**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-QSB**

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**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended June 30, 2006**

**or**

**o**** TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Commission File Number 000-25873**

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**ApolloResources International, Inc.**

(Exact name of registrant as specified in its charter)

| **Utah**                                                        |   | **84-1431425**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**3001 Knox Street, Suite 403Dallas, TX  75205**(Address of principal executive offices, including zip code)

**(214) 389-9800**(Registrant’s telephone number, including area code)

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.Yes x   Noo

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o   Nox

As ofAugust 18, 2006 there were 201,770,625 shares of the registrant’s common stockoutstanding.

 

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**EXPLANATORY NOTE**

*For theThree and Six Months Periods Ended June 30, 2005*

Apollo Resources International, Inc. (the “Company”)hereby amends Part I, Items 1, 2 and 3 of its quarterly report on Form 10-QSBfor the three and six months periods ended June 30, 2005. These amendmentsaddress the Company’s adoption of statement of Financial Accounting StandardsNo. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), therecording of the acquisitions of BC&D Oil and Gas Corporation (“BC&D)and OGC Pipeline, LLC (“OGC”) at historical cost, the reclassification ofdirect expenses related to offering costs associated with the Company’sRegulation S common stock offering, the reversal of expenses recorded inrelation to the Company’s private placement memorandum and the rescinding itsstock sale agreement with JSC Kaliningradneft executed on March 22, 2005.

Upon adoption of SFAS No.143 the Company has restated its financial statement to reflect the inclusionof asset retirement obligations of approximately $1.1million. The Companyincurred an additional net loss of $19,093 and $38,186 related to depreciationexpense on the asset for the three and six months ended June 30, 2005. TheCompany incurred an additional net loss of $10,083 and $20,166 on accretion ofdiscount related to the liability for the three and six months ended June 30,2005.

The Company has also amendedits June 30, 2005 financial statements to reflect the acquisition of BC&Din October of 2004, and the acquisition of OGC in February of 2005, using thecarryover basis of accounting under the guidance in Statement of FinancialAccounting Standards No. 141. Therefore the property plant and equipmentoriginally recorded has been amended to reflect a reduction of assets ofapproximately $6.3 million related to the BC&D assets and approximately$5.8 million related to the OGC assets with a corresponding reduction toadditional paid in capital.

The Company has also made anamendment to its June 30, 2005 financial statements related to certain offeringcosts associated with its offering of common stock to foreign investors underRegulation S. These offering costs relate to brokerage fees associated witheach individual sale which were recorded as selling, general and administrativeexpenses. Per the guidance of Generally Accepted Accounting Principals theCompany has reclassified approximately $1.8 million and $1.9 million fromselling, general and administrative expense to additional paid in capital forthe three and six months ended June 30, 2005.

The Company has also amendedits June 30, 2005 financial statements to reclassify expenses related to thesale of the Company’s common stock through its private placement memorandum.Originally the Company had recorded an expense for the difference between themarket price per share on the date of the sale and the discounted price atwhich the stock was sold. The majority of the Company’s common stock was soldat a discount to market value based on the terms of the Company’s privateplacement memorandum. The Company took into consideration the accountingtreatment of other companies with like transactions and has determined that thediscounted price was representative of market price when taking intoconsideration the restrictive nature of the common stock being sold. Thereforethe Company has reclassified approximately $1.2 million and $1.5 million fromselling, general and administrative expense to additional paid in capital forthe three and six months ended June 30, 2005.

Please see footnote 1 to theCompany’s consolidated financial statements for a detailed discussion of itsdecision to rescind its stock sale transaction with JSC Kaliningradneft.

2

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The following tableillustrates the change to the Company’s financial statements for the three andsix months periods ended June 30, 2005 related to the notes above.

|                                          | ** ** | ** **             | ** ** | **Previously** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                               | ** ** | **(As Restated)** | ** ** | **Reported**   | ** ** |
| Property and  equipment, net             |       | $                      | 5,046,496  |           | $          | 16,045,975 |   |
| Total assets                             |       | $                      | 9,043,363  |           | $          | 20,042,842 |   |
| Asset retirement  obligations-short term |       | $                      | 41,034     |           | $          | — |   |
| Asset retirement  obligations            |       | $                      | 1,131,404  |           | $          | — |   |
| Additional paid  in capital              |       | $                      | 4,130,527  |           | $          | 29,674,369 |   |
| Accumulated  deficit                     |       | $                      | (4,129,211 | )              | $          | (7,501,136 | ) |
| Total stockholders’  equity         |       | $                      | 2,216,729  |           | $          | 14,388,646 |   |

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | **Previously**                 | ** ** | ** ** | ** ** | **Previously** | ** ** |
| ** **                           | ** ** | **(As Restated)**           | ** ** | **Reported**                   | ** ** | **(As Restated)** | ** ** | **Reported** | ** ** |
| Selling, general  and administrative |       | $                                | 2,818,795  |                           | $          | 5,857,866 |   | $ | 4,523,014 |   | $ | 7,914,818 |   |
| Net loss                             |       | $                                | (2,901,776 | )                              | $          | (5,940,847 | ) | $ | (2,499,151 | ) | $ | (5,890,955 | ) |

 

3

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**APOLLO RESOURCESINTERNATIONAL, INC.**

**BALANCE SHEET**
| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**          | ** ** |
| **ASSETS**                                                                                                                                   |       |              |       |
| Current Assets                                                                                                                               |       |              |       |
| Cash and cash  equivalents                                                                                                                   |       | $                 | 867,634    |   |
| Trade accounts  receivable, net of $137,040 allowances at June 30, 2006                                                                      |       | 3,765,984         |       |
| Accounts  receivable working interest owners                                                                                                 |       | 357,579           |       |
| Prepaid expenses  and deposits                                                                                                               |       | 3,929,186         |       |
| Inventory                                                                                                                                    |       | 1,093,686         |       |
| Other current  assets                                                                                                                        |       | 288,940           |       |
| Total Current  Assets                                                                                                                        |       | 10,303,009        |       |
| Property and equipment,  net                                                                                                                 |       | 36,903,477        |       |
| Goodwill                                                                                                                                     |       | 30,601,554        |       |
| Deposits                                                                                                                                     |       | 4,351,515         |       |
| Investment in joint  ventures                                                                                                                |       | 15,096,005        |       |
| Other assets                                                                                                                                 |       | 2,604,045         |       |
|                                                                                                                                         |       | $                 | 99,859,605 |   |
|                                                                                                                                         |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               |       |              |       |
| Current Liabilities                                                                                                                          |       |              |       |
| Accounts payable  and accrued liabilities                                                                                                    |       | $                 | 5,257,240  |   |
| Royalty payable                                                                                                                              |       | 817,789           |       |
| Accounts payable  related party                                                                                                              |       | 75,000            |       |
| Notes payable                                                                                                                                |       | 7,857,480         |       |
| Derivative  liabilities                                                                                                                      |       | 31,418,428        |       |
| Asset retirement  obligations short-term                                                                                                     |       | 58,100            |       |
| Deferred revenue                                                                                                                             |       | 213,272           |       |
| Total Current  Liabilities                                                                                                                   |       | 45,697,309        |       |
| Notes payable                                                                                                                                |       | 14,446,912        |       |
| Asset retirement  obligations                                                                                                                |       | 1,642,944         |       |
| Other long-term  liabilities                                                                                                                 |       | 156,561           |       |
| Total  Liabilities                                                                                                                           |       | 61,943,726        |       |
|                                                                                                                                         |       |              |       |
| Minority  interest                                                                                                                           |       | 221,541           |       |
|                                                                                                                                         |       |              |       |
| Stockholders’ Equity                                                                                                                    |       |              |       |
| Preferred stock  Series A, $1.00 par; 8.5% cumulative non-voting convertible; 12,500,000  shares authorized and outstanding at June 30, 2006 |       | 12,500,000        |       |
| Preferred stock  Series B, $1.00 par; 8.5% cumulative non-voting convertible; 12,500,000  shares authorized and outstanding at June 30, 2006 |       | 12,500,000        |       |
| Common stock,  $.001 par value; 500,000,000 shares authorized; 181,726,026 shares issued and  outstanding at June 30, 2006                   |       | 181,726           |       |
| Additional  paid-in capital                                                                                                                  |       | 75,302,415        |       |
| Accumulated  deficit                                                                                                                         |       | (55,196,799       | )          |
| Common stock  issued for future services                                                                                                     |       | (7,593,004        | )          |
| Total  Stockholders’ Equity                                                                                                             |       | 37,694,338        |       |
|                                                                                                                                         |       | $                 | 99,859,605 |   |

 

See accompanying notes to financial statements.

