 30, 2006 increased $9.5million, or 2341%, to approximately $9.9 million from approximately $404,000for the three months ended September 30, 2005.  Our cost ofgoods sold is mainly affected by the cost of biodiesel, vegetable oil, andother raw materials.  The increase in cost of sales is primarily theresult of increased sales of biodiesel.

*Compensation. *Compensation for the three months endedSeptember 30, 2006 was approximately $8 million and related primarilyto shares issued to employees and consultants for consulting services. The shares issued as share based compensation were valued at market consistentwith SFAS No. 123(R).

*Other Selling, General andAdministrative Expenses. *Other selling, general andadministrative expenses for the three months ended September 30, 2006increased $4.1 million from approximately $454,000 for the three months endedSeptember 30, 2005.  These costs consist of approximately $467,000 oftravel expenses, $1.9 million in professional fees and $1.9 million of otheroffice and operating expenses.

*Depreciation and Amortization*. Depreciation and amortization for the three months endedSeptember 30, 2006 increased to approximately $262,000 from $1,000for the three months ended September 30, 2006.  The increase indepreciation and amortization is primarily related to acquisitions of plant andequipment.

*Interest Income.* Interest income for the three months ended September 30, 2006increased to $33,000 from zero for the three months endedSeptember 30, 2005. Interest income related to interest earned on oursavings account.

*Gain on Derivatives. *Gain on derivatives the three monthsended September 30, 2006 increased to approximately $22.8 millionfrom zero for the three months ended September 30, 2005.  Gainon derivatives related to convertible debt and warrants reversed during thequarter.

*Loss on marketable securities.* Losson marketable securities forthe three months ended September 30, 2006 increased to approximately$415,000 from zero. The loss on marketablesecurities related to mark to market adjustments on fuel futures.

*Interest Expense Related toDerivatives.*  Interest expense related to derivativesfor the three months ended September 30, 2006 increased toapproximately $6.3 million from zero for the three months endedSeptember 30, 2005.  Interest expense consisted primarily of theamortization of debt discounts associated with beneficial conversion featuresand derivative liabilities.

 

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**Liquidity and 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 fundingoperations, our principal short-term and long-term liquidity needs have been,and are expected to be, the debt service requirements of our senior convertiblenotes, the acquisition and construction of new facilities, capital expendituresand 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.

Netcash used in operating activities was approximately $18.6 million for the ninemonths ended September 30, 2006, compared to net cash used inoperating activities of approximately $462,000 for the same periodin 2005.  The increase in net cash flow used in operating activitiesrelates to increasing operating costs as we ramp-up our operations, including highercost of good sold, other selling, general and administrative expenses andinterest expense.

Netcash used in investing activities was $32.8 million the nine months endedSeptember 30, 2006, compared to net cash used in investing activitiesof  approximately $109,000 for the sameperiod in 2005.  The increase in net cash used in investingactivities relates to purchases of fixed assets in the amount of approximately$5.6 million for our Durant, Oklahoma facility and advances of approximately$25.9 million during the nine months ended September 30, 2006 relatedto letters of intent we have entered into to own and operate biodiesel andethanol facilities.

Netcash provided by financing activities was $51.4 million the nine months endedSeptember 30, 2006, compared to net cash provided by financingactivities of approximately $721,000 for the same period in 2005. Cash flows provided by financing activities during the nine months endedSeptember 30, 2006 relate primarily to the issuance of seniorconvertible debts totaling of with net proceeds of $74.9 million, less therepayment of prior debts of $21.1 million, and offset by debt issuance costs of $3.4 million.

Cashand cash equivalents as of December 31, 2005 were insufficient to provide thecapital we needed to operate and expand. During May and June of 2006 we issued $17.5 million in bridgenotes.  These notes were repaid pursuantto a private placement totaling $52.5 million in July 2006.  The proceeds of the convertible promissorynotes enabled us to continue operating during the first nine months of 2006.

