##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB/A
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 000-50842
 
 Earth Biofuels, Inc.
 
 Delaware
    
    71-0915825(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 3001 Knox Street, Suite 403
Dallas, TX 75205   (214) 3899800
 þ o
 o þ
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EARTH BIOFUELS, INC.
TABLE OF CONTENTS
FORM 10-QSB QUARTERLY REPORT
 PART I FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsRestated
Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005Restated
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)Restated
Consolidated Statements of Stockholders Equity (Deficit) For the Nine Months Ended September 30, 2006 and December 31, 2005Restated
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (unaudited)Notes to Restated Consolidated Financial Statements (unaudited)Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Controls and ProceduresPART II OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 2.
    
    Equity Securities and Use of ProceedsItem 3.
    
    Defaults upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsSignaturesCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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##### Table of Contents



EARTH BIOFUELS, INC.
 
   September 30,
    
    
    December 31,2006
    
    
    2005(Restated)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    41,609
    
    
    $
    82,093Trade accounts receivable, net
    
    
    1,905,379
    
    
    
    253,376Accounts receivable  tax credits
    
    
    
    
    
    
    374,381Marketable securities, net
    
    
    890,050
    
    
    
    Inventory
    
    
    252,638
    
    
    
    131,391Prepaid expenses & other current assets
    
    
    715,504
    
    
    
    40,401Notes receivable
    
    
    803,550
    
    
    
    Notes receivable from related parties
    
    
    2,960,621
    
    
    
    Total Current Assets
    
    
    7,569,351
    
    
    
    881,642Property and equipment, net
    
    
    15,090,606
    
    
    
    455,419Investment  related party
    
    
    100,000
    
    
    
    Investments
    
    
    41,531,996
    
    
    
    Deferred financing fees
    
    
    2,588,703
    
    
    
    Other assets
    
    
    413,106
    
    
    
    261,384Goodwill
    
    
    3,981,280
    
    
    
    3,981,280Total Assets
    
    $
    71,275,042
    
    
    $
    5,579,725LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current LiabilitiesAccounts payable
    
    $
    3,946,203
    
    
    $
    763,215Accrued liabilities
    
    
    2,834,656
    
    
    
    Shares payable
    
    
    
    
    
    
    4,210,248Payables to related parties
    
    
    3,037,217
    
    
    
    1,442,569Current portion of convertible promissory notes, net of discount of $6,623,411
    
    
    2,309,923
    
    
    
    Other current liabilities
    
    
    
    
    
    
    110,664Total Current Liabilities
    
    
    12,127,999
    
    
    
    6,526,696Long-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
    
    
    
    161,591Additional paid-in capital
    
    
    96,437,339
    
    
    
    9,499,709Deferred compensation
    
    
    
    
    
    
    (98,500
    )Other comprehensive income
    
    
    (124,854
    )
    
    
    Accumulated deficit
    
    
    (46,238,852
    )
    
    
    (10,509,771
    )Total Stockholders Equity (Deficit)
    
    
    50,277,609
    
    
    
    (946,971
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    71,275,042
    
    
    $
    5,579,725
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##### Table of Contents



EARTH BIOFUELS, INC.
 
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    

(Restated)Revenues:Sales revenue
    
    $
    9,382,652
    
    
    $
    392,564
    
    
    $
    13,278,542
    
    
    $
    1,065,087Energy production credits
    
    
    919,809
    
    
    
    
    
    
    
    1,817,961
    
    
    
    Total revenues
    
    
    10,302,461
    
    
    
    392,564
    
    
    
    15,096,503
    
    
    
    1,065,087Cost of sales
    
    
    9,862,837
    
    
    
    403,921
    
    
    
    14,249,523
    
    
    
    958,822Gross profit (loss)
    
    
    439,624
    
    
    
    (11,357
    )
    
    
    846,980
    
    
    
    106,265Compensation (including share based compensation of $24,880,406
and $36,532,115, respectively)
    
    
    26,198,092
    
    
    
    
    
    
    
    39,307,006
    
    
    
    Other selling, general and administrative
    
    
    4,789,378
    
    
    
    454,417
    
    
    
    9,920,369
    
    
    
    683,381Depreciation and amortization
    
    
    261,701
    
    
    
    877
    
    
    
    273,059
    
    
    
    2,167Net loss from operations
    
    
    (30,809,547
    )
    
    
    (466,651
    )
    
    
    (48,653,454
    )
    
    
    (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
    )
    
    
    3,362Total other income
    
    
    16,131,508
    
    
    
    3,362
    
    
    
    12,924,373
    
    
    
    3,362Net income (loss)
    
    $
    (14,678,039
    )
    
    $
    (463,289
    )
    
    $
    (35,729,081
    )
    
    $
    (575,921
    )Net income (loss) per common share:Basic and Diluted
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (0.12
    )Weighted average shares:Basic and Diluted
    
    
    201,310,426
    
    
    
    7,458,696
    
    
    
    183,701,363
    
    
    
    4,734,615
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##### Table of Contents



EARTH BIOFUELS, INC.
 