4

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**APOLLO RESOURCESINTERNATIONAL, INC.**

**STATEMENT OF OPERATIONS**
| ** **                                  | ** ** | **Three Months**       | ** **  | **Three Months**       | ** ** | **Six Months**         | ** ** | **Six Months**         | ** **  |
|---------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|-------------|
| ** **                                  | ** ** | **Ended**                   | ** **  | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** **  |
| ** **                                  | ** ** | **June 30, 2006** | ** **  | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** **  |
| ** **                                  | ** ** | ** **                  | ** **  | **(Restated)**              | ** ** | ** **                  | ** ** | **(Restated)**              | ** **  |
| Revenue                                     |       | $                           | 10,107,606  |                        | $          | 41,866                      |       | $                           | 19,566,829  |   | $ | 190,358 |   |
| Cost of sales                               |       | 9,899,353                   |        | 94,726                      |       | 21,750,617                  |       | 252,932                     |        |
| Gross profit  (loss)                        |       | 208,253                     |        | (52,860                     | )          | (2,183,788                  | )          | (62,574                     | )           |
| Selling, general  and administrative        |       | 15,277,239                  |        | 2,818,795                   |       | 25,297,241                  |       | 4,523,014                   |        |
| Operating loss                              |       | (15,068,986                 | )           | (2,871,655                  | )          | (27,481,029                 | )          | (4,585,588                  | )           |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Other income  (expense), net:               |       |                        |        |                        |       |                        |       |                        |        |
| Interest expense                            |       | (3,460,947                  | )           | (100,399                    | )          | (3,867,809                  | )          | (171,823                    | )           |
| Financing  expense                          |       | (3,312,000                  | )           | —                      |       | (3,312,000                  | )          | —                      |        |
| Gain on derivatives                         |       | 1,543,409                   |        | —                      |       | 1,543,409                   |       | —                      |        |
| Gain on sale of  assets                     |       | 590,027                     |        |                        |       | 687,842                     |       |                        |        |
| Gain on  marketable equity securities       |       | 7,851                       |        |                        |       | 493,081                     |       |                        |        |
| Minority  interest                          |       | 4,088,829                   |        | —                      |       | 6,260,389                   |       | —                      |        |
| Other income,  net                          |       | 70,551                      |        | 70,278                      |       | 91,476                      |       | 75,574                      |        |
| Loss from  operations before income taxes   |       | (15,541,266                 | )           | (2,901,776                  | )          | (25,584,641                 | )          | (4,681,837                  | )           |
| Income taxes                                |       |                        |        | —                      |       | —                      |       | —                      |        |
| Loss before  extraordinary item             |       | (15,541,266                 | )           | (2,901,776                  | )          | (25,584,641                 | )          | (4,681,837                  | )           |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Extraordinary  item:                        |       |                        |        |                        |       |                        |       |                        |        |
| Gain on  extinguishment of debt, net of tax |       | —                      |        | —                      |       | —                      |       | 2,182,686                   |        |
| Net loss                                    |       | $                           | (15,541,266 | )                           | $          | (2,901,776                  | )          | $                           | (25,584,641 | ) | $ | (2,499,151 | ) |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Income (loss)  per common share:            |       |                        |        |                        |       |                        |       |                        |        |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Basic and  diluted:                         |       |                        |        |                        |       |                        |       |                        |        |
| Loss before  extraordinary item             |       | $                           | (.09        | )                           | $          | (.06                        | )          | $                           | (.15        | ) | $ | (.11 | ) |
| Extraordinary  item                         |       | —                      |        | —                      |       | —                      |       | .05                         |        |
| Net loss                                    |       | $                           | (.09        | )                           | $          | (.06                        | )          | $                           | (.15        | ) | $ | (.06 | ) |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Weighted average  shares:                   |       |                        |        |                        |       |                        |       |                        |        |
|                                        |       |                        |        |                        |       |                        |       |                        |        |
| Basic and diluted                           |       | 176,696,415                 |        | 51,155,810                  |       | 168,161,686                 |       | 41,644,250                  |        |

 

See accompanying notes to financial statements.

5

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**APOLLORESOURCES INTERNATIONAL, INC.**

**STATEMENT OFSTOCKHOLDERS’ EQUITY**
| ** **                                                           | ** ** | ** **     | ** ** | **Preferred**         | ** ** | ** **           | ** ** | ** **                    | ** ** | **Common**                  | ** ** | ** **      | ** ** | ** **     | ** ** |
|----------------------------------------------------------------------|------------|----------------|------------|-----------------------|------------|----------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                           | ** ** | ** **     | ** ** | **Stock Series** | ** ** | **Common**           | ** ** | ** **                    | ** ** | **Stock Issued ** | ** ** | ** **      | ** ** | ** **     | ** ** |
| ** **                                                           | ** ** | **Common**     | ** ** | **A and B** | ** ** | **Stock**            | ** ** | **Additional**                | ** ** | **for Future**         | ** ** | **Accumulated** | ** ** | ** **     | ** ** |
| ** **                                                           | ** ** | **Shares**     | ** ** | **($1.00 par)**  | ** ** | **($.001 par)** | ** ** | **Paid In Capital** | ** ** | **Services**                | ** ** | **Deficit**     | ** ** | **Totals**     | ** ** |
| ** **                                                           | ** ** | **(Restated)** | ** ** | ** **            | ** ** | **(Restated)**       | ** ** | **(Restated)**                | ** ** | ** **                  | ** ** | **(Restated)**  | ** ** | **(Restated)** | ** ** |
| **Balance  December 31, 2005**                                       |       | 154,450,740    |       | $                     | 25,000,000 |                 | $          | 154,451                       |       | $                           | 56,636,831 |            | $          | (9,319,419     | )          | $ | (29,612,158 | ) | $ | 42,859,705 |   |
|                                                                 |       |           |       |                  |       |                 |       |                          |       |                        |       |            |       |           |       |
| Common stock  issued to retire debt                                  |       | 1,223,169      |       | —                |       | 1,223                |       | 388,569                       |       | —                      |       | —          |       | 389,792        |       |
| Common stock  issued in private equity sales                         |       | 23,423,334     |       | —                |       | 23,423               |       | 4,275,859                     |       | —                      |       | —          |       | 4,299,282      |       |
| Common stock  issued for services                                    |       | 2,292,761      |       | —                |       | 2,293                |       | 1,029,535                     |       | 1,726,415                   |       | —          |       | 2,758,243      |       |
| Common stock  issued for employee compensation, net of cancellations |       | 102,222        |       | —                |       | 102                  |       | 38,698                        |       | —                      |       | —          |       | 38,800         |       |
| Common stock  issued in litigation settlement                        |       | 120,000        |       | —                |       | 120                  |       | 50,280                        |       | —                      |       | —          |       | 50,400         |       |
| Common stock  issued to acquire assets                               |       | 213,800        |       | —                |       | 214                  |       | 113,091                       |       | —                      |       | —          |       | 113,305        |       |
| Common stock  issued for investment in joint venture                 |       | 250,000        |       | —                |       | 250                  |       | 124,750                       |       | —                      |       | —          |       | 125,000        |       |
| Common stock  cancelled for collateral, net of issuances             |       | (350,000       | )          | —                |       | (350                 | )          | (59,150                       | )          | —                      |       | —          |       | (59,500        | )          |
| Adjustment  related to acquisition                                   |       |           |       |                  |       |                 |       | (52,359                       | )          |                        |       |            |       | (52,359        | )          |
| Contributions  from minority shareholders’                      |       | —         |       | —                |       | —               |       | 12,756,311                    |       | —                      |       | —          |       | 12,756,311     |       |
| Net and  comprehensive loss                                          |       | —         |       | —                |       | —               |       | —                        |       | —                      |       | (25,584,641     | )          | (25,584,641    | )          |
| **Balance June 30, 2006**                                            |       | 181,726,026    |       | $                     | 25,000,000 |                 | $          | 181,726                       |       | $                           | 75,302,415 |            | $          | (7,593,004     | )          | $ | (55,196,799 | ) | $ | 37,694,338 |   |

 

See accompanying notes to financial statements

6

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**APOLLO RESOURCESINTERNATIONAL, INC.**

**STATEMENTS OF CASH FLOWS**
| ** **                                                                   | ** ** | **Six Months  Ended**  | ** **  | **Six Months  Ended**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **June 30, 2006** | ** **  | **June 30, 2005** | ** ** |
| ** **                                                                   | ** ** | ** **                  | ** **  | **(Restated)**              | ** ** |
| Cash Flows from  Operating Activities:                                       |       |                        |        |                        |       |
| Net loss                                                                     |       | $                           | (25,584,641 | )                           | $          | (2,499,151 | ) |
| Non-cash items  included in net income (loss):                               |       |                        |        |                        |       |
| Depreciation, amortization and depletion                                     |       | 2,944,118                   |        | 146,352                     |       |
| Accretion of discount on asset retirement  obligations and convertible notes |       | 3,004,340                   |        | 20,166                      |       |
| Warrant expense                                                              |       | 3,312,000                   |        | —                      |       |
| Bad debt expense                                                             |       | 112,025                     |        | —                      |       |
| Common stock issued for services                                             |       | 14,115,643                  |        | 2,166,639                   |       |
| Common stock issued for compensation                                         |       | 726,800                     |        | 723,400                     |       |
| Gain on derivatives                                                          |       | (1,543,408                  | )           | —                      |       |
| (Gain) loss on sale of assets                                                |       | (687,842                    | )           | 5,000                       |       |
| Gain on marketable equity securities                                         |       | (493,081                    | )           | —                      |       |
| Gain on extinguishment of debt                                               |       | —                      |        | (2,182,686                  | )          |
| Minority interest                                                            |       | (6,260,389                  | )           | —                      |       |
| Other                                                                        |       | 162,184                     |        | (155,194                    | )          |
| Changes in  assets and liabilities, net of acquisitions:                     |       |                        |        |                        |       |
| Decrease (increase)  in:                                                     |       |                        |        |                        |       |
| Accounts receivable                                                          |       | 228,104                     |        | (183,820                    | )          |
| Prepaid and other assets                                                     |       | (2,132,507                  | )           | (23,022                     | )          |
| Inventory                                                                    |       | (408,026                    | )           | —                      |       |
| Increase  (decrease) in:                                                     |       |                        |        |                        |       |
| Accounts payable and accrued expenses                                        |       | 506,517                     |        | 360,762                     |       |
| Advances from related party                                                  |       | (1,141,822                  | )           |                        |       |
| Deferred revenue                                                             |       | 213,272                     |        |                        |       |
| Net cash used in  operating activities                                       |       | (12,926,713                 | )           | (1,621,554                  | )          |
|                                                                         |       |                        |        |                        |       |
| Cash Flows From  Investing Activities:                                       |       |                        |        |                        |       |
| Cash acquired in  acquisitions                                               |       | —                      |        | 2,003                       |       |
| Investments in  joint ventures                                               |       | (14,466,005                 | )           | —                      |       |
| Purchase of  property, plant and equipment                                   |       | (6,033,096                  | )           | (4,061                      | )          |
| Proceeds from  sale of assets                                                |       | 875,000                     |        | —                      |       |
| Net cash used in  investing activities                                       |       | (19,624,101                 | )           | (2,058                      | )          |
|                                                                         |       |                        |        |                        |       |
| Cash Flows From  Financing Activities:                                       |       |                        |        |                        |       |
| Proceeds from  note payable                                                  |       | 24,873,343                  |        | 112,005                     |       |
| Proceeds from  sale of common stock                                          |       | 11,042,359                  |        | 1,837,639                   |       |
| Proceeds from  related party notes                                           |       | 235,167                     |        | —                      |       |
| Advances  (repayments) line of credit, net                                   |       | 1,476,697                   |        |                        |       |
| Repayments of  notes and capital leases payable                              |       | (5,634,575                  | )           | (377,313                    | )          |
| Cash paid for  debt issuance costs                                           |       | (975,000                    | )           |                        |       |
| Net cash  provided by financing activities                                   |       | 31,017,991                  |        | 1,572,331                   |       |
|                                                                         |       |                        |        |                        |       |
| Net decrease in  cash                                                        |       | (1,532,823                  | )           | (51,281                     | )          |
| Cash and cash  equivalents:                                                  |       |                        |        |                        |       |
| Beginning of year                                                            |       | 2,400,457                   |        | 56,018                      |       |
| End of period                                                                |       | $                           | 867,634     |                        | $          | 4,737 |   |