***Currentand Future Financing Needs***

Thesuccess of our operations and business growth and expansion strategy dependsupon our ability to raise additional equity and debt financing and our abilityto generate sufficient cash flow from operations.  We expect to continueto devote capital resources to fund our business plan.  In order tosupport the initiatives envisioned in our business plan, we intend to raiseadditional funds through the sale of equity, debt or a combination of thetwo.  Our operating performance and ability to raise additional financingdepends on many factors beyond our control, including the prevailing economicconditions, state of the capital markets, the market price of our common stockand other risks and uncertainties including the prices of various commodities,particularly the prices of ethanol, soybean, corn, natural gas and unleadedgasoline, our dependence on key suppliers and adverse changes in governmentalincentives and governmental regulation.  We might not have access to thefunding required for the expansion of our business or such funding might not beavailable to us on acceptable terms.  We might finance the expansion ofour business with additional indebtedness or by issuing additional equitysecurities.  The amount of any additional indebtedness could besubstantial.  We could face financial risks associated with incurringadditional indebtedness, such as reducing our liquidity and access to financialmarkets and increasing the amount of cash flow required to service our debt, orassociated with issuing additional stock, such as dilution of ownership andearnings.  An increase in our debt would decrease the amount of fundsavailable for our growth strategy, thereby making it more challenging toimplement our strategy in a timely manner, or at all.  If future cashflows and 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 theevent that we are unable to do so, we may be left without sufficient liquidityand we may not be able to continue operations.

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Weincurred net losses and negative cash flows from operations of approximately $16million and $18.6 million, respectively, as of the nine months ended September30, 2006.  We had $41,609 of cash andcash equivalents at September 30, 2006. Our working capital at September 30, 2006 was $14,840,278.

We havespent, and expect to continue to spend, substantial amounts in connection withimplementing our business strategy. Based on our current plans, we believe that after consideration of thenet proceeds of the $52.5 million offering and future private sales of ourshares, we have sufficient funds to enable us to meet our planned operatingneeds for at least the twelve month period subsequent to the balance sheetdate, September 30, 2006. In addition, we are currently working to secure a$12.5 million Senior Secured Bridge Term Loan, in November, 2006.

The company is acquiring a liquid natural gas (“LNG”)production company.  This company is thelargest producer and wholesaler of vehicle-quality liquid natural gas in theUnited States and is one of only five production facilities in the country thatproduces clean liquid natural gas. This company offers turnkey fuel solutions,and leases storage, fuel dispensing equipment and fuel loading facilities.  The LNG markets include transportationalternative fuel for transit systems, seaports, local delivery fleets andlocomotive switch engines. This gas also has industrial and agriculturalapplications.  The company currentlyproduces 86,000 gallons per day. Earth expects subsequent to acquisitionrevenues will increase approximately $25 million per year related to LNG sales.

**Off-Balance Sheet Arrangements**

AtSeptember 30, 2006, we had no obligations that would qualify to bedisclosed as off-balance sheet arrangements.

**ITEM3.  CONTROLS AND PROCEDURES**

***Evaluation ofDisclosure Controls and Procedures***

Anevaluation of the effectiveness of our “disclosure controls and procedures” (assuch term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities ExchangeAct of 1934, as amended, or the Exchange Act) was carried out by us under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer. Disclosure controls and procedures are controls andprocedures designed to ensure that information we are required to disclose bein our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and include controls and procedures designed to ensure thatinformation we are required to disclose in such reports is accumulated andcommunicated to management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.  Based upon that evaluation, the Chief Executive Officer andthe Chief Financial Officer concluded that, as of the end of the period coveredby this report, our disclosure controls and procedures were not effective.Specifically, our independent auditors identified deficiencies in our controlsrelated to the identification and evaluation of potential derivativeliabilities, valuation and recording of share-based compensation, and valuationand recording of beneficial conversion features associated with convertibledebt.  We are continuing our efforts to improve and strengthen our controlprocesses and procedures to fully remedy these deficiencies and during thethree months ended September 30, 2006 have added additional accounting staff.Our management and directors will continue to work with our auditors and otheroutside advisors to ensure that our controls and procedures are adequate andeffective.

Notwithstandingthe material weaknesses described above, management believes that theconsolidated financial statements included in this Quarterly Report on Form10-QSB fairly present, in all material respects, our financial position,results of operations and cash flows for the periods presented.

Thecertifications of our principal executive officer and principal financialofficer required in accordance with Section 302 of the Sarbanes-Oxley Actof 2002 are attached as exhibits to this Quarterly Report of Form 10-QSB. Thedisclosures set forth in this Item 3 contain information concerning theevaluation of our disclosure controls and procedures and changes in internalcontrol over financial reporting, referred to in the certifications. Thosecertifications should be read in conjunction with this Item 3 for a morecomplete understanding of the matters covered by the certifications.

