**EXHIBIT 10.54**

**THISWARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEENREGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS AREGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWSSHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATIONUNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE INCONNECTION WITH SUCH OFFER OR SALE OR TRANSFER.**

**WARRANT**

**TO PURCHASE COMMONSTOCK**

**OF**

**EARTHBIOFUELS, INC.**
| **Issue Date: July 11, 2006** | **Warrant No. 1** |
|-------------------------------|------------------------|

 

THIS CERTIFIESthat CASTLERIGG MASTER INVESTMENTS LTD. or any subsequent holder hereof (the “***Holder***”), has theright to purchase from EARTH BIOFUELS, INC.,a Delaware corporation (the “***Company***”), up to 750,000 fully paid andnonassessable shares of the Company’s common stock, par value $0.001 per share(the “***Common Stock***”),subject to adjustment as provided herein, at a price per share equal to theExercise Price (as defined below), at any time and from time to time beginningon the date on which this Warrant is issued (the “***Issue Date***”) and ending at 5:00 p.m.,eastern time, on the fifth (5th) anniversary of the Issue Date or, if such day is not aBusiness Day, on the next succeeding Business Day (the “***Expiration Date***”).  This Warrant is issued pursuant to aSecurities Purchase Agreement, dated as of July 10, 2006 (the “***Securities Purchase Agreement***”).  Capitalized terms used herein and nototherwise defined shall have the respective meanings set forth in theSecurities Purchase Agreement.

1.               *EXERCISE.*

(a)   Right to Exercise; Exercise Price.  The Holder shall have the right to exercisethis Warrant at any time and from time to time during the period beginning onthe Issue Date and ending on the Expiration Date as to all or any part of theshares of Common Stock covered hereby (the “***Warrant Shares***”).  The “***Exercise Price***” for each Warrant Share purchasedby the Holder upon the exercise of this Warrant shall be $2.50, subject toadjustment for the events specified in ***Section 6*** below.

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(b)   ExerciseNotice.  In order to exercise thisWarrant, the Holder shall (i) send by facsimile transmission, at any time priorto 5:00 p.m., eastern time, on the Business Day on which the Holder wishes toeffect such exercise (the “***ExerciseDate***”), to the Company an executed copy of the notice ofexercise in the form attached hereto as ***Exhibit A*** (the “***Exercise Notice***”), (ii) deliver theoriginal Warrant or a copy thereof, and (iii) in the case of a Cash Exercise(as defined below), the Exercise Price to the Company.  The Exercise Notice shall also state the nameor names in which the Warrant Shares issuable on such exercise shall beissued.  In the case of a dispute as tothe calculation of the Exercise Price or the number of Warrant Shares issuablehereunder (including, without limitation, the calculation of any adjustmentpursuant to ***Section 6***below),the Company shall promptly issue to the Holder the number of Warrant Sharesthat are not disputed and shall submit the disputed calculations to a certifiedpublic accounting firm of national recognition (other than the Company’sindependent accountants) within two (2) Business Days following the date onwhich the Exercise Notice is delivered to the Company. The Company shall useits best efforts to cause such accountant to calculate the Exercise Priceand/or the number of Warrant Shares issuable hereunder and to notify theCompany and the Holder of the results in writing no later than two (2) BusinessDays following the day on which such accountant received the disputedcalculations (the “***DisputeProcedure***”). Such accountant’s calculation shall be deemedconclusive absent manifest error.  Thefees of any such accountant shall be borne by the party whose calculations weremost at variance with those of such accountant.

(c)   Holderof Record.  The Holder shall, for allpurposes, be deemed to have become the holder of record of the Warrant Sharesspecified in an Exercise Notice on the Exercise Date specified therein,irrespective of the date of delivery of such Warrant Shares. Except asspecifically provided herein, nothing in this Warrant shall be construed asconferring upon the Holder hereof any rights as a stockholder of the Companyprior to the Exercise Date.

(d)   Cancellationof Warrant.  This Warrant shall becanceled upon its exercise and, if this Warrant is exercised in part, theCompany shall, at the time that it delivers Warrant Shares to the Holderpursuant to such exercise as provided herein, issue a new warrant, and deliverto the Holder a certificate representing such new warrant, with terms identicalin all respects to this Warrant (except that such new warrant shall beexercisable into the number of shares of Common Stock with respect to whichthis Warrant shall remain unexercised); *provided,however*, that the Holder shall be entitled to exercise all or anyportion of such new warrant at any time following the time at which thisWarrant is exercised, regardless of whether the Company has actually issuedsuch new warrant or delivered to the Holder a certificate therefor.

(e)   CharterAmendment.  In the event there are insufficientshares of Common Stock authorized, unreserved and available for issuance uponexercise of this Warrant, the Company shall use its best efforts to effect anamendment of its certificate of incorporation so as to increase the authorizedshares of Common Stock to accommodate such exercise.