 

See accompanying notes to financial statements.

7

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**1.NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Companyand Purpose* - Apollo Resources International, Inc. (the “Company”)was incorporated on July 9, 1997 under the laws of the State of Utah. EffectiveOctober 28, 2004, the Company executed a share exchange agreement, in which theCompany acquired an oil and natural gas production company. With thisacquisition the Company changed its primary business focus to oil & naturalgas production. Subsequent acquisitions and ventures have added oil and naturalgas transportation via the acquisition of pipelines, developed an alternativefuels segment focused on the production and sale of bio diesel fuel, and theproduction and distribution of liquefied natural gas (“LNG”).

*Basis ofPresentation* - The accompanying consolidated financialstatements include the accounts of the Company, its wholly owned and majorityowned subsidiaries. All significant inter-company transactions and balanceshave been eliminated.

Thefollowing relates to the 2005 financial presentation. Results of operations forthe Company’s gas pipeline transmission company OGC Pipeline, LLC (“OGC”) havebeen consolidated since February 7, 2005 the effective date of the acquisition.Results of operations of Earth Biofuels, Inc. (“Earth”) have been consolidatedsince the Company acquired an 80% interest on September 13, 2005. The Companyinitially acquired a 50% interest in Earth on February 25, 2005 and onAugust 19, 2005, acquired an additional 30% ownership interest and wasaccounted for under the equity method from such date until September 13, 2005.On September 13, 2005, the Company executed a share exchange with MeadowsSprings, Inc. (“Meadows Springs”) whereby the Company contributed its 80%interest in Earth in exchange for 21,000,000 shares of the common stock ofMeadows Springs. As a consequence of the share exchange the Company maintaineda controlling interest in Meadows Springs of approximately 89% and Earthremains an indirect subsidiary of the Company. As of August 18, 2006, theCompany owned 129,381,182 shares of common stock of Earth representing a 63.83%majority ownership. Results of operations for the Company’s LNG businesses,Applied LNG Technologies USA, LLC (“ALT”), TxHLDM, Inc. and its wholly ownedsubsidiary Arizona LNG, LLC, (“Arizona LNG”) have been consolidated sinceNovember 30, 2005 the effective date of the acquisition. The Company’s otheroil and natural gas production company Mountain States Petroleum Corporation (“MountainStates”) has been consolidated since November 30, 2005 the effective date ofthe acquisition. On May 12, 2006 the Company entered into a Securities PurchaseAgreement with Siam Imports, Inc. (“Siam”) whereby the Company sold its whollyowned subsidiary Apollo Drilling Company, LLC (“Apollo Drilling”) to Siam inexchange for 13,700,000 shares of common stock of Siam. As a consequence of theSecurities Purchase Agreement the Company maintained a controlling interest inSiam of approximately 91.70% and Apollo Drilling remains an indirect subsidiaryof the Company. As of August 18, 2006, the Company owned 19,900,000 shares ofcommon stock of Siam representing an 82.06% majority ownership.

Certainamounts from prior years have been reclassified to conform to the 2006presentation.

*Restatementof June 30, 2005 Financial Statements*

Apollo Resources International, Inc. (the “Company”)hereby amends Part I, Items 1, 2 and 3 of its quarterly report on Form 10-QSBfor the three and six months periods ended June 30, 2005. These amendmentsaddress the Company’s adoption of statement of Financial Accounting StandardsNo. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), therecording of the acquisitions of BC&D Oil and Gas Corporation (“BC&D)and OGC Pipeline, LLC (“OGC”) at historical cost, the reclassification ofdirect expenses related to offering costs associated with the Company’sRegulation S common stock offering, the reversal of expenses recorded inrelation to the Company’s private placement memorandum and the rescinding itsstock sale agreement with JSC Kaliningradneft executed on March 22, 2005.

Upon adoption of SFAS No.143 the Company has restated its financial statement to reflect the inclusionof asset retirement obligations of approximately $1.1million. The Companyincurred an additional net loss of $19,093 and $38,186 related to depreciationexpense on the asset for the three and six months ended June 30, 2005. TheCompany incurred an additional net loss of $10,083 and $20,166 on accretion ofdiscount related to the liability for the three and six months ended June 30,2005.

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The Company has also amendedits June 30, 2005 financial statements to reflect the acquisition of BC&Din October of 2004, and the acquisition of OGC in February of 2005, using thecarryover basis of accounting under the guidance in Statement of FinancialAccounting Standards No. 141. Therefore the property plant and equipmentoriginally recorded has been amended to reflect a reduction of assets ofapproximately $6.3 million related to the BC&D assets and approximately$5.8 million related to the OGC assets with a corresponding reduction toadditional paid in capital.

The Company has also made anamendment to its June 30, 2005 financial statements related to certain offeringcosts associated with its offering of common stock to foreign investors underRegulation S. These offering costs relate to brokerage fees associated witheach individual sale which were recorded as selling, general and administrativeexpenses. Per the guidance of Generally Accepted Accounting Principals theCompany has reclassified approximately $1.8 million and $1.9 million fromselling, general and administrative expense to additional paid in capital forthe three and six months ended June 30, 2005.

The Company has also amendedits June 30, 2005 financial statements to reclassify expenses related to thesale of the Company’s common stock through its private placement memorandum.Originally the Company had recorded an expense for the difference between themarket price per share on the date of the sale and the discounted price atwhich the stock was sold. The majority of the Company’s common stock was soldat a discount to market value based on the terms of the Company’s privateplacement memorandum. The Company took into consideration the accountingtreatment of other companies with like transactions and has determined that thediscounted price was representative of market price when taking intoconsideration the restrictive nature of the common stock being sold. Thereforethe Company has reclassified approximately $1.2 million and $1.5 million fromselling, general and administrative expense to additional paid in capital forthe three and six months ended June 30, 2005.

Please see footnote 1 to theCompany’s consolidated financial statements for a detailed discussion of itsdecision to rescind its stock sale transaction with JSC Kaliningradneft.

The following tableillustrates the change to the Company’s financial statements for the three andsix months periods ended June 30, 2005 related to the notes above.

|                                          | ** ** | ** **             | ** ** | **Previously** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                               | ** ** | **(As Restated)** | ** ** | **Reported**   | ** ** |
| Property and  equipment, net             |       | $                      | 5,046,496  |           | $          | 16,045,975 |   |
| Total assets                             |       | $                      | 9,043,363  |           | $          | 20,042,842 |   |
| Asset retirement  obligations-short term |       | $                      | 41,034     |           | $          | — |   |
| Asset retirement  obligations            |       | $                      | 1,131,404  |           | $          | — |   |
| Additional paid  in capital              |       | $                      | 4,130,527  |           | $          | 29,674,369 |   |
| Accumulated  deficit                     |       | $                      | (4,129,211 | )              | $          | (7,501,136 | ) |
| Total stockholders’  equity         |       | $                      | 2,216,729  |           | $          | 14,388,646 |   |

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | **Previously**                 | ** ** | ** ** | ** ** | **Previously** | ** ** |
| ** **                           | ** ** | **(As Restated)**           | ** ** | **Reported**                   | ** ** | **(As Restated)** | ** ** | **Reported** | ** ** |
| Selling, general  and administrative |       | $                                | 2,818,795  |                           | $          | 5,857,866 |   | $ | 4,523,014 |   | $ | 7,914,818 |   |
| Net loss                             |       | $                                | (2,901,776 | )                              | $          | (5,940,847 | ) | $ | (2,499,151 | ) | $ | (5,890,955 | ) |

 

Theresults of operations of JSC Kaliningradneft (“Kaliningrad”) acquired March 22,2005, are not included with the accounts presented in this Form 10-QSB.Effective November 3, 2005, the Company announced that it was exercising itscontractual right to rescind the March 2005 stock sale transaction withshareholders of Kaliningrad. The Company’s decision came after protractedefforts to resolve serious issues that were discovered by the Companypost-closing, as well as efforts to resolve the failure of Kaliningrad toprovide certain critical financial data that was represented in the Marchagreement. Specifically, shareholders of Kaliningrad had purported to transfer90% of its issued and outstanding shares of stock to the Company; however, ithad become apparent that shareholders of Kaliningrad were not in a position totransfer more than 50.10% of its stock. The Company was in protracteddiscussion with the owners of the remaining shares but was unable to reach a newagreement with them and agreed to release any claims it may have had in regardto their shares. Additionally, Kaliningrad, pursuant to the March agreement,was required to provide the Company with audited statements for fiscal years2003 and 2004, prepared in accordance with

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U.S. GenerallyAccepted Accounting Principles, which Kaliningrad failed to do despite repeatedefforts on the part of the Company to secure them. As a result of the aboveissues, the Company exercised the contractual right of rescission that wasreserved to the Company under the March 2005 stock sale agreement, bill ofsale, and $18.5 million convertible debenture. The Company remains in contactwith the ownership of Kaliningrad and a new agreement may be reached. In themeantime, the convertible debenture issued by the Company was cancelled and theCompany has reserved certain rights that it may have had under the Marchagreement with respect to the rescission of the stock sale transaction.