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***Changes in Internal Control over FinancialReporting***

Therehave been no changes in our internal control over financial reporting (exceptas noted in this Item 3) that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II — OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS**

H.C.Wainwright & Co., Inc. (“HCW”) commenced an arbitration against us onJuly 20, 2006, asserting a claim for breach of contract relating to aMarch 7, 2006 letter allegedly appointing H.C. Wainwright ourplacement agent for a limited time for the sale of our securities.  H.C. Wainwrightis seeking an award of unpaid commissions, warrants for the purchase our commonstock, and attorneys’ fees and costs. The Company filed an answering statement on August 25, 2006, and deniedthat it was liable to HCW for breach of contract.  Among other things, the Company assets thatany agreement was terminated prior to any alleged breach, HCW failed to performas promised, and HCW made material misrepresentations of fact to induce theCompany in to the alleged agreement. The arbitration proceeding is at an earlystage and no discovery has been taken or dates established.  The Company intends to vigorously defend thisclaim.

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

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

OnMarch 31, 2006, pursuant to the closing of the merger with SouthernBio Fuels, we issued 2,933,333 shares of our common stock to the solestockholder of Southern Bio Fuels.  The sale of these shares of our commonstock to 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.

OnApril 28, 2006, we entered into a securities purchase agreement,pursuant to which we issued 6,400,000 shares of our common stock to accreditedinvestors, in consideration for the payment of approximately $3.2million.  We 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 providesfor an additional issuance of 6,400,000 shares of our common stock, if we havenot timely consummated the acquisition of the equity interest in the plannedNew Orleans ethanol plant discussed below.  Contemporaneously with theexecution and delivery of the securities purchase agreement, we entered into aregistration rights agreement, pursuant to which we agreed to provide certainregistration rights with respect to the shares of common stock issued pursuantto the securities purchase agreement.  The sale of these shares of ourcommon stock to accredited investors was made in reliance upon the exemptionfrom registration afforded by Section 4(2) of the Securities Act of 1933, asamended, or the Securities Act.

On June12, 2006, we issued 125,000 shares of our common stock in connection with ourApril 20, 2006 acquisition of a 25% limited partnership interest in Trucker’sCorner, L.P.  In addition, Trucker’s Corner received $1.1 million from usand 25,000 shares of Apollo Resources’ common stock from ApolloResources.  Our shares of common stock were issued in reliance upon theexemption from registration afforded by Section 4(2) of the Securities Act.

On June12, 2006, we issued 537,500 shares of our common stock to Biodiesel Venture,L.P. and 537,500 shares of our common stock to Willie H. Nelson in connectionwith a sublicense agreement entered into on April 1, 2006 with BiodieselVenture, L.P., pursuant to which Biodiesel Venture granted us an exclusivesublicense to use the trademark “BioWillie” which is licensed to BiodieselVenture pursuant to a master license with Mr. Nelson, the owner of thetrademark.  These shares were issued in reliance upon the exemption fromregistration afforded by Section 4(2) of the Securities Act.

Duringthe quarter ending September 30, 2006, we issued 3,000,000 shares of our commonstock in repayment of a loan including accrued and unpaid interestthereon.  These shares were issued in reliance upon the exemption fromregistration afforded by Section 4(2) of the Securities Act.

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Duringthe quarter ending September 30, 2006, we issued 2,082,867 shares of our commonstock to employees for services rendered and 2,430,000 shares of our commonstock to for consulting services, of which 4,600,000 were issued to Herb Meyer,a member of our Board of Directors, under his consulting agreement.  Theseshares were issued in reliance upon the exemption from registration afforded bySection 4(2) of the Securities Act.

Duringthe quarter ending June 30, 2006, we issued convertible notes and warrants toinstitutional investors in reliance upon the exemption from registrationafforded by Section 4(2) of the Securities Act. as follows:

·                  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 pershare.  We also issued the investor a warrant to purchase 920,810 sharesof our common stock, exercisable until May 31, 2001 at the lesser of $2.00 pershare or 80% of the average trading price of our common stock for the thirtytrading days prior to the exercise of the warrant.  We used the netproceeds from the sale in connection with our biodiesel and ethanol plantacquisition strategy and for other general corporate purposes.  We grantedthe noteholder certain registration rights with respect to the shares of commonstock underlying the convertible note and the warrant.  The note andwarrant and a corresponding guarantee given by Apollo Resources, our majoritystockholder, were subsequently cancelled by the holder in connection withApollo Resources’ closing on July 21, 2006 of a securities purchase agreementwith Greenwich Power.