(f)    Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock uponexercise of this Warrant if the issuance of such shares of Common Stock wouldexceed that number of shares of Common Stock which the Company may issue uponexercise of this Warrant without breaching the Company’s obligations under therules

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orregulations of the Principal Market (the “Exchange Cap”), except that suchlimitation shall not apply in the event that the Company (A) obtains theapproval of its shareholders as required by the applicable rules of thePrincipal Market for issuances of shares of Common Stock in excess of suchamount or (B) obtains a written opinion from outside counsel to the Companythat such approval is not required, which opinion shall be reasonablysatisfactory to the holders of the Warrant representing at least a majority ofthe shares of Common Stock underlying the Warrants then outstanding issuedunder the Securities Purchase Agreement.  Until such approval or writtenopinion is obtained, no Purchaser shall be issued, upon exercise of anyWarrants, shares of Common Stock in an amount greater than the product of theExchange Cap multiplied by a fraction, the numerator of which is the totalnumber of shares of Common Stock issued to such Purchaser pursuant to theSecurities Purchase Agreement on the Issuance Date and the denominator of whichis the aggregate number of shares of Common Stock issued to the Purchaserspursuant to the Securities Purchase Agreement on the Issuance Date (withrespect to each Purchaser, the “Exchange Cap Allocation”“).  In the eventthat any Purchaser shall sell or otherwise transfer any of such Purchaser’sWarrants, the transferee shall be allocated a pro rata portion of suchPurchaser’s Exchange Cap Allocation, and the restrictions of the prior sentenceshall apply to such transferee with respect to the portion of the Exchange CapAllocation allocated to such transferee.  In the event that any holder ofWarrants shall exercise all of such holder’s Warrants into a number of sharesof Common Stock which, in the aggregate, is less than such holder’s ExchangeCap Allocation, then the difference between such holder’s Exchange CapAllocation and the number of shares of Common Stock actually issued to such holdershall be allocated to the respective Exchange Cap Allocations of the remainingholders of Warrants on a pro rata basis in proportion to the shares of CommonStock underlying the Warrants then held by each such holder.  In the eventthat the Company is prohibited from issuing any Warrant Shares for which anExercise Notice has been received as a result of the operation of this Section1(f), the Company shall pay cash in exchange for cancellation of such WarrantShares, at a price per Warrant Share equal to the difference between theclosing sale price and the Exercise Price as of the date of the attemptedexercise.

2.               *DELIVERY OF WARRANT SHARES UPON EXERCISE*.

Upon receipt of anExercise Notice pursuant to ***Section 1*** above, the Company shall, (A) in the case of aCash Exercise (as defined below) no later than the close of business on thelater to occur of (i) the third (3rd) Business Day following the Exercise Dateset forth in such Exercise Notice and (ii) the date on which the Company hasreceived payment of the Exercise Price, (B) in the case of a Cashless Exercise(as defined below), no later than the close of business on the third (3rd)Business Day following the Exercise Date set forth in such Exercise Notice, and(C) with respect to Warrant Shares that are the subject of a Dispute Procedure,the close of business on the third (3rd) Business Day following thedetermination made pursuant to ***Section 1(b)*** (each of the dates specified in (A), (B) or(C) being referred to as a “***Delivery Date***”), issue and deliver or cause to bedelivered to the Holder the number of Warrant Shares as shall be determined asprovided herein. The Company shall effect delivery of Warrant Shares to theHolder, as long as the Company’s designated transfer agent or co-transfer agentin the United States for the Common Stock (the “***Transfer Agent***”) participates in theDepository Trust Company (“***DTC***”)Fast Automated Securities Transfer program (“***FAST***”), by crediting the account of theHolder or its nominee at DTC (as specified in the applicable Exercise Notice)with the number of Warrant

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Sharesrequired to be delivered, no later than the close of business on such DeliveryDate. In the event that the Transfer Agent is not a participant in FAST, or ifthe Holder so specifies in an Exercise Notice or otherwise in writing on orbefore the Exercise Date, the Company shall effect delivery of Warrant Sharesby delivering to the Holder or its nominee physical certificates representingsuch Warrant Shares, no later than the close of business on such Delivery Date. If any exercise would create afractional Warrant Share, such fractional Warrant Share shall be disregardedand the number of Warrant Shares issuable upon such exercise, in the aggregate,shall be the nearest whole number of Warrant Shares.  Warrant Shares delivered to the Holder shallnot contain any restrictive legend unless such legend is required pursuant tothe terms of the Securities Purchase Agreement.

3.               *FAILURE TO DELIVER WARRANT SHARES*.