Inmanagement’s opinion, these financial statements include all adjustmentsnecessary to present fairly the financial position of the Company at June 30,2006 and the results of operations and changes in cash flows for the three andsix months periods ended June 30, 2006. The accounting and reporting policiesof the Company conform to generally accepted accounting principles and reflectpractices appropriate for its industry. Revenue is recognized when earned inaccordance with the accrual basis of accounting. These policies are summarizedbelow.

*Management’s Estimates and Assumptions*– The presentation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.The Company reviews all significant estimates affecting the financialstatements on a recurring basis and records the effect of any necessaryadjustments prior to their issuance.

*Oil andGas Properties*— The Company follows the full cost method ofaccounting for exploration and development of oil and gas properties wherebyall costs in acquiring, exploring and developing properties are capitalized,including estimate of abandonment costs, net of estimated equipment salvagecosts. No costs related to production, general corporate overhead, or similaractivities have been capitalized. At June 30, 2006 the Company had nocapitalized costs of unproved properties and major development projectsexcluded from capitalized costs being amortized. Leasehold costs are depletedbased on the units-of-production method based on estimated proved reserves.

Inaccordance with Statement of Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company reviews itslong-lived assets to be held and used, excluding proved oil and gas propertiesaccounted for under the full cost method of accounting, whenever events orcircumstances indicate that the carrying value of those assets may not berecoverable. An impairment loss is indicated if the sum of the expected futurenet cash flows is less than the carrying amount of the assets. In thiscircumstance, the Company recognizes an impairment loss for the amount by whichthe carrying amount of the asset exceeds the estimated fair value of the asset.The Company’s long-lived assets related to its proved oil and gas propertiesaccounted for under the full cost method of accounting are prescribed by theSecurities and Exchange Commission (Regulation S-X, Rule 4-10, “FinancialAccounting and Reporting for Oil and Gas Producing Activities Pursuant to theFederal Securities Laws and the Energy Policy and Conservation Act of 1975”).

*Adoptionof SFAS 143*— The Company has adopted the provisions ofStatement of Financial Accounting Standards No. 143, “Accounting for AssetRetirement Obligations” (SFAS 143”). SFAS 143 amended Statement of FinancialAccounting Standards No. 19, “Financial Accounting and Reporting by Oil and GasProduction Companies” to require that the fair value of a liability for anasset retirement obligation be recognized in the period in which it is incurredif a reasonable estimate of fair value can be made. Under the provisions ofSFAS 143, asset retirement obligations are capitalized as part of the carryingvalue of the long-lived asset.

*Cash and Cash Equivalents*—Cashequivalents consist of highly liquid investments with original maturities ofthree months or less.

*Allowancefor Doubtful Accounts*— Allowance for doubtful accounts isestablished through a provision for bad debts charged to expense. Tradeaccounts receivable are charged against the allowance for doubtful accountswhen management believes that collection of the account is unlikely. Theallowance is an amount that management believes will be adequate to absorbestimated losses on existing accounts, based on an evaluation of the futurecollection of accounts, prior loss experience and current economic conditions.At June 30, 2006 there was $ 137,040 of receivables written off against theallowance. There were no receivables written off against the allowance for thecomparative period June 30, 2005.

*Accounts Receivable Working Interest Owners*—The Company previously advanced funds to working interest owners. As netroyalties are earned, the working interest owners are reducing their receivableon a quarterly basis. The

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workinginterest owners receive 54% of the revenue and are billed 54% of the directexpenses. As of June 30, 2006 the working interest owners owed the Companyapproximately $357,579.

*Concentration of Credit Risk —*Financialinstruments which potentially subject the Company to concentrations of creditrisk consist principally of accounts receivable and temporary cash investments.Exposure to losses on receivables is principally dependent on each customer’sfinancial condition. The Company controls its exposure to credit risk throughcredit approvals, credit limits and monitoring procedures and establishesallowances for anticipated losses. The Company places its temporary cashinvestments with quality financial institutions and, by policy, limits theamount of credit exposure with any one financial instrument. The Companymaintains its cash in bank deposit accounts, which, at times, may exceedfederally insured limits. At June 30, 2006, the Company had $867,471 in bankdeposit accounts, of which $539,725 was in excess of the federally insuredlimit. The Company has not experienced any losses in such accounts and believesit is not exposed to any significant credit risk on cash and cash equivalents.

*FairMarket Value of Financial Instruments*— Estimated fair valueof cash and cash equivalents, accounts receivable, accounts payable and accruedexpenses and other liabilities approximate their carrying amounts in thefinancial statements. The Company’s financial instruments include notespayable. The carrying value of notes payable approximates market value becausethe borrowing rate is similar to other financial instruments with similarterms.

*MarketableEquity Securities*— Marketable equity securities (“MES”)consisting of common stock purchased in open market transactions, by theCompany, are subject to the general volatility of financial markets. Thefollowing table summarizes the investment in the Company’s marketable equitysecurities at June 30, 2006.
| ** **                   | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total**         | ** ** |
|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-------------------|------------|
| **Trading Securities:** | ** ** | **Adjusted  Cost  Basis**              | ** ** | **Gain  (Loss)**                       | ** ** | **Market  Value** | ** ** | **Adjusted  Cost  Basis** | ** ** | **Unrealized  Gain  (Loss)** | ** ** | **Market  Value** | ** ** | **Adjusted  Cost  Basis** | ** ** | **Gain  (Loss)** | ** ** | **Market  Value** | ** ** |
|                         |       |                                   |       |                                   |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| MES – Common Stock      |       | $                                      | 84,725     |                                   | $          | 493,081           |       | $ | 577,806 |   | $ | — |   | $ | — |   | $ | — |   | $ | 84,725 |   | $ | 493,081 |   | $ | 577,806 |   |
|                              |            |                                        |            |                                        |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

OnFebruary 28, 2006, the Company transferred 600,000 shares of Earth common stockthat it purchased in open market transactions to a lender as collateral for anote payable in the principal amount of $330,720.

*Prepaidexpenses and deposits*— The Company had approximately $3.9million of prepaid expenses and deposits classified as current assets at June30, 2006. These balances consisted of $1.5 million of prepaid feedstock and$0.5 million of LNG gas balancing deposits related to its LNG operations, $0.3million deposit for a truck stop and $1.0 million of prepaid loan fees forfinancings related to its biodiesel operations, $0.2 million for deposits ondrilling rig equipment, $0.1 million of prepayments for gas leases and $0.2million for an escrow deposit to pay unsettled property taxes related to thesale of pipeline easements.

TheCompany also had approximately $4.3 million of deposits classified as long-termassets at June 30, 2006. These deposits consist of 12,000,000 shares of theCompany’s common stock valued at $3.3 million issued to BC&D for collateralon a line of credit, 600,000 shares of Earth Biofuels common stock, valued at$0.7 million, that the Company purchased in open market transactions and usedas collateral for a loan and $0.3 million of prepaid professional services forits biodiesel operations.

*Inventory*— Inventory balances at June 30, 2006 were $1,093,686 consisting of drillingrig equipment totaling $451,500, biodiesel fuel and products purchased forresale totaling $174,035, inventory related to LNG in storage of $13,341 andLNG equipment inventory totaled $454,810.

*Goodwill*—Goodwill recorded on the Company’s balance sheet reflects the purchase price ofthe Company’s acquisitions exceeding the fair market value of the net assets.At June 30, 2006 the Company had recorded $22,107,382 of goodwill related toits acquisition of its LNG businesses and its oil and gas production companyMountain States. The remaining, $8,494,172, of goodwill relates to theacquisition of Earth and its subsequent acquisition of Distribution Drive inNovember of 2005.

*Stock Options*—The Companyaccounts for its stock-based compensation plans in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB 25) and related interpretations. The Company accounts for stock-basedcompensation for non-employees under the fair value method prescribed byStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation.” Through June 30, 2006, there have been nosignificant grants to non-employees.

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The Company grants incentive and non-qualified stockoptions and has reserved 23,282,000 shares of common stock for issuance underits stock option plans. The majority of the options granted become exercisableat the date of grant, and generally expire three years after the date of grant.