   Common
    
    
    
    
    
    Additional
    
    OtherMembers
    

    Prefered
    
    Stock
    
    Common
    
    Paid
    
    Comprehensive
    
    
    AccumulatedCapital
    

    Stock
    
    Shares
    
    Stock
    
    In Capital
    
    Income
    
    
    Deficit
    
    TotalsBalance December 31, 2004
    
    $
    60,000
    
    $
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (56,199
    )
    
    $
    3,801Members contributions
    
    
    260,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,000Recapitalization
    
    
    (320,000
    )
    
    
    
    
    146,100,000
    
    
    
    146,100
    
    
    $
    173,900
    
    
    
    
    
    
    
    
    
    
    
    Shares issued for cash
    
    
    
    
    
    
    
    
    251,036
    
    
    
    251
    
    
    
    109,549
    
    
    
    
    
    
    
    
    
    
    
    109,800Shares issued for services
    
    
    
    
    
    
    
    
    15,240,000
    
    
    
    15,240
    
    
    
    9,216,260
    
    
    
    (98,500
    )
    
    
    
    
    
    
    9,133,000Net 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
    
    
    
    
    
    
    
    
    
    
    
    1,078,595Shares issued for services
    
    
    
    
    
    
    
    
    7,879,131
    
    
    
    7,879
    
    
    
    34,922,585
    
    
    
    
    
    
    
    
    
    
    
    34,930,464Shares issued for investments
    
    
    
    
    
    
    
    
    24,777,626
    
    
    
    24,777
    
    
    
    23,505,557
    
    
    
    
    
    
    
    
    
    
    
    23,530,334Unrealized loss on marketable 
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124,854
    )
    
    
    
    
    
    
    (124,854
    )Amortization of Deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,500
    
    
    
    
    
    
    
    98,500Net Changes in discounts on
convertible debt and reversal
of derivative liabilities and
related discounts from
retirements of debts
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,000
    
    
    
    29,583,375
    
    
    
    
    
    
    
    
    
    
    
    29,586,375Net
loss (Restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,729,081
    )
    
    
    (35,729,081
    )Balance September 30, 2006
    
    $
    
    
    $
    
    
    
    203,976,749
    
    
    $
    203,976
    
    
    $
    96,437,339
    
    
    $
    (124,854
    )
    
    $
    (46,238,852
    )
    
    $
    50,277,609
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EARTH BIOFUELS, INC.
 
   Nine Months Ended September 30,2006
    
    
    2005(Restated)Cash Flows from Operating Activities:Net Loss
    
    $
    (35,729,081
    )
    
    $
    (575,921
    )Non-cash Items Included in Net Loss:Depreciation
    
    
    273,059
    
    
    
    2,167Minority 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
    
    
    36,532,115
    
    
    
    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
    )
    
    
    3,962Prepaid expenses & other current assets
    
    
    (2,374,206
    )
    
    
    Other assets
    
    
    (151,422
    )
    
    
    Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,820,039
    
    
    
    108,237Property, sales and payroll taxes payable
    
    
    (12,643
    )
    
    
    27,194Related party advances
    
    
    1,594,447
    
    
    
    113,058Other liabilities
    
    
    (110,739
    )
    
    
    190Net 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
    )
    
    
    (229,280
    )Cash Flows From Financing Activities:Proceeds from issuance of common stock
    
    
    1,078,595
    
    
    
    461,000Proceeds from issuance of convertible debt
    
    
    74,900,054
    
    
    
    Repayments of convertible debt
    
    
    (21,100,054
    )
    
    
    Capital contributions
    
    
    
    
    
    
    260,000Cash paid for debt issuance cost
    
    
    (3,451,833
    )
    
    
    Net cash provided by financing activities
    
    
    51,426,762
    
    
    
    721,000Net increase (decrease) in cash
    
    
    (40,484
    )
    
    
    29,354Cash and cash equivalents:Beginning of period
    
    
    82,093
    
    
    
    10,903End of period
    
    $
    41,609
    
    
    $
    40,257Supplemental 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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##### Table of Contents