(a)           In the event that the Company failsfor any reason (other than as a result of the Holder’s failure, in the case ofa Cash Exercise (as defined below), to pay the aggregate Exercise Price for theWarrant Shares being purchased) to deliver to the Holder the number of WarrantShares specified in the applicable Exercise Notice (without any restrictivelegend to the extent permitted by the terms of the Securities PurchaseAgreement) on or before the second (2nd) Business Day following the DeliveryDate therefor (an “***ExerciseDefault***”), the Holder shall have the right to receive from the Companyan amount equal to (i) (N/365) multiplied by (ii) the aggregate ExercisePrice of the Warrant Shares which are the subject of such Exercise Default multipliedby (iii) the lower of sixteen percent (16%) and the maximum rate permittedby applicable law or by the applicable rules or regulations of any GovernmentalAgency (the “***DefaultInterest Rate***”), where “N” equals the number of days elapsedbetween the original Delivery Date of such Warrant Shares and the date on whichsuch Exercise Default has been cured.  Inthe event that shares of Common Stock are purchased by or on behalf of theHolder in order to make delivery ona sale effected in anticipation of receiving Warrant Shares upon an exercise,the Holder shall have the right to receive from the Company, in addition to theforegoing amounts, (i) the aggregate amount paid by or on behalf of the Holderfor such shares of Common Stock minus (ii) the aggregate amount of netproceeds, if any, received by the Holder from the sale of the Warrant Sharesissued by the Company pursuant to such exercise.  Amountspayable under this ***Section3(a)***shall be paid tothe Holder in immediately available funds on or before the fifth (5th) BusinessDay following written notice from the Holder to the Company specifying theamount owed to it by the Company pursuant to this ***Section 3(a)***.

(b)           In addition to its rights under ***Section 3(a)*** above,upon an Exercise Default, the Exercise Price applicable to the applicable exerciseshall be automatically be adjusted to the lower of (i) the Exercise Price ineffect on the Exercise Date and (ii) the lowest Exercise Price occurring fromthe first date of such Exercise Default through the date on which all WarrantShares to which the Holder is entitled have been delivered in accordance withthe terms of this Warrant.  The Holdershall have the right to pursue all other remedies available to it at law or inequity (including, without limitation, a decree of specific performance and/orinjunctive relief).

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4.               *EXERCISE LIMITATION*.

In no event shall the Holder be permitted to exercisethis Warrant, or part thereof, if, upon such exercise, the number of shares ofCommon Stock beneficially owned by the Holder (other than shares which may bedeemed beneficially owned except for being subject to a limitation on exerciseor exercise analogous to the limitation contained in this ***Section 4***), wouldexceed 4.99% of the number of shares of Common Stock then issued andoutstanding, it being the intent of the Company and the Holder that the Holdernot be deemed at any time to have the power to vote or dispose of greater than4.99% of the number of shares of Common Stock issued and outstanding at anytime. Nothing contained herein shall be deemed to restrict the right of theHolder to exercise this Warrant at such time as such exercise will not violatethe provisions of this ***Section4***.  As used herein, beneficial ownership shall bedetermined in accordance with Section 13(d) of (i) Securities Exchange Act of1934, as amended, and the rules thereunder. To the extent that the limitation contained in this ***Section 4*** applies (and without limiting any rights theCompany may otherwise have), the Company may rely on the Holder’s determinationof whether this Warrant is exercisable pursuant to the terms hereof, the Company shall have no obligation whatsoeverto verify or confirm the accuracy of such determination, and the submission ofan Exercise Notice by the Holder shall be deemed to be the Holder’srepresentation that this Warrant is exercisable pursuant to the termshereof. The Company shall have no liability to any person if the Holder’sdetermination of whether this Warrant is exercisable pursuant to the termshereof is incorrect.

5.               *PAYMENT OF THE EXERCISE PRICE; CASHLESS EXERCISE*.

The Holder may pay the Exercise Price in either of thefollowing forms or, at the election of Holder, a combination thereof:

(a)   through acash exercise (a “***CashExercise***”) by delivering immediately available funds, or

(b)   through a cashless exercise(a “***Cashless Exercise***”)if, following the one-year anniversary of the Issue Date, an effectiveRegistration Statement is not available for the resale of all of the WarrantShares issuable hereunder at the time an Exercise Notice is delivered to theCompany, or if the Company otherwise consents in writing.  The Holder shall effect a Cashless Exerciseby surrendering this Warrant to the Company and noting on the Exercise Noticethat the Holder wishes to effect a Cashless Exercise, upon which the Companyshall issue to the Holder a number of Warrant Shares determined as follows:
|        | X = Y x (A-B)/A                                                                          |
|--------|------------------------------------------------------------------------------------------|
|   |                                                                                     |
| where: | X = the number of Warrant Shares to be issued to the  Holder;                            |
|   |                                                                                     |
|   | Y = the number of Warrant Shares with respect to  which this Warrant is being exercised; |

 

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|        | A = the Market Price as of the Exercise Date; and |
|--------|---------------------------------------------------|
|   |                                              |
|   | B = the Exercise Price.                           |

 

It is intended andacknowledged that the Warrant Shares issued in a Cashless Exercise transactionshall be deemed to have been acquired by the Holder, and the holding period forthe Warrant Shares required by Rule 144 shall be deemed to have been commenced,on the Issue Date.