The Company adopted the disclosure provisions ofStatement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accountingfor Stock Based Compensation.” This statement requires the Company to providepro forma information regarding net income and net income per share as ifcompensation cost for the Company’s stock options had been determined inaccordance with the fair value method. The fair value of these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted average assumptions for 2006 and 2005.

| Dividend Yield           |   | 0    | %      |
|--------------------------|--------|------|--------|
| Expected  volatility     |   | 80   | %      |
| Risk free  interest rate |   | 3.25 | %      |
| Expected life (years)    |   | 3    |   |

 

Had compensation cost for the Company’s stock optionplans been determined based on the fair value at the grant date consistent withthe provisions of SFAS No. 123, the Company’s net loss and loss per sharewould have been reduced to the pro forma amounts indicated below:
| ** **                                                                                                        | ** ** | **June 30.  2006** | ** **  | **June 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                                                                                                        | ** ** | ** **              | ** **  | **(Restated)**          | ** ** |
|                                                                                                              |       |                    |        |                    |       |
| Net loss, as  reported                                                                                            |       | $                       | (25,584,641 | )                       | $          | (2,499,151 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | —                  |        | (937                    | )          |
| Adjusted net  loss                                                                                                |       | $                       | (25,584,641 | )                       | $          | (2,500,088 | ) |
|                                                                                                              |       |                    |        |                    |       |
| Loss per share                                                                                                    |       |                    |        |                    |       |
| As reported                                                                                                       |       |                    |        |                    |       |
| Basic and diluted                                                                                                 |       | $                       | (0.15       | )                       | $          | (.06 | ) |
| As adjusted                                                                                                       |       |                    |        |                    |       |
| Basic and  diluted                                                                                                |       | $                       | (0.15       | )                       | $          | (.06 | ) |

 

*Revenue –*Oil and natural gasproduction revenue is recognized at the time and point of sale after theproduct has been extracted from the ground. Revenue from pipeline rental feesfor natural gas transmission is based on volume of Mcf of natural gas meteredmonthly. Revenue from product sales of bio diesel fuel and other sales relatedto service station operations are point of sale transactions. The Company usesthe sales method of accounting for LNG revenues. Under this method, revenuesare recognized based on actual volumes of LNG sold to customers.

*Comprehensive Income*–Comprehensive income includes all changes in equity except those resulting from investments by stockholders and distributions to stockholders.

*Earnings per Share*- Earnings (loss) per common share is presented inaccordance with the provisions of the Statement of Financial AccountingStandards No. 128, “Earnings Per Share” (SFAS 128), which requiresthe presentation of “basic” and “diluted” earnings per share. Basic earnings(loss) per share are based on the weighted average shares outstanding. Dilutedearnings per share include the effect of dilutive securities such as stockoptions and warrants.

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The following table reconciles basic earnings pershare to diluted earnings per share under the provisions of SFAS 128.
| ** **                                    | ** ** | **Net Loss  (Numerator)**                                   | ** **  | **Shares  (Denominator)** | ** **  | **Per Share  Amount** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------|-------------|---------------------------|-------------|----------------------------|------------|
| ** **                                    | ** ** | **(Restated)**                                                   | ** **  | ** **                | ** **  | ** **                 | ** ** |
| ** **                                    | ** ** | **In thousands, except per share data** | ** **  |
| **Six  Months Ended June 30, 2006**           |       |                                                             |        |                      |        |                       |       |
| Basic earnings  per share                     |       | $                                                                | (25,584,641 | )                         | 168,161,686 |                       | $          | (.15 | ) |
| Effect of  dilutive securities:               |       |                                                             |        |                      |        |                       |       |
| Stock options, warrants and convertible notes |       | —                                                           |        | —                    |        | —                     |       |
| Diluted earnings  per share                   |       | $                                                                | (25,584,641 | )                         | 168,161,686 |                       | $          | (.15 | ) |
|                                          |       |                                                             |        |                      |        |                       |       |
| **Three  Months Ended June 30, 2006**         |       |                                                             |        |                      |        |                       |       |
| Basic earnings  per share                     |       | $                                                                | (15,541,266 | )                         | 176,696,415 |                       | $          | (.09 | ) |
| Effect of  dilutive securities:               |       |                                                             |        |                      |        |                       |       |
| Stock options, warrants and convertible notes |       | —                                                           |        | —                    |        | —                     |       |
| Diluted earnings per  share                   |       | $                                                                | (15,541,266 | )                         | 176,696,415 |                       | $          | (.09 | ) |

 
| ** **                                    | ** ** | **Net Loss  (Numerator)**                                   | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **(Restated)**                                                   | ** ** | ** **                | ** ** | ** **                 | ** ** |
| ** **                                    | ** ** | **In thousands, except per share data** | ** ** |
| **Six  Months Ended June 30, 2005**           |       |                                                             |       |                      |       |                       |       |
| Basic earnings  per share                     |       | $                                                                | (2,499,151 | )                         | 41,644,250 |                       | $          | (.06 | ) |
| Effect of  dilutive securities:               |       |                                                             |       |                      |       |                       |       |
| Stock options, warrants and convertible notes |       | —                                                           |       | —                    |       | —                     |       |
| Diluted earnings  per share                   |       | $                                                                | (2,499,151 | )                         | 41,644,250 |                       | $          | (.06 | ) |
|                                          |       |                                                             |       |                      |       |                       |       |
| **Three  Months Ended June 30, 2005**         |       |                                                             |       |                      |       |                       |       |
| Basic earnings  per share                     |       | $                                                                | (2,901,776 | )                         | 51,155,810 |                       | $          | (.06 | ) |
| Effect of  dilutive securities:               |       |                                                             |       |                      |       |                       |       |
| Stock options, warrants and convertible notes |       | —                                                           |       | —                    |       | —                     |       |
| Diluted earnings per  share                   |       | $                                                                | (2,901,776 | )                         | 51,155,810 |                       | $          | (.06 | ) |

 

Total stock options and warrants outstanding at June30, 2006 that are not included in the diluted earnings per share computationdue to the antidilutive effects are 16,080,875. Convertible notes not includedin the computation of diluted earnings per share are equivalent to approximately10,605,317 shares. Convertible preferred stock not included in the dilutedearnings per share computation due to the antidilutive effects are 5,000,000shares. These stock options, warrants, convertible notes and convertiblepreferred stock were not included in the computation of earnings per share atJune 30, 2006 due to exercise prices exceeding the average market value of theCompany’s common stock, and due to the Company’s incurring a net loss duringthe period.

Total stock options and warrants outstanding At June30, 2005 that are not included in the diluted earnings per share computationare approximately 80,875. Convertible notes included in the computation ofdiluted earnings per share are approximately 1,328,755 shares. These stockoptions, warrants and convertible notes were not included at June 30, 2005 dueto exercise prices exceeding the average market value of the Company’s commonstock, and due to the Company’s incurring a net loss during the period.

Basicnet income (loss) per share is computed by dividing net income (loss) availableto common shareholders (numerator) by the weighted average number of commonshares outstanding during the year (denominator). Diluted net income (loss) pershare is computed using the weighted average number of common shares andpotential common shares outstanding during the year. Potential common sharesresult from the assumed exercise, using the treasury stock method, ofoutstanding stock options, warrants and convertible notes having a dilutiveeffect. The numerator for the periods presented is equal to the reported netloss.

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Income Taxes—The Company has adopted FinancialAccounting Standards No. 109, which requires the recognition of deferred taxassets and liabilities for the expected future tax consequences of events thathave been included in the financial statements or tax returns. Under thismethod, deferred tax assets and liabilities are determined based on thedifference between financial statements and tax bases of assets and liabilitiesusing enacted tax rates in effect for the year in which the differences areexpected to reverse.

For income tax reporting purposes, the Company’saggregate unused net operating losses approximate $6.2 million which expire inyears 2013 through 2020, subject to limitations of Section 382 of the InternalRevenue Code, as amended. The Company has provided a valuation allowanceagainst the full amount of net operating loss benefit, since in the opinion ofmanagement based upon the earnings history of the Company, it is more likelythen not that the benefits will not be realized. Deferred tax assets of$590,029 relate to the differences associated with the Company’s depletion ofits oil and gas assets. The deferred tax liabilities of $156,561 relate to thedifferences associated with the depreciation related to the Company’s oil andgas assets.

**2. GOINGCONCERN AND MANAGEMENT PLANS**

Duringthe period ending June 30, 2006, the Company recorded a net loss of $25,584,641.Since the Company completed its initial acquisition of BC&D on October 28,2004, the Company has accumulated losses aggregating $55.2 million. The Company’scontinued existence is dependent upon its ability to take advantage ofacquisition opportunities, raise capital through private securities offerings,secure collateralized debt financing and use these sources of capital to growand enhance its oil and gas production, gas pipeline transmission operationsand its biodiesel and LNG sales and production. The following addresses theCompany’s efforts regarding its recent acquisitions and financings.

*Acquisitions*

Duringthe fourth quarter of fiscal 2004 the Company completed the acquisition ofBC&D. The acquisition of BC&D marked the initial entrance of theCompany into the oil and natural gas production business. During the firstquarter of fiscal 2005, the Company completed the acquisition of OGC. The OGCacquisition added a pipeline network to the Company’s assets enabling theCompany to diversify into the oil and gas transmission business. In addition,in December of 2005, the Company acquired another oil and gas productioncompany Mountain States which added approximately 50 oil and gas wells to theCompany’s operations. Also in December of 2005, the Company acquired businessesspecializing in LNG sales and production. The Company believes theseacquisitions will be a major part of establishing future financial stability.The Mountain States and LNG company acquisitions have produced revenue inexcess on $20 million over the preceding two fiscal years.

TheCompany has acquired an interest in Earth. Earth produces and distributedbio-diesel fuel. Earth’s assets consist primarily of a biodiesel refinery andrefueling station. In response to soaring fuel costs, and to avail itself ofgovernment subsidies and tax incentives, the Company has pursued a strategy ofdeveloping renewable forms of energy, such as bio diesel. Consequently, onFebruary 25, 2005 the Company acquired a 50% interest in Earth, aMississippi-based company and on August 19, 2005, acquired an additional30% ownership interest. On September 13, 2005, the Company executed a shareexchange with Meadows Springs, Inc. whereby the Company contributed its 80%interest in Earth in exchange for 21,000,000 shares of the common stock ofMeadows Springs. As a consequence of the share exchange the Company maintaineda controlling interest in Meadows Springs of approximately 89% and Earthremains an indirect subsidiary of the Company. As of May 18, 2006, the Companyowned 129,381,182 shares of common stock of Earth Biofuels representing a63.83% majority ownership.