EARTH BIOFUELS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
    
    BASIS OF PRESENTATIONThe unaudited consolidated financial statements of Earth Biofuels, Inc. (Earth or the
Company) have been prepared in accordance with accounting principles generally accepted in
the United States and the rules of the Securities and Exchange Commission (SEC), and should
be read in conjunction with the audited financial statements and notes thereto contained in
Earths latest Annual Report on Form 10-KSB filed with the SEC. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim period
presented have been reflected herein. Notes to the financial statements which would
substantially duplicate the disclosures contained in the audited financial statements for the
most recent fiscal year 2005 as reported in the Form 10-KSB, have been omitted. The results
of operations for the three and nine month periods ended September 30, 2006 are not
necessarily indicative of the results to be expected for the full year.Background Earth Biofuels, Inc., (Earth) was incorporated in the state of Nevada on July
15, 2002. On September 13, 2005, Earth issued 146,100,000 shares of common stock to Apollo
Resources International, Inc., a Utah corporation, in exchange for 80% of the outstanding
shares of common stock of Earth Biofuels, Inc., a Mississippi corporation. On October 7,
2005, Earth Biofuels, Inc. (the Mississippi company) changed its name to Earth Biofuels
Operating, Inc. Effective November 14, 2005, the domicile of the Company was moved to
Delaware by means of a merger of Earth with and into Earth Biofuels, Inc., a Delaware
corporation.The consolidated financial statements include the accounts of Earth Biofuels, Inc, Earth
Biofuels Operating, Inc., (EBO) which is the main operating subsidiary and 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 been eliminated in consolidation.Nature of Operations  The principal business of Earth is the production, supply and
distribution of pure biodiesel fuel (B100) for sale directly to wholesalers and to be used as
a blend stock to make B20, a petroleum diesel-based alternative fuel. The company utilizes
vegetable oils such as soy and canola oil as raw material (feedstock) for the production of
biodiesel fuel.Accounting for Stock-Based Compensation On April 27, 2006, our Board of Directors and a
majority of our stockholders acted by unanimous written consent to approve and adopt our 2006
Stock Option and Award Plan. The plan is intended to aid in maintaining and developing a
management team, attracting qualified officers and employees capable of assisting in our
future success, and rewarding those individuals who have contributed to our success. It is
designed to aid in retaining the services of executives and employees and in attracting new
personnel when needed for future operations and growth and to provide such personnel with an
incentive to remain our employees, to use their best efforts to promote the success of our
business, and to provide them with an opportunity to obtain or increase a proprietary
interest in us through the granting of stock options and/or stock awards. Eligible award
recipients are employees and directors of our company and our subsidiaries and other
individuals who are not employed by us as determined by the administrator of the plan. The
maximum number of shares of our common stock which may be issued under the plan may not
exceed 5,000,000 shares, subject to certain adjustments.During the quarter ending September 30, 2006, the Company issued 2,082,867 restricted shares
of the Companys common stock to employees for services rendered and 6,430,000 restricted
shares of the Companys common stock for consulting services, of which 400,000 the Company
issued to Herb Meyer, a member of the Companys Board of Directors, under his consulting
agreement. There have been no stock options granted as of September 30, 2006.
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Accounting for Derivatives Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended,
requires all derivatives to be recorded on the balance sheet at fair value. These
derivatives, including embedded derivatives in our structured borrowings, are separately
valued and accounted for on our balance sheet. Fair values for exchange-traded securities and
derivatives are based on quoted market prices. Where market prices are not readily available,
fair values are determined using market based pricing models incorporating readily observable
market data and requiring judgment and estimates.In September 2000, the Emerging Issues Task Force (EITF) issued EITF Issue 00-19,
Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a
Companys Own Stock, (EITF 00-19) which requires freestanding contracts that are settled
in a companys own stock, including common stock warrants, to be designated as an equity
instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated
as an asset or a liability must be carried at fair value on a companys balance sheet, with
any changes in fair value recorded in earnings. A contract designated as an equity instrument
must be included within equity, and no fair value adjustments are required. In accordance
with SFAS 133 and EITF 00-19, we determined that several of the outstanding warrants to
purchase our common stock and the embedded conversion feature and certain other features of
several of our financial instruments should be separately accounted for as assets or
liabilities. Our financial statements for the six and nine months ended September 30, 2006
reflect the fair value of these warrants and the conversion and other embedded derivatives
features on our balance sheet and the unrealized changes in the values 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 during the quarter, there is no
derivative liability at September 30, 2006.Net Loss Per Share Data Basic and diluted net loss per common share are presented in
conformity with the SFAS No. 128, Earnings Per Share. Diluted net loss per share is the
same as basic net loss per share as the inclusion of outstanding warrants until their
exercise would be anti-dilutive. Share and per-share data presented throughout the financial
statements and notes reflect a 6-for-1 forward split that the Company declared in November,
2005.Reclassifications Certain previously reported amounts have been reclassified to conform to
the current presentation.Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.2.
    
    RESTATEMENTThe accompanying financial statements have been restated to adjust for the accounting of certain
share based transactions under Statement of Financial Accounting Standards No. 123R, Share-Based
Payments and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Earth Biofuels,
Inc.(the Company) determined that it will be necessary to restate its previously-issued financial
statements contained in its Quarterly Reports on Form 10-QSB for the quarters ended June 30, 2006,
and September 30, 2006. Share based compensation related to shares issued for non-employees were
previously reported as deferred and were being amortized over the life of the contract. The Company
measures all share-based payments, including grants of employee stock options, using a fair-value
based method in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based
Payments. Earth also determined the measurement date for share based transactions with
non-employees according to the terms of EITF 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Earth measured fair value of equity instruments using the stock price and other measurement
assumptions as of the earlier of either of the date at which a commitment for performance by the
counterparty to earn the equity instruments is, or the date at which the counterpartys performance
is complete. Subsequently however, it was determined that the date at which the commitments for
performance by the Companys non-employees to earn the equity instruments had in fact occurred
before the date at which the counterpartys performance was complete. As such, the Company is
expensing the amounts reported as deferred compensation for the quarters ended June 30, 2006, and
September 30, 2006. There were no amounts reported as deferred compensation in the Companys year
end filing in its 10KSB as of December 31, 2006.The following table sets forth a reconciliation of previously reported and restated Prepaid
Expenses and Other Current Assets, Compensation expenses, including share based compensation,
Net Income (loss),  Net income (loss) per common share: Basic and Diluted and
Accumulated deficit for the three and nine months ended September 30, 2006.
 As Reported
    