6.               *ANTI-DILUTION ADJUSTMENTS; DISTRIBUTIONS; OTHEREVENTS*.

The Exercise Price and the number of Warrant Shares issuable hereundershall be subject to adjustment from time to time as provided in this ***Section 6***.

(a)           Stock Splits, Stock Interests, Etc.  If, at any time on or after the Issue Date,the number of outstanding shares of Common Stock is increased by a stock split,stock dividend, combination, reclassification or other similar event, the ExercisePrice shall be proportionately reduced, or if the number of outstanding sharesof Common Stock is decreased by a reverse stock split, combination,reclassification or other similar event, the Exercise Price shall beproportionately increased. In such event, the Company shall notify the Company’stransfer agent of such change on or before the effective date thereof.

(b)           Major Transactions.  If, at any time after the Issue Date, anyMajor Transaction shall occur, then the Holder shall thereafter have the rightto receive upon exercise, in lieu of the shares of Common Stock otherwiseissuable, such shares of publicly traded stock, securities and/or otherproperty as would have been issued or payable upon such Major Transaction withrespect to or in exchange for the number of shares of Common Stock which wouldhave been issuable upon exercise had such Major Transaction not taken place(without giving effect to any limitations on such exercise contained in this Warrantor the Securities Purchase Agreement). Notwithstanding the foregoing, followinga Major Transaction in which all or substantially all of the outstanding CommonStock of the Company is exchanged for, converted into, acquired for orconstitutes the right to receive solely cash (a “Triggering Event”), at thewritten request of the Holder delivered before the 30th day after suchTriggering Event, the Company (or the successor entity) shall purchase thisWarrant from the Holder by paying to the Holder, within five days after suchrequest, cash in an amount equal to the Black-Scholes Value (as defined below)of the remaining unexercised portion of this Warrant.  “Black-Scholes Value” means the value of theunexercised portion of this Warrant calculated using the Black-Scholes OptionPricing Model determined as of the day immediately following the publicannouncement of the applicable Triggering Event and reflecting (i) a risk-freeinterest rate corresponding to the U.S. Treasury rate for a period equal to theremaining term of this Warrant as of the date of such request and (ii) anexpected volatility equal to the lesser of (a) the 100 day volatility obtainedfrom the HVT function on Bloomberg or (b) a volatility of 60.  The Company shall not effect any MajorTransaction unless (i) the Holder has received written notice of suchtransaction at least thirty (30) days prior thereto (which period shall beincreased to sixty one (61) days if, at such time, without giving effect to thelimitation on exercise contained in ***Section 4*** hereof, the Holder wouldbeneficially own more than 4.9% of the Common Stock then outstanding, and the

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Holder has notified theCompany in writing of such circumstance) but in no event later than fifteen(15) days prior to the record date for the determination of stockholdersentitled to vote with respect thereto; *provided*,*however*, that the Company shallpublicly disclose the material terms of any such Major Transaction on or beforethe date on which it delivers notice of a Major Transaction to the Holder, and(ii) the resulting successor or acquiring entity (if not the Company) assumesby written instrument (in form and substance reasonable satisfactory to theHolder) the obligations of the Company under this Warrant.  The above provisions shall apply regardlessof whether or not there would have been a sufficient number of shares of CommonStock authorized and available for issuance upon exercise of this Warrant as ofthe date of such transaction, and shall similarly apply to successive MajorTransactions.

(c)           Distributions.  If, at any time after the Issue Date, theCompany declares or makes any distribution of cash or any other assets (orrights to acquire such assets) to holders of Common Stock, including withoutlimitation any dividend or distribution to the Company’s stockholders in shares(or rights to acquire shares) of capital stock of a subsidiary) (a “***Distribution***”), theCompany shall deliver written notice of such Distribution (a “***Distribution Notice***”)to the Holder at least fifteen (15) days prior to the earlier to occur of (i)the record date for determining stockholders entitled to such Distribution (the“***Record Date***”)and (ii) the date on which such Distribution is made (the “***Distribution Date***”)(theearlier of such dates being referred to as the “***Determination Date***”).  Upon receipt of the Distribution Notice, theHolder shall promptly (but in no event later than three (3) Business Days)notify the Company whether it has elected (A) to receive the same amount andtype of assets (including, without limitation, cash) being distributed asthough the Holder were, on the Determination Date, a holder of a number ofshares of Common Stock into which this Warrant is exercisable as of suchDetermination Date (such number of shares to be determined without givingeffect to any limitations on such exercise) or (B) upon any exercise of this Warranton or after the Distribution Date, to reduce the Exercise Price applicable tosuch exercise by reducing the Exercise Price in effect on the Business Dayimmediately preceding the Record Date by an amount equal to the fair marketvalue of the assets to be distributed divided by the number of shares ofCommon Stock as to which such Distribution is to be made, such fair marketvalue to be reasonably determined in good faith by the independent members ofthe Company’s Board of Directors.  Uponreceipt of such election notice from the Holder, the Company shall timely effectuatethe transaction or adjustment contemplated in the foregoing ***clause (A) or (B)***, asapplicable.****** If the Holder does not notify the Company ofits election pursuant to the preceding sentence on or prior to theDetermination Date, the Holder shall be deemed to have elected clause (A) ofthe preceding sentence.