Inaddition, on May 12, 2006 the Company entered into a Securities PurchaseAgreement with Siam Imports, Inc. (“Siam”) whereby the Company sold its whollyowned subsidiary Apollo Drilling Company, LLC (“Apollo Drilling”) to Siam inexchange for 13,700,000 shares of common stock of Siam. As a consequence of theSecurities Purchase Agreement the Company maintained a controlling interest inSiam of approximately 91.70% and Apollo Drilling remains an indirect subsidiaryof the Company. As of August 18, 2006, the Company owned 19,900,000 shares ofcommon stock of Siam representing an 82.06% majority ownership.

*Financing*

OnJuly 7, 2005 the Company completed a $3.0 million financing consisting of convertiblenotes with related warrants. The Company collateralized certain of its oil andgas assets and properties along with its pipeline assets to secure thisfunding. This financing enabled the Company to pay in full the mortgage due onits pipeline assets and fund working capital.

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OnFebruary 7, 2006, the Company finalized negotiations to provide a $3.5 millionline of credit for working capital related to its oil and gas assets acquiredin the BC&D acquisition. The Company plans to use this capital to restartproduction. The credit line is subject to a borrowing base and funds are preapproved and borrowed for production purposes only at the discretion of thelender. This facility bears interest at the prime rate + 3.0% and matures onFebruary 1, 2007. At August 18, 2006 the Company had borrowed $726,263 on thiscredit line.

OnApril 13, 2006, the Company completed an $8.0 million loan agreement to fundworking capital for its LNG businesses. This facility consists of a three year$3.0 million revolver, collateralized by the receivables of ALT, and a fiveyear $5.0 million term loan collateralized by the remaining assets of ALT andArizona LNG, which consists primarily of an LNG plant. The facility bearsinterest at the greater of 7% or the prime rate + 1.5%. At June 30, 2006 the Companyhad borrowed $4.9 million on the term loan and $1.4 million on the line ofcredit. The Company plans to use this facility to enhance its operations andprovide working capital.

OnJune 20, 2006 the Company completed a $1.0 million loan agreement to fundworking capital for its drilling subsidiary. This loan bears interest at Prime+ 3% and matures December 20, 2006. The Company plans to use this loan torefurbish its drilling rig assets and fund working capital. This loan has beenprovided by the same lender that provided the $8.0 million loan agreement forthe Company’s LNG businesses and is collateralized with the same assets.

OnJuly 21, 2006, the Company entered into a Securities Purchase Agreement with anaccredited investor whereby the Company received $8,000,000 before payment ofcommissions and expenses, in exchange for $8,000,000 notes (the “Notes”),bearing interest at 7% and maturing on May 31, 2011.The Notes are exchangeable ata price of $1.00 per share into Company-owned shares of common stock of Earth,a majority owned subsidiary of the Company. This agreement contains adetachable and separate right to an option to purchase, from the Company, anadditional 8,000,000 shares of common stock of Earth owned by the Company. (*See Footnote 14, Subsequent Events*)

On July 25, 2006, the Company entered into aSecurities Purchase Agreement with an accredited investor relating to the saleand issuance of 13,157,895 shares of common stock of the Company, par value$.001 per share at $0.38 per share for gross proceeds of approximately$5,000,000 before payment of commissions and expenses. The Company also issueda five-year warrant exercisable into 16,447,369 shares of its common stock atan exercise price of $0.38 per share, subject to adjustment in certaincircumstances. The warrants include a cashless exercise feature under certaincircumstances when there is not an effective registration statement availablefor the resale of the shares of the Company’s common stock issuable uponexercise of the warrants. (*See Footnote 14,Subsequent Events*)

TheCompany’s bodiesel subsidiary, Earth has been able to raise approximately $24.2million over the first half of 2006. $17.5 million relates to convertible debt,*(see footnote 3 below),*and $6.7 millionrelates to sales from the issuance of Earth’s common stock. This capital willbe used to for the acquisition of an ethanol plant, two biodiesel productionfacilities and for other general corporate purposes, including working capitalto support growth and capital expenditures associated with new project development.

On July 10, 2006, Earth entered into asecurities purchase agreement, pursuant to which it issued, onJuly 11, 2006, a senior convertible note with a principal amount of$5.0 million to one institutional investor.  The note carries an 8%coupon, payable quarterly, and may be redeemed by Earth at par at any timeprior to its initial maturity date in October 2006.  The note is notconvertible by the holder until after October 2006, at which time thematurity date may be extended to January 2007 at the holder’soption.  The notes are convertible into Earth’s common stock at aconversion price equal to the greater of $1.00 per share or 75% of the weightedaverage price per share of its common stock on a five-day volume weightedaverage prior to closing.  Earth also issued five-year warrants topurchase an aggregate of 1,500,000 shares of its common stock to the investorand five-year warrants to purchase 15,000 shares of its common stock to Earth’splacement agent, both at an exercise price of $2.50 per share.  OnJuly 24, 2006, Earth used a portion of the net proceeds from itsJuly 24, 2006 offering to repay in full the remaining unpaidprincipal and accrued and unpaid interest on the note issued onJuly 11, 2006.

On July 24, 2006, Earth entered into asecurities purchase agreement pursuant to which it issued $52.5 millionaggregate senior convertible notes that are due in 2011 to eightinstitutional investors.  The notes initially carry an 8% coupon, payablequarterly, and are convertible into shares of its common stock at $2.90 pershare.  In 2007, the coupon may decline to 6% upon Earth achievingcertain financial milestones.  The notes will begin to amortize in equal,quarterly payments beginning in 2007.  In connection with theissuance of the notes, Earth also issued five-year warrants to purchase9,051,725 shares of common stock to the investors and five-year warrants topurchase 1,357,759

 

15

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shares of common stock to Earth’s placement agent, at$2.90 per share.  Earth used the net proceeds from this offering to repayin full the remaining unpaid principal and accrued and unpaid interest on its$20.0 million aggregate principal amount of senior convertible promissory notesissued in May, June and July of 2006, and expects to use the remaining proceedsfrom the offering for its program of building and acquiring interests inbiodiesel and ethanol production facilities, and for other general corporatepurposes.

TheCompany has also continued to raise capital through a variety of privatesecurities offerings of its common stock. During the first half of 2006, theCompany has been able to raise $4.3 million through private equity sales toaccredited investors. In addition, the Company recently completed a $5.0million financing through a sale of its common stock in July of 2006. Inaddition, in July of 2006, the Company also raised $8.0 million in exchange for$8.0 million notes bearing interest at 7%. These notes are exchangeable intoshares of common stock of Earth, a majority owned subsidiary of the Company.

Managementbelieves these recent financings greatly enhance its ability to execute itsbusiness plan an mitigate its risk of its continuing as a going concern.

Managementis focusing on expanding and improving its oil and natural gas productionoperations, leveraging its opportunities regarding its pipeline assets andcontinuing to develop its biodiesel and LNG production and sales throughacquisition, organic growth and funding via collateralized loans, privateplacement offerings and convertible debt instruments. The Company plans tocontinue to increase the profitability of its operations necessary to supportoperations.

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

*The Company’s Liquidity Plan*

Recent operating results give rise to concerns aboutthe Company’s ability to generate cash flow from operations sufficient to makescheduled debt payments as they become due. The Company’s has completed recentfinancings, described above, to help fund its working capital needs. As of June30, 2006, the Company continued to seek other financing from privateplacements, convertible debt instruments and other acquisitions to expand itsopportunities in the areas of oil and gas production, oil and gas transmissionand biodiesel and LNG production and sales. The Company has implemented costsaving measures, primarily in its oil and gas operations, by implementing costcontrols designed to reduce unnecessary expenditures and operate productionactivities within the current economic constraints with which the Companycurrently operates. The Company will take additional cost savings measures, ifnecessary, to enhance its liquidity position.

The Company’s need to raise additional equity or debtfinancing and the Company’s ability to generate cash flow from operationssufficient to make scheduled payments on its debts as they become due willdepend on its future performance and the Company’s ability to successfullyraise capital and implement business and growth strategies. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the Company’s control. If future cash flows andcapital resources are insufficient to meet the Company’s debt obligations andcommitments, the Company may be forced to reduce or delay activities andcapital expenditures, obtain additional equity capital or restructure orrefinance its debt. In the event that the Company is unable to do so, theCompany may be left without sufficient liquidity and it may not be able to meetits debt service requirements. In such a case, this could result in asubstantial portion of the Company’s indebtedness becoming immediately due andpayable. As a result, the Company may not be able to continue operations due toliens, collateralized notes or other secured positions placed on the Company’sassets.

**3.CONVERTIBLE DEBT AND WARRANTS**

*Warrants* — As of May 1, 2006, theCompany issued additional warrants to the investors that participated in the$3.0 million, June 30, 2005, private placement. In total, the Company issuedwarrants to purchase an aggregate of 4,000,000 shares of its common stock.These warrants contain the same attributes as the original warrants to purchasean aggregate of 12,000,000 million shares of the Company’s common stock issuedon June 30, 2005. The 4,000,000 warrants have an exercise price of $0.30 pershare, and expire in May 2011. The warrant exercise price is subject toadjustment upon the occurrence of certain specified events, including stockdividends and stock splits, pro rata distributions of equity securities,evidences of indebtedness, rights or warrants to purchase common stock or cashor any other asset, mergers or consolidations, or certain issuances of commonstock at a price below the initial exercise price of $0.30 per share. Thewarrants include a “cashless exercise” feature, which permits the holder toexercise the warrants by surrender of a portion of the warrants. The cashlessexercise feature is available to the holder, if at the time of exercise,

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there is not in effect a registration statementcovering the shares underlying the warrants. At the date of issuance, May 1,2006, these warrants had a fair value of $.83 based on the Black-Scholes optionpricing model. These warrants were issued as consideration for penaltiesrelated to the Company’s noncompliance, regarding the timing of the effectivedate of the Company’s registration statement.