    
    
    
    
    As Restated
    
    
    As Reported
    
    
    
    
    
    As Restatedfor the Three
    
    
    
    
    
    for the Three
    
    
    for the Nine
    
    
    
    
    
    for the NineFor the Three and
    
    
    Months Ended
    
    
    
    
    
    Months Ended
    
    
    Months Ended
    
    
    
    
    
    Months EndedNine Months Ended
    
    
    September 30,
    
    
    Amount of
    
    
    September 30,
    
    
    September 30,
    
    
    Amount of
    
    
    September 30,September 30, 2006
    
    
    2006
    
    
    Adjustment
    
    
    2006
    
    
    2006
    
    
    Adjustment
    
    
    2006Prepaid expenses
and other current
assets
    
    
    $20,506,719
    
    
    (19,791,215)
    
    
    $715,504
    
    
    $20,506,719
    
    
    (19,791,215)
    
    
    $
    715,504Compensation,
including share
based compensation
    
    
    $8,093,976
    
    
    18,104,116
    
    
    $26,198,092
    
    
    $19,515,791
    
    
    19,791,215
    
    
    $
    39,307,006Net income (loss)
from operations
    
    
    ($12,705,431)
    
    
    (18,104,116)
    
    
    ($30,809,547)
    
    
    ($28,862,239)
    
    
    (19,791,215)
    
    
    
    ($48,653,454
    )Net income (loss)
    
    
    $3,426,077
    
    
    (18,104,116)
    
    
    ($14,678,039)
    
    
    ($15,937,866)
    
    
    (19,791,215)
    
    
    
    ($35,729,081
    )Net
income (loss) per common share: Basic and diluted
    
    

$0.02
    
    

(.05)


    

($0.07)
    
    

($0.09)
    
    

(0.10)
    
    
    

($0.19)Accumulated deficit
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    ($26,447 637)
    
    
    (19,791,215)
    
    
    
    ($46,238,852
    )
 In addition, there was no impact on net cash flows from operations and changes in cash and
cash equivalents for the above periods.3.
    
    MARKETABLE SECURITIESEarths investments consist primarily of available for sale securities totaling $698,000, and
trading securities for approximately $192,000. In accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, securities are marked to market with
gains and losses being reflected as unrealized for available for sale securities, and
realized gains or losses for trading securities.4.
    
    PROPERTY AND EQUIPMENTProperty and equipment are recorded at cost. Expenditures that substantially increase the
useful lives of the property and equipment are capitalized, whereas costs incurred to
maintain the appearance and functionality of such assets are charged to repair and
maintenance expense. Reviews are performed regularly to determine whether facts or
circumstances exist that indicate the carrying values of our property and equipment are
impaired. We assess the recoverability of our property and equipment by comparing the
projected future undiscounted net cash flows associated with these assets to their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the
estimated fair market value of the assets.On April 27, 2006, Earth acquired approximately eight acres of land in Durant, Oklahoma for
$175,000 in anticipation of Earths plans to build an ethanol production facility. The land
is immediately adjacent to Earths existing biodiesel production facility such that the two
facilities will be able to share the rail access at the site. In addition, during the quarter
ended September 30, 2006, plant equipment acquisitions were made in the amount of $3,323,335,
and $5,550,914 for the nine months ended September 30, 2006.On May 4, 2006, we acquired approximately 4.5 acres of land in Greenville, Mississippi
adjacent to the Mississippi River for approximately $275,000. The property includes bulk
storage tanks with a capacity of approximately one million gallons, barge loading/unloading
facilities, and a fuel truck rack. We plan to utilize the property for the construction of a
biodiesel production plant.5.
    
    INVESTMENTSInvestments are comprised mainly of $41,281,996 in Earths funding of its ownership interests
in investments that have not closed as of September 30, 2006. Accordingly, these amounts are
reported as non-current. After these investments are closed, Earth will either consolidate
the entities, recording minority interest, or record its interests on the equity method, as
appropriate. Because certain other investors will not contribute cash or other assets, or
cash or assets in proportion to their ownership interest, Earth will recognize either losses
on minority interest or loss on equity investments, as appropriate.
 8




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##### Table of Contents



Letters of Intent 
     Investments 
 Investment  related party 
 9




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##### Table of Contents



6.
    