(d)           Convertible Securities; Options.  If, at any time after the Issue Date, theCompany issues Convertible Securities or Options to the record holders of theCommon Stock, whether or not such Convertible Securities or Options areimmediately convertible, exercisable or exchangeable, then the Holders shall beentitled, upon any exercise of this Warrant after the date of record fordetermining stockholders entitled to receive such Convertible Securities orOptions (or if no such record is taken, the date on which such ConvertibleSecurities or Options are issued), to receive the aggregate number ofConvertible Securities or Options which the Holder would have received withrespect to the shares of Common Stock issuable upon such exercise (withoutgiving effect to any limitations on such exercise contained in this Warrant or

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the Securities PurchaseAgreement) had the Holder been the holder of such shares of Common Stock on therecord date for the determination of stockholders entitled to receive suchConvertible Securities or Options (or if no such record is taken, the date onwhich such Convertible Securities or Options were issued).

(e)                                  DilutiveIssuances.

(i)            Adjustment Upon Dilutive Issuance.  If, at any time after the Issue Date, theCompany issues or sells, or in accordance with ***Section 6(e)(ii)***is deemed to haveissued or sold, any shares of Common Stock for no consideration or for aconsideration per share less than the Exercise Price on the date of suchissuance or sale (or deemed issuance or sale) (a “***Dilutive Issuance***”), then the ExercisePrice shall be adjusted as follows:

(A)          if such Dilutive Issuance occurs on orprior to the eighteen (18) month anniversary of the Issue Date, then effectiveimmediately upon such Dilutive Issuance, the Exercise Price shall be adjustedso as to equal the consideration received or receivable by the Company (on aper share basis) for the additional shares of Common Stock so issued, sold ordeemed issued or sold in such Dilutive Issuance (which, in the case of a deemedissuance or sale, shall be calculated in accordance with ***Section 6(e)(ii)***below).  Notwithstanding the foregoing,no adjustment shall be made pursuant to this ***Section 6(e)(i)(A)*** if such adjustmentwould result in an increase in the Exercise Price.

(B)           ifsuch Dilutive Issuance occurs after the eighteen (18) month anniversary of theIssue Date, then effective immediately upon the Dilutive Issuance, the ExercisePrice shall be adjusted so as to equal an amount determined by multiplying suchExercise Price by the following fraction:
| N0 + N1 |
|--------------|
| N0 + N2 |

 

where:
| N0 =                  | the number of  shares of Common Stock outstanding immediately prior to such Dilutive  Issuance (without taking into account any Convertible Securities or Options,  including the Notes and Warrants);                                                                                                                                                                                                                                                                               |
|-----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** ***          | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| N1********* =*** | the number of  shares of Common Stock which the aggregate consideration, if any, received or  receivable by the Company for the total number of such additional shares of  Common Stock so issued, sold or deemed issued or sold in such Dilutive  Issuance (which, in the case of a deemed issuance or sale, shall be  calculated in accordance with ***Section 6(e)(ii)*** below) would purchase at the Exercise  Price in effect immediately prior to such Dilutive Issuance; and |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| N2 =                  | the number of  such additional shares of Common Stock so issued,                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|  | sold or deemed  issued or sold in such Dilutive Issuance. |
|--|-----------------------------------------------------------|

 

Notwithstandingthe foregoing, no adjustment shall be made pursuant hereto if such adjustmentwould result in an increase in the Exercise Price.

(ii)           Effect On Exercise Price OfCertain Events.  For purposes ofdetermining the adjusted Exercise Price under ***Section 6(e)(i)***, the following will beapplicable:

(A)          IssuanceOf Options.  If the Company issues orsells any Options, whether or not immediately exercisable, and the price pershare for which Common Stock is issuable upon the exercise of such Options (andthe price of any conversion of Convertible Securities, if applicable) is lessthan the Exercise Price in effect on the date of issuance or sale of suchOptions, then the maximum total number of shares of Common Stock issuable uponthe exercise of all such Options (assuming full conversion, exercise orexchange of Convertible Securities, if applicable) shall, as of the date of theissuance or sale of such Options, be deemed to be outstanding and to have beenissued and sold by the Company for such price per share. For purposes of thepreceding sentence, the “price per share for which Common Stock is issuableupon the exercise of such Options” shall be determined by dividing (x) thetotal amount, if any, received or receivable by the Company as considerationfor the issuance or sale of all such Options, plus the minimum aggregate amountof additional consideration, if any, payable to the Company upon the exerciseof all such Options, plus, in the case of Convertible Securitiesissuable upon the exercise of such Options, the minimum aggregate amount ofadditional consideration payable upon the conversion, exercise or exchangethereof (determined in accordance with the calculation method set forth in ***Section 6(e)(ii)(B)***below) at the time such Convertible Securities first become convertible,exercisable or exchangeable, by (y) the maximum total number of shares ofCommon Stock issuable upon the exercise of all such Options (assuming fullconversion, exercise or exchange of Convertible Securities, if applicable). Nofurther adjustment to the Exercise Price shall be made upon the actual issuanceof such Common Stock upon the exercise of such Options or upon the conversion,exercise or exchange of Convertible Securities issuable upon exercise of suchOptions.

(B)           Issuance Of Convertible Securities.  If the Company issues or sells anyConvertible Securities, whether or not immediately convertible, exercisable orexchangeable, and the price per share for which Common Stock is issuable uponsuch conversion, exercise or exchange is less than the Exercise Price in effecton the date of issuance or sale of such Convertible Securities, then themaximum total number of shares of Common Stock issuable upon the conversion,exercise or exchange of all such Convertible Securities shall, as of the dateof the issuance or sale of such Convertible Securities, be deemed to beoutstanding and to have been issued and sold by the Company for such price pershare. If the Convertible Securities so issued or sold do not have afluctuating conversion or exercise price or exchange ratio, then for thepurposes of the immediately preceding sentence, the “price per share for whichCommon Stock is issuable upon such conversion, exercise or exchange” shall bedetermined by dividing (A) the total amount, if any, received or receivable bythe Company as consideration for the issuance or sale of all such ConvertibleSecurities, plus the minimum aggregate

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amount of additional consideration, if any, payable to the Company uponthe conversion, exercise or exchange thereof (determined in accordance with thecalculation method set forth in this ***Section 6(e)(ii)(B)***) at the time suchConvertible Securities first become convertible, exercisable or exchangeable,by (B) the maximum total number of shares of Common Stock issuable upon theexercise, conversion or exchange of all such Convertible Securities. If theConvertible Securities so issued or sold have a fluctuating conversion orexercise price or exchange ratio (a “***Variable Rate Convertible Security***”), thenfor purposes of the first sentence of this ***Section 6(e)(ii)(B)***, the “price per share forwhich Common Stock is issuable upon such conversion, exercise or exchange”shall be deemed to be the lowest price per share which would be applicable(assuming all holding period and other conditions to any discounts contained insuch Variable Rate Convertible Security have been satisfied) if the conversionprice of such Variable Rate Convertible Security on the date of issuance or salethereof were equal to the actual conversion price on such date (or such higherminimum conversion price if such Variable Rate Convertible Security is subjectto a minimum conversion price) (the “***Assumed Variable Market Price***”), and,further, if the conversion price of such Variable Rate Convertible Security atany time or times thereafter is less than or equal to the Assumed VariableMarket Price last used for making any adjustment under this ***Section 6(e)*** withrespect to any Variable Rate Convertible Security, the Exercise Price in effectat such time shall be readjusted to equal the Exercise Price which would haveresulted if the Assumed Variable Market Price at the time of issuance of theVariable Rate Convertible Security had been equal to the actual conversionprice of such Variable Rate Convertible Security existing at the time of theadjustment required by this sentence; *provided,however*, that if the conversion or exercise price or exchange ratioof a Convertible Security may fluctuate solely as a result of provisionsdesigned to protect against dilution, such Convertible Security shall not bedeemed to be a Variable Rate Convertible Security.  No further adjustment to the Exercise Priceshall be made upon the actual issuance of such Common Stock upon conversion,exercise or exchange of such Convertible Securities.

(C)           ChangeIn Option Price Or Conversion Rate. If there is a change at any time in (x) the amount of additionalconsideration payable to the Company upon the exercise of any Options; (y) theamount of additional consideration, if any, payable to the Company upon theconversion, exercise or exchange of any Convertible Securities; or (z) the rateat which any Convertible Securities are convertible into or exercisable orexchangeable for Common Stock (in each such case, other than under or by reasonof provisions designed to protect against dilution), the Exercise Price ineffect at the time of such change shall be readjusted to the Exercise Pricewhich would have been in effect at such time had such Options or ConvertibleSecurities still outstanding provided for such changed additional considerationor changed conversion, exercise or exchange rate, as the case may be, at thetime initially issued or sold.