The Company issued warrants to the investors thatparticipated in the Company’s July, 2005 private placement of 8% securedconvertible promissory notes. In total, the Company issued warrants to purchasean aggregate of 12,000,000 shares of its common stock. The warrants had anoriginal exercise price of $0.30 per share, and expire in June 2010. Perthe terms of the warrants the Company has adjusted the warrant price to $.25due to the Company’s sale of stock at that price subsequent to the issuance ofthe warrants. The warrant exercise price is subject to adjustment upon theoccurrence of certain specified events, including stock dividends and stocksplits, pro rata distributions of equity securities, evidences of indebtedness,rights or warrants to purchase common stock or cash or any other asset, mergersor consolidations, or certain issuances of common stock at a price below theinitial exercise price of $0.30 per share. The warrants include a “cashlessexercise” feature, which permits the holder to exercise the warrants bysurrender of a portion of the warrants. The cashless exercise feature isavailable to the holder, if at the time of exercise, there is not in effect aregistration statement covering the shares underlying the warrants. In July of2006, 600,000 of these warrants were exercised via the cashless exerciseoption. At the date of issuance, June 30, 2005, these warrants had a fair valueof $.61 based on the Black-Scholes option pricing model.

During 2003, the Company issued a former officer inconnection with such officer’s employment agreement, a warrant for 65,000shares of restricted common stock. Such warrant has an exercise price of $4.50per share and expires on December 11, 2006.

*The following pertains toconvertible debt and warrants related to Earth, the Company’s majority ownedsubsidiary.*

On May 4, 2006, Earth issued a $1.0 millionconvertible, secured promissory note which bears interest at 7% and is payablewithin thirty days upon demand by the holder.  The note is convertibleinto shares of Earth’s common stock at a conversion price of $1.086 pershare.  In connection with this note, Earth also issued the holder of thenote a warrant to purchase 920,810 shares of its common stock.  Thewarrant is exercisable at the lesser of $2.00 per share or 80% of the averagetrading price of the Earth’s common stock for the thirty trading days prior tothe exercise of the warrant.  The warrant is exercisable untilMay 31, 2011.  At the date of issuance, the warrants were valuedat a relative fair value of $791,394, and Earth recognized a beneficialconversion feature (“BCF”) in the amount of $208,606 based on the intrinsicvalue of the conversion feature.  Due to the on demand repayment terms,the debt discount of $1,000,000 was fully amortized to interest expense as ofJune 30, 2006.  Earth analyzed the notes and warrants forderivative accounting treatment under SFAS No. 133 and EITF 00-19 (seeDerivatives footnote below).

On May 26, 2006, Earth entered into asecurities purchase agreement, pursuant to which the Company issued $5 millionprincipal amount of 8% senior convertible promissory notes to a singleinstitutional investor.  The notes carry an 8% coupon, payable quarterly,and may be redeemed by Earth at par at any time prior to their initial maturitydate in August 2006.  The notes are not convertible until afterAugust 2006, at which time the maturity date may be extended toNovember 2006 at the holder’s option.  The notes are convertible intoEarth’s common stock at a conversion price equal to the greater of $1.00 pershare or 75% of the weighted average price per share of our common stock on afive-day volume weighted average prior to closing.  Earth also issuedfive-year warrants to purchase 750,000 shares of common stock to the investorand five-year warrants to purchase 18,750 shares of common stock to Earth’splacement agent, both at an exercise price of $3.84 per share.  Due to theconversion features being convertible into an indeterminate number of shares,Earth analyzed the notes and warrants for derivative accounting treatment underSFAS No. 133 and EITF 00-19 (see Derivatives footnote below).

On June 2, 2006, Earth issued a convertiblenote with a principal amount of $500,000 to one individual.  The notebears interest at 8% per year, which is payable on July 28, 2006,August 28, 2006, January 28, 2007 andApril 28, 2007.  The note has a maturity date ofApril 28, 2007.  The note is convertible into shares of the Earth’scommon stock at a conversion price equal to the lesser of $0.50 per share or70% of the weighted average price per share of Earth’s common stock.  Dueto the conversion into an indeterminate number of shares, Earth analyzed thenote for derivative accounting treatment under SFAS 133 and EITF 00-19 (seeDerivatives footnote below).

On June 7, 2006, Earth entered into asecurities purchase agreement, pursuant to which Earth issued $10 millionaggregate principal amount of senior convertible notes to four institutionalinvestors.  The notes carry an 8% coupon, payable quarterly, and may beredeemed by Earth at par at any time prior to their initial maturity date inSeptember 2006.  The notes are not convertible until afterSeptember 2006, at which time the maturity date may be extended toDecember 2006 at the holder’s option.  The notes are convertible intoEarth’s common stock at a conversion price equal to the greater of $1.00 pershare or 70% of the weighted average price per share of Earth’s common stock ona five-day volume weighted average prior to closing.  Earth also issuedfive-year warrants to purchase

17

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an aggregate of 1,500,000 shares of common stock tothe investors and five-year warrants to purchase 45,000 shares of common stockto Earth’s placement agent, at an exercise price of $2.93 per share.  Dueto the conversion features being convertible into an indeterminate number ofshares, Earth analyzed the notes and warrants for derivative accountingtreatment under SFAS No. 133 and EITF 00-19 (see Derivatives footnote below).

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

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

**4.DERIVATIVES**

The Company evaluated the application of Statement ofFinancial Accounting Standards (“SFAS”) No.133, “Accounting for DerivativeInstruments and Certain Hedging Activities” (“SFAS No. 133”), and EITF 00-19for its $3,000,000 convertible debt issuance, 12,000,0000 warrants issued in connectionwith the convertible debt, and 4,000,0000 stand alone warrants issued toinvestors. Based on the guidance in SFAS No. 133 and EITF 00-19, the Companyconcluded that each of the warrants was required to be accounted for asderivatives. The convertible debt, which can be converted into free tradingstock, as of June 30, 2005, was not determined to be an embedded derivative.The Company determined that the conversion feature of the warrants met theattributes of a liability and therefore recorded the fair value of the warrantsas current liabilities. The Company is required to record the fair value of thewarrants on its balance sheet at fair value with changes in the values of thesederivatives reflected in the consolidated statement of operations as “Gain(loss) on derivatives.”

The impact of the application of SFAS No. 133 and EITF00-19 on the balance sheet and statement of operations as of June 30, 2006 isas follows:

|          | ** ** | **Fair Value of  Warrants @  Issuance** | ** ** | **Fair Value of  Warrants  6/30/2006** | ** ** | **Gain (Loss)** | ** ** |
|----------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| Warrants |       | $                                                      | 5,447,907  |                                             | $          | 3,503,636            |       | $ | 1,944,271 |   |
|          |            |                                                        |            |                                                  |            |                      |            |  |  |  |

 

The Company used the Black Scholes valuation model forcalculation of the value of derivative liabilities with the following weightedaverage assumptions.

| Warrants              | ** ** | ** ** | ** ** | **Dividend  Yield** | ** ** | **Expected  Volatility** | ** ** | **Risk Free  Interest  Rate** | ** ** | **Expected  Life (Years)** | ** ** |
|-----------------------|------------|------------|------------|---------------------|------------|--------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| 12,000,000            |       | 0          | %          | 340.32              | %          | 3.080                    | %          | 5                                  |       |
|   4,000,000 |       | 0          | %          | 143.56              | %          | 4.875                    | %          | 5                                  |       |

 

*The following pertains toconvertible debt and warrants related to Earth, the Company’s majority ownedsubsidiary.*

Earth evaluated the application of SFAS No. 133, andEITF 00-19 for convertible debt issued in the first and second quarters offiscal 2006, as well as warrants issued in connection with the debtofferings.  Based on the guidance in SFAS No. 133 and EITF 00-19, Earthconcluded all of these instruments were required to be accounted for asderivatives during the second quarter of fiscal 2006.  SFAS No. 133and EITF 00-19 require the Company to bifurcate and separately account for theconversion features of the convertible debt as embedded derivatives.  Pursuantto SFAS No. 133, the Company bifurcated the conversion features from theconvertible debt because the economic characteristics and risks of theconversion features were determined to not be clearly and closely related tothe economic characteristics and risks of the debt.  In addition, onMay 26, 2006, Earth issued convertible debt that was convertible intoan indeterminate number of shares of Earth.  As a result, the conversionfeatures and warrants associated with the convertible debt were determined tobe derivatives under SFAS No. 133 and EITF 00-19 on that date.  Theconvertible debt and warrants issued prior and subsequent toMay 26, 2006 were also tainted under EITF 00-19 due to theuncertainty that Earth had sufficient authorized and unissued shares availableto settle the convertible debt and warrant contracts and after considering allother commitments that could require Earth’s issuance of stock during thecontract period.  Earth determined that the conversion features and thewarrants met the attributes of a liability and therefore recorded the fairvalue of the conversion features and the warrants as currentliabilities. Earth is required to record the fair value of the conversionfeatures and the warrants on its balance sheet at fair value with changes in thevalues of these derivatives reflected in the consolidated statement ofoperations as “Gain (loss) on embedded derivative liability.”