    CONVERTIBLE DEBTOn July 10, 2006, Earth entered into a securities purchase agreement, pursuant to which the
Company issued an 8% senior convertible note with a principal amount of $5.0 million to one
institutional investor. The Company also issued five-year warrants to purchase an aggregate
of 1,500,000 shares of common stock to the investor and five-year warrants to purchase 15,000
shares of common stock to the Companys placement agent, both at an exercise price of $2.50
per share. On July 24, 2006, the Company used a portion of the net proceeds from its July 24,
2006 offering to repay in full the remaining unpaid principal and accrued and unpaid interest
on this note.On July 13, 2006, holders of convertible notes issued during January through June of 2006,
exercised their conversion option and the Company issued an aggregate of 3,000,000 shares of
common stock in exchange for the conversion of notes with an aggregate principal amount of
$1.5 million.On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which the
Company issued $52.5 million aggregate senior convertible notes that are due in 2011 to eight
institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are
convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline
to 6% upon the Company achieving certain financial milestones. The notes will begin to
amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of
the notes, the Company also issued five-year warrants to purchase 9,051,725 shares of common
stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to
the Companys placement agent, at $2.90 per share. At the date of issuance the warrants had a
relative fair value of $18,808,359, and the company recognized a beneficial conversion
feature in the amount of $42,906,599 based on the intrinsic value of the conversion feature.
Amortization on the debt discount totaled $678,245 for the quarter ended September 30, 2006.Earth used the net proceeds from this offering to repay in full the remaining unpaid
principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of
senior convertible promissory notes issued in May, June, and July 2006, and expects to use
the remaining proceeds from the offering for its program of building and acquiring interests
in biodiesel and ethanol production facilities, and for other general corporate purposes.In connection with the 8% senior convertible notes 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.On August 11, 2006, the Company entered into a securities purchase agreement pursuant to
which the Company issued $1.1 million aggregate senior convertible notes that are due in 2011
to two institutional investors. The notes initially carry an 8% coupon, payable quarterly,
and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may
decline to 6% upon the Company achieving certain financial milestones. The notes will begin
to amortize in equal, quarterly payments beginning in March, 2007. In connection with the
issuance of the notes, the Company also issued five-year warrants to purchase 232,759 shares
of common stock to the investors at $2.90 per share.Earth will use the debt proceeds, in concert with other funds, for the acquisition of an
ethanol production plant, two biodiesel production facilities and for other general corporate
purposes, including working capital to support growth and capital expenditures associated
with new project development. During the second quarter of 2006, Earth received proceeds
under various convertible notes with warrants totaling approximately $17.5 million. The
conversion features and exercise prices were at different variable market prices. As such,
the Company evaluated the application of Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Certain Hedging Activities (SFAS No.
133), and EITF 00-19 for convertible debt issued in the first, second and third quarters of
fiscal 2006, as well as warrants issued in connection with the debt offerings. Based on the
guidance in SFAS No. 133 and EITF 00-19, the Company concluded that instruments were required
to be accounted for as derivatives during the second quarter of fiscal 2006. SFAS No. 133 and
EITF 00-19 required the Company to bifurcate and separately account for the conversion
features of the convertible debt as embedded derivatives. In addition, on May 26, 2006, the
Company issued convertible debt that was convertible into an indeterminate number of shares.
As a result, the conversion features and warrants associated with the convertible debt were
determined to be derivatives under SFAS No. 133 and EITF 00-19 for this debt in the second
quarter also. The Company determined that the conversion features and the warrants met the
attributes of a liability and therefore recorded the fair value of the conversion features
and the warrants as current liabilities in the second quarter.
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##### Table of Contents



Accounting for Derivative Instruments and Certain Hedging Activities
 7.
    
    STOCKHOLDERS EQUITYCommon Stock and WarrantsOn July 12, 2006, subsequent to majority shareholder approval, Earth filed an amendment to
its certification of incorporation with the Secretary of State of Delaware in which the
number of authorized shares of common stock was increased from 250,000,000 to 400,000,000
shares.On July 21, 2006, Apollo Resources entered into a securities purchase agreement with
Greenwich Power, LLC and Greenwich Power II, LLC, pursuant to which Apollo Resources issued
notes exchangeable for shares of our common stock held by Apollo Resources and options to
purchase our common stock held by Apollo Resources. In connection with this transaction,
Apollo Resources agreed to cause us to grant these Apollo Resources noteholders registration
rights with respect to the shares of common stock underlying the convertible notes and
options. We have acknowledged and agreed to comply with the terms of the registration rights
agreements between Apollo and these noteholders. In connection with this transaction, Lance
Backrow, who is the sole manager of both Greenwich Power entities, purchased a warrant to
purchase 4,000,000 shares of our common stock at 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
registration rights with respect to the shares of common stock issuable upon exercise of this
warrant.Private Offerings  On July 24, 2006, Earth entered into a securities purchase agreement
pursuant to which the Company issued $52.5 million aggregate senior convertible notes that
are due in 2011 to eight institutional investors. The notes initially carry an 8% coupon,
payable quarterly, and are convertible into shares of common stock at $2.90 per share. In
connection with the issuance of the notes, the Company also issued five-year warrants to
purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase
1,357,759 shares of common stock to the Companys placement agent, at $2.90 per share.On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which the
Company issued $1.1 million aggregate senior convertible notes that are due in 2011 to two
institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are
convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline
to 6% upon the Company achieving certain financial milestones. The notes will begin to
amortize in equal, quarterly payments beginning in March, 2007. In connection with the
issuance of the notes, the Company also issued five-year warrants to purchase 232,759 shares
of common stock to the investors at $2.90 per share.The Company was obligated under a Registration Rights Agreements to file, on the 30th day
following the agreements a Registration Statement with the SEC registering for resale shares
of common stock, and shares of common stock underlying investor warrants and certain of the
placement agent warrants, issued in connection with the private offering. If (i) the Company
did not file the Registration Statement within the time period prescribed, or (ii) the
Company failed to file with the SEC a request for acceleration in accordance with Rule 461
promulgated under the Securities Act of 1933, within five trading days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the SEC that the
Registration Statement will not be reviewed, or is not subject to further review, or (iii)
the Registration Statement filed or required to be filed under the Registration Rights
Agreement was not declared effective by the SEC on or before 120 days following March 23,
2005, or (iv) after the Registration Statement is first declared effective by the SEC, it
ceases for any reason to remain continuously effective as to all securities registered there
under, or the holders of such securities are not permitted to utilize the prospectus
contained in the Registration Statement to resell such securities, for more than an aggregate
of 45 trading days during any 12-month period (which need not be consecutive trading days)
(any such failure or breach being referred to as an Event, and for purposes of clause
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##### Table of Contents