(D)          Calculation Of ConsiderationReceived.  If any Common Stock,Options or Convertible Securities are issued or sold for cash, theconsideration received therefor will be the amount received by the Companytherefor. In case any Common Stock, Options or Convertible Securities areissued or sold for a consideration part or all of which shall be other thancash, including in the case of a strategic or similar arrangement in which theother entity will provide services to the Company, purchase

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services from the Company or otherwise provide intangible considerationto the Company, the amount of the consideration other than cash received by theCompany (including the net present value of the consideration expected by theCompany for the provided or purchased services) shall be the fair market valueof such consideration. In case any Common Stock, Options or ConvertibleSecurities are issued in connection with any merger or consolidation in whichthe Company is the surviving corporation, the amount of consideration thereforwill be deemed to be the fair market value of such portion of the net assetsand business of the non-surviving corporation as is attributable to such CommonStock, Options or Convertible Securities, as the case may be. The independentmembers of the Company’s Board of Directors shall calculate reasonably and ingood faith, using standard commercial valuation methods appropriate for valuingsuch assets, the fair market value of any consideration.

(iii)          Exceptions To Adjustment Of ExercisePrice.  Notwithstanding theforegoing, no adjustment to the Exercise Price shall be made pursuant to this ***Section 6(e)*** upon theissuance of any Excluded Securities.

(iv)          Notice Of Adjustments.  Upon the occurrence of each adjustment orreadjustment of the Exercise Price pursuant to this ***Section 6(e)*** resultingin a change in the Exercise Price by more than one percent (1%), or any changein the number or type of stock, securities and/or other property issuable upon exerciseof this Warrant, the Company, at its expense, shall promptly compute suchadjustment, readjustment or change and prepare and furnish to the Holder acertificate setting forth such adjustment, readjustment or change and showingin detail the facts upon which such adjustment, readjustment or change isbased.  The Company shall, upon the writtenrequest at any time of the Holder, furnish to the Holder a like certificatesetting forth (i) such adjustment, readjustment or change, (ii) the ExercisePrice at the time in effect and (iii) the number of shares of Common Stock andthe amount, if any, of other securities or property which at the time would bereceived upon exercise of this Warrant.

(v)           Adjustments; Additional Shares,Securities or Assets.  In the eventthat at any time, as a result of an adjustment made pursuant to this ***Section 6***, the Holderof this Warrant shall, upon exercise of this Warrant, become entitled toreceive securities or assets (other than Common Stock) then, whereverappropriate, all references herein to shares of Common Stock shall be deemed torefer to and include such shares and/or other securities or assets; andthereafter the number of such shares and/or other securities or assets shall besubject to adjustment from time to time in a manner and upon terms as nearlyequivalent as practicable to the provisions of this ***Section 6***.  Any adjustment made herein that results in adecrease in the Exercise Price shall also effect a proportional increase in thenumber of shares of Common Stock into which this Warrant is exercisable.

7.               *MISCELLANEOUS*.

(a)           Failure to Exercise Rights notWaiver.  No failure or delay on thepart of the Holder in the exercise of any power, right or privilege hereundershall operate as a waiver thereof, nor shall any single or partial exercise ofany such power, right or privilege preclude any other or further exercisethereof. All rights and remedies of the Holder hereunder are cumulative and notexclusive of any rights or remedies otherwise available. In the event that theCompany

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breaches any of itsobligations hereunder to issue Warrant Shares or pay any amounts as and whendue, the Company shall bear all costs incurred by the Holder in collecting suchamount, including without limitation reasonable legal fees and expenses.

(b)           Notices. Any notices,consents, waivers or other communications required or permitted to be givenunder the terms of this Warrant must be in writing and will be deemed to havebeen delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,when sent by facsimile (provided confirmation of transmission is mechanicallyor electronically generated and kept on file by the sending party); or (iii)one Business Day after deposit with an overnight courier service, in each caseproperly addressed to the party to receive the same. The addresses andfacsimile numbers for such communications shall be:
| if to the Company:                                |
|---------------------------------------------------|
|                                              |   |
|                                              | Earth Biofuels, Inc. |
|                                              | 3001 Knox Street, Suite 403, |
|                                              | Dallas, Texas 75205 |
|                                              | Telephone: | 214.389.9800 |
|                                              | Facsimile: | 214.389.9806 |
|                                              | Attention: | Dennis McLaughlin |
|                                              |   |   |
| with a copy (for informational purposes only) to: |
|                                              |   |   |
|                                              | Scheef & Stone, LLP |
|                                              | Telephone: | 214.706.4200 |
|                                              | Facsimile: | 214.706.4242 |
|                                              | Attention: | Roger A. Crabb, Esq. |

 

and if to the Holder, tothe address and facsimile number as to which the Holder has notified theCompany in writing. Written confirmation of receipt (A) given by the recipientof such notice, consent, waiver or other communication, (B) mechanically orelectronically generated by the sender’s facsimile machine containing the time,date, recipient facsimile number and an image of the first page of suchtransmission or (C) provided by an overnight courier service shall berebuttable evidence of personal service, receipt by facsimile or receipt froman overnight courier service in accordance with clause (i), (ii) or (iii)above, respectively.