·                  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 redeemable by us at par at any time prior to theirinitial maturity date in August 2006.  The notes were not convertibleuntil after August 2006, at which time the maturity date was extendable toNovember 2006 at the holder’s option.  The notes were convertible into ourcommon stock at a conversion price equal to the greater of $1.00 per share or75% of the weighted average price per share of our common stock on a five-dayvolume weighted average prior to closing.  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 netproceeds from the sale in connection with our biodiesel and ethanol plantacquisition strategy and for other general corporate purposes.  We grantedthe investor certain registration rights with respect to the shares of commonstock issuable upon conversion of the convertible notes and exercise of thewarrants.  The remaining unpaid principal and accrued and unpaid intereston these notes were repaid in full with a portion of the net proceeds from thesenior convertible promissory notes we issued in July 2006.  The warrantsremain 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 onJuly 28, 2006, August 28, 2006, January 28, 2007 and April 28, 2007. The note had a maturity date of April 28, 2007.  The note was convertibleinto shares of our common stock at a conversion price equal to the lesser of$0.50 per share or 70% of the weighted average price per share of our commonstock. We used the net proceeds from the sale in connection with our biodieseland ethanol plant acquisition strategy and for other general corporatepurposes.  We granted the note holder certain registration rights withrespect to the shares of common stock underlying the convertible notes. On July 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 notes carried an 8% coupon, payablequarterly, and were redeemable by us at par at any time prior to their initialmaturity date in September 2006.  The notes were not convertible untilafter September 2006, at which time the maturity date was extendable toDecember 2006 at the holder’s option.  The notes were convertible into ourcommon stock at a conversion price equal to the greater of $1.00 per share or70% of the weighted average price per share of our common stock on a five-dayvolume weighted average prior to closing.  We also issued to the investorsfive-year warrants to purchase an aggregate of 1,500,000 shares of common stockto the investors and five-year warrants to purchase 45,000 shares of commonstock to our placement agent, at an exercise price of $2.93 per share.  Weused the net proceeds from the sale, in concert with other funds, to continueto execute our business plan, specifically the construction or acquisition ofadditional biodiesel and ethanol facilities, and for other general corporatepurposes, including working capital.  We granted the investor certainregistration rights with respect to the shares of common stock underlying theconvertible notes and 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.

23

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·                  OnJuly 10, 2006, the Company entered into a securities purchase agreement,pursuant to which the Company issued a 8% senior convertible note with aprincipal amount of $5.0 million to one institutional investor.  TheCompany also issued five-year warrants to purchase an aggregate of 1,500,000shares of common stock to the investor and five-year warrants to purchase15,000 shares of common stock to the Company’s placement agent, both at anexercise price of $2.50 per share.  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 this note.

·                  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, andare convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon the Company achieving certainfinancial milestones.  The notes will begin to amortize in equal,quarterly payments beginning in 2007.  In connection with theissuance of the notes, the Company also issued five-year warrants to purchase 9,051,725shares of common stock to the investors and five-year warrants to purchase1,357,759 shares of common stock to the Company’s placement agent, at $2.90 pershare.  The Company used the net proceeds from this offering to repay infull the remaining unpaid principal and accrued and unpaid interest on our$20.0 million aggregate principal amount of senior convertible promissory notesissued in May, June and July 2006, and expects to use the remainingproceeds from the offering for its program of building and acquiring interestsin biodiesel and ethanol production facilities, and for other general corporatepurposes.

·                  In connection with the 8% seniorconvertible notes issued in July, 2006, Earth incurred loan costs in the amountof $3,452,000 which will be amortized over the term of the convertible notes.

·                  OnAugust 11, 2006, the Company entered into a securities purchaseagreement pursuant to which the Company issued $1.1 million aggregate seniorconvertible notes that are due in 2011 to two institutional investors.  The notes initially carry an 8% coupon, payable quarterly, andare convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon the Company achieving certainfinancial milestones.  The notes will begin to amortize in equal,quarterly payments beginning in  March, 2007.  In connection with theissuance of the notes, the Company also issued five-year warrants to purchase232,759 shares of common stock to the investors at $2.90 per share.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

OnJune 12, 2006, our board of directors approved and recommended to ourstockholders an amendment to our certificate of incorporation to increase thenumber of authorized shares of our common stock from 250,000,000 to400,000,000.  Also on June 12, 2006, in accordance with Delawarelaw and our bylaws, Apollo Resources, the holder of a majority of our issuedand outstanding shares of common stock, executed a written consent adopting andapproving the amendment to our certificate of incorporation.  The writtenconsent of common stockholders was executed by Apollo Resources which, as ofJune 12, 2006, held approximately 62% of the shares of common stockeligible to vote.  The amendment to our certificate of incorporation didnot become effective until filing with the Secretary of State of Delaware onJuly 21, 2006.