Acquisitions
     12




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##### Table of Contents



Stock based Compensation
  8.
    
    RELATED PARTY TRANSACTIONSAcquisitionsIn September 2006, the Company sold Eastern Shelf Partners, LLC (a working interest in a
series of oil and natural gas interests, pursuant to an acquisition, exploration and
development agreement entered into on June 22, 2006 between Eastern Shelf and Apollo
Resources, International, Inc., our majority stockholder) back to the parent company, Apollo.
Pursuant to the arrangement, the parties have agreed to provide for reimbursement of the
companies interest as of September 30, 2006.On April 20, 2006, Earth acquired a 25% limited partnership interest in Truckers Corner,
L.P. in exchange for a capital contribution of $1.1 million in cash, 125,000 shares of the
Companys common stock and 250,000 shares of Apollo Resources common stock. Willie H. Nelson,
who serves on the Companys board of directors, is also a limited partner of Truckers
Corner. As of September 30, 2006 the company had made advances totaling $515,738 to the
partnership in connection with the remodeling of the flagship station owned by the
partnership.On April 1, 2006, Earth entered into a sublicense agreement with Biodiesel Venture, L.P.,
pursuant to which Biodiesel Venture granted the Company an exclusive sublicense to use the
trademark BioWillie which is licensed to Biodiesel Venture pursuant to a master license
with Mr. Nelson, the owner of the trademark. The sublicense has a two-year term and is
renewable by the Company for four successive two-year terms (for a total term of ten years)
so long as the Company is in compliance with the terms of the sublicense. In connection with
the sublicense, in June 2006, the Company issued 537,500 shares of its common stock to each
of Biodiesel Venture and Mr. Nelson. During the term of the sublicense, the Company has
agreed to pay to each of Biodiesel Venture and Mr. Nelson annual royalties of $0.01 per
gallon of biodiesel fuel branded with the BioWillie trademark that the Company sell, with a
minimum annual royalty of $150,000 payable to each of Biodiesel Venture and Mr. Nelson. Mr.
Nelson, who serves on the Companys board of directors, is a limited partner of Biodiesel
Venture and is the sole owner and manager of the general partner of Biodiesel Venture.On March 31, 2006, Earth entered into a merger agreement with Southern Bio Fuels, Inc. and
certain other parties affiliated with Southern Bio Fuels. Pursuant to the merger agreement,
on April 3, 2006, Southern Bio Fuels merged with and into the Company, with the Company being
the surviving 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 sole stockholder of Southern Bio
Fuels. Upon completion of the merger, we acquired the sole asset of Southern Bio Fuels, a
biodiesel refinery that was formerly located in Pearl, Mississippi and that has been
relocated to the our premises in Durant, Oklahoma. Dean Blackwell, an indirect equity owner
of Southern Bio Fuels, is the brother of Bruce Blackwell, a member of the Companys Board of
Directors. The consideration was determined through arms length negotiation of the parties
involved, and a portion of the cash consideration was provided by a loan from Apollo
Resources International, Inc., the Companys majority stockholder.In connection with the Southern Bio Fuels merger, on March 2, 2006, the Company issued to
Southern Bio Fuels a note with a principal amount of $850,000 and bearing interest at 7.25%
per year. The Companys obligations under this note were guaranteed by Dennis G. McLaughlin,
III, the Companys Chief Executive Officer. The note matured on March 13, 2006 and was paid
in full at that time. On March 31, 2006, the Company issued another note to Southern Bio
Fuels with a principal amount of $1,100,000 and bearing interest at 7.25% per year. The note
matured on June 29, 2006. The Companys obligations under these notes were guaranteed by the
Companys Chief Executive Officer and Tommy Johnson and Bruce Blackwell, each of which serve
on the Companys board of directors. On July 12, 2006, the Company repaid this note.
 13




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##### Table of Contents



Affiliates
      9.
    