(c)           Amendments.  No amendment, modification or other changeto, or waiver of any provision of, this Warrant may be made unless suchamendment, modification or change is set forth in writing and is signed by theCompany and the Holder.

(d)           Transfer of Warrant.  The Holder may sell, transfer or otherwisedispose of all or any part of this Warrant (including without limitationpursuant to a pledge) to any person or entity as long as such sale, transfer ordisposition is the subject of an effective registration statement under theSecurities Act of 1933, as amended, and applicable state securities laws, or isexempt from registration thereunder, and is otherwise made in accordance withthe applicable provisions of the Securities Purchase Agreement.  From and after the date of any such sale,transfer or disposition, the transferee hereof shall be deemed to be the holderof

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the portion of thisWarrant acquired by such transferee, and the Company shall, as promptly aspracticable, issue and deliver to such transferee a new Warrant identical inall respects to this Warrant, in the name of such transferee. The Company shallbe entitled to treat the original Holder as the holder of this entire Warrantunless and until it receives written notice of the sale, transfer ordisposition hereof.

(e)           Lost or Stolen Warrant.  Upon receipt by the Company of evidence ofthe loss, theft, destruction or mutilation of this Warrant, and (in the case ofloss, theft or destruction) of indemnity or security reasonably satisfactory tothe Company, and upon surrender and cancellation of this Warrant, if mutilated,the Company shall execute and deliver to the Holder a new Warrant identical inall respects to this Warrant.

(f)            Governing Law.  This Warrant shall be governed by andconstrued in accordance with the laws of the State of New York applicable to contracts made and to be performedentirely within the State of New York.

(g)           Successors andAssigns.  The terms and conditions ofthis Warrant shall inure to the benefit of and be binding upon the respectivesuccessors (whether by merger or otherwise) and permitted assigns of theCompany and the Holder. The Company may not assign its rights or obligationsunder this Warrant except as specifically required or permitted pursuant to theterms hereof.

(h)           Taxes.  The issue of stock certificates on exercisesof this Warrant shall be made without charge to the exercising Holder for anytax in respect of the issue thereof.  TheCompany shall not, however, be required to pay any tax which may be payable inrespect of any transfer involved in the issue and delivery of stock in any nameother than that of the Holder of any Warrant exercised, and the Company shallnot be required to issue or deliver any such stock certificate unless and untilthe person or persons requesting the issue thereof shall have paid to theCompany the amount of such tax or shall have established to the reasonablesatisfaction of the Company that such tax has been paid.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the Company has duly executed anddelivered this Warrant as of the Issue Date.
|        | EARTH BIOFUELS, INC. |
|--------|----------------------|
|   |                 |
|   |                 |
|   | By:                  | /s/DENNIS G. MCLAUGHLIN, III |   |
|   |                 | Name: Dennis G. McLaughlin, III |
|   |                 | Title: Chief Executive Officer |

 

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EXHIBIT A to WARRANT

EXERCISE NOTICE

The undersigned Holder hereby irrevocably exercisesthe right to purchase                      ofthe shares of Common Stock (“Warrant Shares”) of EARTH BIOFUELS, INC.evidenced by the attached Warrant (the “Warrant”).  Capitalized terms used herein and nototherwise defined shall have the respective meanings set forth in the Warrant.

1.     Form ofExercise Price.  The Holder intends thatpayment of the Exercise Price shall be made as:

              aCash Exercise with respect to                       WarrantShares; and/or

              aCashless Exercise with respect to                       WarrantShares, as permitted by Section 5(b) of the attached Warrant.

2.     Payment ofExercise Price.  In the event that theHolder has elected a Cash Exercise with respect to some or all of the WarrantShares to be issued pursuant hereto, the Holder shall pay the sum of $                      tothe Company in accordance with the terms of the Warrant.
| Date:                      |   |   |
|----------------------------|--------|--------|
|                       |
|                       |
|                       |   |
| Name of  Registered Holder |   |
|                       |
| By:                        |   |   |
|                       | Name:  |   |
|                       | Title: |   |
|                            |        |        |  |  |

 

By tendering this Exercise Notice, the Holderrepresents to the Company that it is an “accredited investor” as that term isdefined in Rule 501 of Regulation D, and that it is acquiring the WarrantsShares solely for its own account, and not with a present view to the publicresale or distribution of all or any part thereof, except pursuant to salesthat are registered under the Securities Act or are exempt from theregistration requirements of the Securities Act; provided, however,that, in making such representation, the Holder does not agree to hold theWarrants Shares for any minimum or specific term and reserves the right tosell, transfer or otherwise dispose of the Warrants Shares at any time inaccordance with the provisions of the Warrant and with Federal and statesecurities laws applicable to such sale, transfer or disposition.

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