24

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**ITEM 5.  OTHER INFORMATION**

***Appointment of NewDirector***

EffectiveJune 12, 2006, our Board of Directors appointed Mr. Herbert E. Meyeras a member of our board of directors.  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 of our common stock.  The agreementhas a two-year term but is terminable by us upon thirty days written notice.

***Approval of 2006Stock Option and Award Plan***

OnApril 27, 2006, our Board of Directors and a majority of our stockholdersacted by unanimous written consent to approve and adopt our 2006 Stock Optionand Award Plan. The plan is intended to aid in maintaining and developing amanagement team, attracting qualified officers and employees capable ofassisting in our future success, and rewarding those individuals who havecontributed to our success. It is designed to aid in retaining the services ofexecutives and employees and in attracting new personnel when needed for futureoperations and growth and to provide such personnel with an incentive to remainour employees, to use their best efforts to promote the success of ourbusiness, and to provide them with an opportunity to obtain or increase aproprietary interest in us through the granting of stock options and/or stockawards.  Eligible award recipients are employees and directors of ourcompany and our subsidiaries and other individuals who are not employee by usas determined by the administrator of the plan.  The maximum number ofshares of our common stock which may be issued under the plan may not exceed5,000,000 shares, subject to certain adjustments.

 

25

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**ITEM6.  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.                                                                                 |
|              |       |                                                                                                                                                                                                                                              |
| *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.                                                                                                                                 |
|              |       |                                                                                                                                                                                                                                              |

 

26

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| *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.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                      |
| *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.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                      |

 

27

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| *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).                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |

 

28

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| *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.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| *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.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                              |

 

29

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| *10.72  |   | Commercial Guaranty  made on March 2, 2006 by Dennis G. McLaughlin, III in favor of Southern  Biofuels, LLC.                                                    |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                            |
| *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.                                                      |
|    |   |                                                                                                                                                            |
| *10.79  |   | Securities Purchase  Agreement dated August 11, 2006 by and among Earth Biofuels, Inc. and  the buyers listed on the schedule.                             |
|    |   |                                                                                                                                                            |
| *10.80  |   | Revised Schedule of buyers  on Securities Purchase Agreement dated August 11, 2006.                                                                             |
|    |   |                                                                                                                                                            |
| *10.81  |   | Registration Rights  Agreement dated August 11, 2006 among Earth Biofuels, Inc. and the  buyers listed on the schedule.                                    |
|    |   |                                                                                                                                                            |
| *10.82  |   | Form of Notes dated as  of August 11, 2006 issued by Earth Biofuels, Inc. with Whalehaven  Capital Fund Ltd.                                               |
|    |   |                                                                                                                                                            |
| *10.83  |   | Form of Notes dated as  of August 11, 2006 issued by Earth Biofuels Inc. with Gundyco ITF Excalibur  Ltd Partnership.                                           |
|    |   |                                                                                                                                                            |
| *10.84  |   | Form of Warrant to  Purchase Common Stock of Earth Biofuels, Inc. dated August 11, 2006,  with Whalehaven Capital Fund Ltd.                                |
|    |   |                                                                                                                                                            |
| *10.85  |   | Form of Warrant to Purchase  Common Stock of Earth Biofuels, Inc. dated August 11, 2006, with Gundyco ITF  Excalibur Ltd Partnership.                           |
|    |   |                                                                                                                                                            |
| *10.86  |   | Form of Warrant to  puchase Common Stock of Earth Biofuels, Inc. dated July 21, 2006 with Lance  Bakrow, and Consulting Agreement with Lance Bakrow.            |
|    |   |                                                                                                                                                            |
| *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.

 

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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: November 20, 2006 | /s/ Dennis G. McLaughlin, III                  |   |
|                         | Dennis G. McLaughlin, III                      |   |
|                         | Chief Executive Officer                        |   |
|                         | (Principal Executive Officer)                  |   |
|                         |                                           |   |
|                         |                                           |   |
| Date: November 20, 2006 | /s/ Darren L. Miles                            |   |
|                         | Darren L. Miles                                |   |
|                         | Chief Financial Officer                        |   |
|                         | (Principal Financial and   Accounting Officer) |   |

 

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