    SUBSEQUENT EVENTSSubsequent to September 30, 2006 Earth renegotiated the securities purchase agreement
originally entered into on July 24, 2006. The conversion features and warrant exercise prices
were amended to reflect more marketable rates. As such, any derivative issues and
re-measurement of beneficial conversion features will be properly reflected in subsequent
periods. The new terms significantly impact the conversion features and related debt
discounts.Management will evaluate the impact of these changes in consideration of EITFs 02-04, 05-07,
00-19 and FAS 133.The Company plans to begin acquiring and operating retail service stations through its
majority-owned subsidiary, American Earth Fuels Company (AEFC). Newly formed in September,
2006 for the purpose of creating the principal distribution channel for Earth Biofuels and
its related companies, AEFC plans to sell biodiesel and ethanol fuel products, as well as
traditional petroleum fuel products, to consumers around the nation. Earth Biofuels, the
exclusive distributor for BioWillie biodiesel fuel, will distribute BioWillie and ethanol
fuel to AEFCs retail stations as required in order to meet the demands of AEFCs customers.Earth has also entered into negotiations to purchase a liquid natural gas production company.
This company is the largest producer and wholesaler of vehicle-quality liquid natural gas in
the United States and Mexico. The proposed acquisition is currently being evaluated by
independent appraisers and will be purchased from the parent Apollo and other third party
investors.On May 18, and May 31, 2007, the registrants
Chief Executive Officer and Chief Financial Officer, in consultation
with the Board of Directors and the registrants independent
registered public accounting firm, concluded that the previously
issued financial statements contained in the registrants
Quarterly Reports on Forms 10-QSB for the interim quarterly
reports as of June 30, 2006, September 30, 2006, and
March 31, 2007, and the annual report as of December 31,
2006, should not be relied upon because of errors in those financial
statements and that the registrant would restate these financial
statements to make the necessary accounting corrections.
 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Cautionary Note Regarding Forward-Looking Statements
  Overview
    15




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##### Table of Contents



Third Quarter Highlights
  
    
    Our total revenue during the three months ended September 30, 2006 was $10.3 million and
related primarily to sales of biodiesel.
    
    We entered into letters of intent and are currently in discussions relating to our entry
into four separate joint ventures to purchase, construct, expand and/or retrofit ethanol
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 the negotiation and execution of definitive documentation. We
can make no assurances that the final terms of any of the transactions will conform to the
terms of the letters of intent or that the parties will even enter into definitive documents.
These negotiations are ongoing as of the end of the third quarter.
    
    During the third quarter of 2006, we received net proceeds of $53.6 million from the
issuance of senior convertible notes. We used the net proceeds from the sale, in concert with
other funds, to continue to execute our business plan, specifically the construction or
acquisition of additional biodiesel and ethanol facilities, and for other general corporate
purposes, including working capital.
 Recent Developments
 Critical Accounting Policies and Estimates
  Revenue Recognition
 Business Combinations
 16




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##### Table of Contents



Accounting for Stock Based Compensation
  Accounting for Derivatives 
  Net Loss Per Share Data
 Reclassifications
 Use of Estimates
 17




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenues: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
    
    
    254.3
    %
    
    
    
    
    
    
    260.4
    %
    
    
    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
    
    
    (299.1
    )%
    
    
    (118.9
    )%
    
    
    (322.3
    )%
    
    
    (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)
    
    
    (142.5
    )%
    
    
    (118.0
    )%
    
    
    (236.7
    )%
    
    
    (54.1
    )%
 Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005
 Revenue.
 Cost of Sales.
 Compensation. Share-Based Payment
 Other Selling, General and Administrative Expenses.
 Depreciation and Amortization
 18




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##### Table of Contents



Interest Income. .
 Gain on Derivatives.
 Loss on marketable securities.
 Interest Expense.
 Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005
 Revenue.
 Cost of Sales.
 Compensation.
 Other Selling, General and Administrative Expenses.
 Depreciation and Amortization
 Interest Income.
 Gain on Derivatives.
 Loss on marketable securities.
 Interest Expense Related to Derivatives.
 19




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##### Table of Contents



Liquidity and Capital Resources
 Overview.
   Current and Future Financing Needs
  20




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 ITEM 3. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    21




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
      22




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##### Table of Contents



During the quarter ending September 30, 2006, we issued 2,082,867 shares of our common stock to
employees for services rendered and 2,430,000 shares of our common stock 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. These shares were issued in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act.During the quarter ending June 30, 2006, we issued convertible notes and warrants to
institutional investors in reliance upon the exemption from registration afforded 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
interest at 7%, payable within thirty days upon demand by the holder, and convertible into
shares of our common stock at a conversion price of $1.086 per share. We also issued the
investor a warrant to purchase 920,810 shares of our common stock, exercisable until May 31,
2001 at the lesser of $2.00 per share or 80% of the average trading price of our common stock
for the thirty trading days prior to the exercise of the warrant. We used the net proceeds
from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for
other general corporate purposes. We granted the noteholder certain registration rights with
respect to the shares of common stock underlying the convertible note and the warrant. The
note and warrant and a corresponding guarantee given by Apollo Resources, our majority
stockholder, were subsequently cancelled by the holder in connection with Apollo Resources
closing on July 21, 2006 of a securities purchase agreement with Greenwich Power.
    
    On May 26, 2006, we issued $5.0 million principal amount of 8% senior convertible
promissory notes 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 their initial maturity date
in August 2006. The notes were not convertible until after August 2006, at which time the
maturity date was extendable to November 2006 at the holders option. The notes were
convertible into our common stock at a conversion price equal to the greater of $1.00 per
share or 75% of the weighted average price per share of our common stock on a five-day volume
weighted average prior to closing. We also issued five-year warrants to purchase 750,000
shares of common stock to the investor and five-year warrants to purchase 18,750 shares of
common stock to our placement agent, both at an exercise price of $3.84 per share. We used the
net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition
strategy and for other general corporate purposes. We granted the investor certain
registration rights with respect to the shares of common stock issuable upon conversion of the
convertible notes and exercise of the warrants. The remaining unpaid principal and accrued and
unpaid interest on these notes were repaid in full with a portion of the net proceeds from the
senior convertible promissory notes we issued in July 2006. The warrants remain outstanding.
    
    On June 2, 2006, we issued a convertible note with a principal amount of $500,000 to one
individual. The note bore interest at 8% per year, which was payable on July 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 convertible into 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 common stock.
We used the net proceeds from the sale in connection with our biodiesel and ethanol plant
acquisition strategy and for other general corporate purposes. We granted the note holder
certain registration rights with respect to the shares of common stock underlying the
convertible notes. On July 13, 2006, the holder of the note exercised its option to convert
the notes, and we issued an aggregate of 1,000,000 shares of our common stock to such holder
in exchange for the cancellation of the note.
    
    On June 7, 2006, we issued $10 million aggregate principal amount of senior convertible
notes to four institutional investors. The notes carried an 8% coupon, payable quarterly, and
were redeemable by us at par at any time prior to their initial maturity date in September
2006. The notes were not convertible until after September 2006, at which time the maturity
date was extendable to December 2006 at the holders option. The notes were convertible into
our common stock at a conversion price equal to the greater of $1.00 per share or 70% of the
weighted average price per share of our common stock on a five-day volume weighted average
prior to closing. We also issued to the investors five-year warrants to purchase an aggregate
of 1,500,000 shares of common stock to the investors and five-year warrants to purchase 45,000
shares of common stock to our placement agent, at an exercise price of $2.93 per share. We
used the net proceeds from the sale, in concert with other funds, to continue to execute our
business plan, specifically the construction or acquisition of additional biodiesel and
ethanol facilities, and for other general corporate purposes, including working capital. We
granted the investor certain registration rights with respect to the shares of common stock
underlying the convertible notes and warrants. The remaining unpaid principal and accrued and
unpaid interest on these notes were repaid in full with a portion of the net proceeds from the
senior convertible promissory notes we issued in July 2006. The warrants remain outstanding.
 
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
    
    On July 10, 2006, the Company entered into a securities purchase agreement, pursuant to
which the Company issued a 8% senior convertible note with a principal amount of $5.0 million
to one institutional investor. The Company also issued five-year warrants to purchase an
aggregate of 1,500,000 shares of common stock to the investor and five-year warrants to
purchase 15,000 shares of common stock to the Companys placement agent, both at an exercise
price of $2.50 per share. On July 24, 2006, the Company used a portion of the net proceeds
from its July 24, 2006 offering to repay in full the remaining unpaid principal and accrued
and unpaid interest on this note.
    
    On July 13, 2006, holders of convertible notes issued during January through June of 2006,
exercised their conversion option and the Company issued an aggregate of 3,000,000 shares of
common stock in exchange for the conversion of notes with an aggregate principal amount of
$1.5 million.
    
    On July 24, 2006, the Company entered into a securities purchase agreement pursuant to
which the Company issued $52.5 million aggregate senior convertible notes that are due in 2011
to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly,
and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may
decline to 6% upon the Company achieving certain financial milestones. The notes will begin to
amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of
the notes, the Company also issued five-year warrants to purchase 9,051,725 shares of common
stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to
the Companys placement agent, at $2.90 per share. The Company used the net proceeds from this
offering to repay in full the remaining unpaid principal and accrued and unpaid interest on
our $20.0 million aggregate principal amount of senior convertible promissory notes issued in
May, June and July 2006, and expects to use the remaining proceeds from the offering for its
program of building and acquiring interests in biodiesel and ethanol production facilities,
and for other general corporate purposes.
    
    In connection with the 8% senior convertible notes 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.
    
    On August 11, 2006, the Company entered into a securities purchase agreement pursuant to
which the Company issued $1.1 million aggregate senior convertible notes that are due in 2011
to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and
are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may
decline to 6% upon the Company achieving certain financial milestones. The notes will begin to
amortize in equal, quarterly payments beginning in March, 2007. In connection with the
issuance of the notes, the Company also issued five-year warrants to purchase 232,759 shares
of common stock to the investors at $2.90 per share.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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ITEM 5. OTHER INFORMATION
 Appointment of New Director
  Approval of 2006 Stock Option and Award Plan
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ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description3.1
    
    
    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.
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ExhibitNo.
    
    Description**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.
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ExhibitNo.
    
    Description**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.
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ExhibitNo.
    
    Description**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.
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ExhibitNo.
    
    Description**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.
 
 *
    
    Filed herewith.**
    
    Previously filed.+
    
    Management contract, compensatory plan or arrangement. 
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EARTH BIOFUELS, INC.Date: June 13, 2007
    /s/ Dennis G. McLaughlin, IIIDennis G. McLaughlin, IIIChief Executive Officer
(Principal Executive Officer)Date: June 13, 2007
    /s/ Darren L. MilesDarren L. MilesChief Financial Officer
(Principal Financial and
Accounting Officer) 31