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

 

Earth uses the Black Scholes valuation model forcalculation of the value of derivative liabilities.  Earth uses volatilityrates based upon the closing stock price of its common stock.  Earth useda risk free interest rate which is the U. S. Treasury bill rate for securitieswith a maturity that approximates the estimated expected life of a derivativeor security.  Earth uses the closing market price of its common stock onthe date of issuance of a derivative or at the end of a quarter when aderivative is valued at fair value.  The volatility factor used in theBlack Scholes pricing model has a significant effect on the resulting valuationof the derivative liabilities on the balance sheet.  The volatility hasranged from 143% to 491% during the period from May 26, 2006 toJune 30, 2006.  The initial volatility for the calculation ofthe embedded and freestanding derivatives ranged from 143% to 491%.  Thefollowing table shows the volatility, risk free rate and market price used inthe calculation of the Black Scholes call value for derivatives beginningMay 26, 2006 through June 7, 2006 and atJune 30, 2006.

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

 

**5.PROPERTY AND EQUIPMENT**

The Company follows the full cost method of accountingfor exploration and development of oil and gas properties whereby all costs inacquiring, exploring and developing properties are capitalized, includingestimates of abandonment costs, net of estimated equipment salvage costs. Nocosts related to production, general corporate overhead, or similar activitieshave been capitalized. Leasehold costs are depleted based on theunits-of-production method based on estimated proved reserves. Property andequipment are stated at cost less accumulated depreciation. The Company recordsimpairment losses on long-lived assets used in operations when events andcircumstances indicate that the assets might be impaired and the undiscountedcash flows estimated to be generated by those assets are less than the carryingamounts of those assets.

Depreciationis calculated on a straight-line basis over the estimated useful lives of thevarious assets as follows:

| Leasehold improvements   |   | 5-7 Years |   |
|--------------------------|--------|-----------|--------|
| Machinery and  equipment |   | 5-7 Years |   |
| Gas plant                |   | 7 Years   |   |
| Automobiles              |   | 5 Years   |   |

 

Property, plant and equipment consist of thefollowing:
|                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | ** **              | ** ** | **(Restated)**              | ** ** |
| Land                                                  |       | $                       | 681,043    |                        | $          | 221,841 |   |
| Building                                              |       | 216,609                 |       | 213,842                     |       |
| Machinery and  equipment                              |       | 16,639,459              |       | 13,570,387                  |       |
| Office furniture  and fixtures and computer equipment |       | 347,620                 |       | 242,199                     |       |
| LNG and  biodiesel plants                             |       | 19,105,955              |       | 8,447,123                   |       |
| Pipeline  easements                                   |       | 1,759,984               |       | 2,172,142                   |       |
| Asset retirement  obligations                         |       | 1,608,570               |       | 1,608,570                   |       |
| Vehicles                                              |       | 267,904                 |       | 213,844                     |       |
| Leasehold  improvements                               |       | 3,216                   |       | 3,216                       |       |
|                                                  |       | 40,630,360              |       | 26,693,164                  |       |
| Less accumulated  depreciation                        |       | 10,514,368              |       | 9,350,164                   |       |
| Sub total                                             |       | 30,115,992              |       | 17,343,000                  |       |
| Oil & gas  leases                                 |       | 9,860,630               |       | 9,356,219                   |       |
| Less accumulated  depletion                           |       | 3,073,145               |       | 1,275,237                   |       |
| Net oil and gas leases                                |       | 6,787,485               |       | 8,080,982                   |       |
| Total property, plant  and equipment                  |       | $                       | 36,903,477 |                        | $          | 25,423,982 |   |

 

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Depreciation,amortization and depletion expense for the three and six months ended June 30,2006 was $1,694,688 and $2,944,118, respectively. At June 30, 2006 $1,797,908of depletion was recorded using the units-of-production method on the Company’sonly cost center consisting of oil and gas properties in the Four Corners areaof New Mexico, Arizona and Utah.

Depreciation,amortization and depletion expense for the year ended December 31, 2005 was$897,751. At December 31, 2005 $178,117 of depletion was recorded using theunits-of-production method on the Company’s only cost center consisting of oiland gas properties in the Four Corners area of New Mexico, Arizona and Utah.

At June 30, 2006 theCompany had no capitalized costs of unproved properties and major developmentprojects excluded from capitalized costs being amortized under the full costmethod of accounting for oil and gas properties.

**6. EQUITYTRANSACTIONS**

During the six monthsended June 30, 2006, the Company issued 23,423,334 shares of its common stock,via private placement. The common stock was sold at prices ranging from $0.25to $0.99 per share to accredited investors. The aggregate purchase price was$4,299,282.

During the six monthsended June 30, 2006 the Company issued 2,292,761 shares of the Company’s commonstock to consultants in restricted form and pursuant to the Company’s 2004 and2005 Stock Option and Award Plans. These shares of common stock were issued atthe fair market value price on the date of issuance and resulted inapproximately $2,758,243 of non-cash consulting services expense.

During the first quarterended March 31, 2006 120,000 shares of the Company’s common stock, originallyissued for compensation to the Company’s Chief Operating Officer, were returnedand cancelled in exchange for $21,942 in cash. During the second quarter endedJune 30, 2006, the Company issued 222,222 shares of its common stock to anemployee as a signing bonus valued at $100,000.

During the first quarterended March 31, 2006, the Company issued 120,000 shares of the Company’s commonstock valued at $50,400 as part of a litigation settlement. See Item 1 of PartII – Other Information in this document.

During the first quarterended March 31, 2006 the Company issued 600,000 shares of its common stockvalued at approximately $234,000 to retire two notes payable with principalamounts of $100,000 and $50,000 payable to JPB Resources, Inc.

 In addition, for the six months ended June 30,2006 the Company issued 623,169 shares of the Company’s common stock valued at$145,833 to retire principal due to investors whom participated in the Company’s$3.0 million convertible notes.

During the first quarterended March 31, 2006, the Company issued 213,800 shares of the Company’s commonstock valued at $113,314 to acquire a truck.

During the second quarterended June 30, 2006, the Company issued 250,000 shares of its common stockvalued at $125,000 to invest in a truck stop related to Earth, its biodieselsubsidiary.

During the second quarterended June 30, 2006, 150,000 shares of the Company’s common stock valued at$85,500 was issued to OGP Sonora LP as collateral for the Company’s purchase ofgas leases located in south Texas. Also, 350,000 shares of the Company’s commonstock valued at $145,000, originally held as collateral for a loan to a relatedparty, was returned to the Company and canceled.

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**7. LONGTERM COMMITMENTS**

The Company leases fiveLNG trailers under a lease agreement. The lease agreement requires monthlyrental payments of $14,629 and expires in September of 2006. Future minimumpayments under the remaining lease terms were approximately $43,887 as of June30, 2006. The lease agreements allow the Company to purchase the trailers atthe end of the lease term for residual payments aggregating approximately$300,000.

The Company leases twomobile fueling units used in its LNG businesses. The lease agreements requiremonthly rental payments of $7,200 and expire during 2008. Future minimumpayments under the remaining lease terms were approximately $28,800 as of June30, 2006.

The Company maintainsseveral leasing arrangements for trailers and LNG equipment on a month to monthbasis approximating $64,175 per month.

The Company maintains amortgage on a building in Trona, California for $34,723. The office lease isfor a term of 59 months commencing on March 31, 2005 at $917 per month.

The following is a schedule of future minimum rentpayments due:

| Year Ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2006                                    |       | $          | 78,189     |   |
| 2007                                    |       | 11,004     |       |
| 2008                                    |       | 11,004     |       |
| 2009                                    |       | 7,213      |       |
| 2010                                    |       | —     |       |
| Thereafter                              |       | —     |       |
| Total                                   |       | $          | 107,410    |   |

 

Rent expense was $598,470and $323,942 for the three and six months ended June 30, 2006. Rent expense was$1,006 and $2,806 for the three and six months ended June 30, 2005.

**8. NOTES PAYABLE**

AtJune 30, 2006 the Company maintained notes payable due to secured lenders andto various investors. All notes having a maturity date of less than twelvemonths are classified as current liabilities.

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| **Lender**                                     | ** ** | **Maturity Date** | ** ** | **Interest Rate**              | ** ** | **Original Principal  Amount  June 30, 2006** | ** ** | **Original Principal  Amount  December 31, 2005** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Jimmy Brown                                    |       | On Demand              |       | 13.00                               | %          | $                                                            | 200,000    |                                                             | $          | 200,000 |   |
| JPB Resources,  Inc.                           |       | —                 |       | 13.00                               | %          | —                                                       |       | 50,000                                                           |       |
| JPB Resources,  Inc.                           |       | —                 |       | 11.00                               | %          | —                                                       |       | 100,000                                                          |       |
| Dennis Lueng                                   |       | On Demand              |       | 6.00                                | %          | 10,000                                                       |       | 10,000                                                           |       |
| Peter  Knollenberg                             |       | On Demand              |       | 6.00                                | %          | 150,000                                                      |       | 150,000                                                          |       |
| TelcoEnergy  Corporation                       |       | On Demand              |       | 6.00                                | %          | 179,000                                                      |       | 179,000                                                          |       |
| West Texas  National Bank                      |       | 2/1/2007               |       | Prime +3                            | %          | 726,263                                                      |       | —                                                           |       |
| Convertible  Notes OGC (2)                     |       | On Demand              |       | 10.00                               | %          | 575,907                                                      |       | 575,907                                                          |       |
| Navistar  Financial Corporation                |       | 10/27/2007             |       | 8.50                                | %          | 33,762                                                       |       | 49,345                                                           |       |
| $3.0 million  convertible notes (1)            |       | 12/31/2007             |       | 8.00                                | %          | 973,256                                                      |       | 1,297,674                                                        |       |
| Argyll Equities,  LLC                          |       | 2/8/2009               |       | 7.50                                | %          | 330,720                                                      |       | —                                                           |       |
| MAC Partners, LP  (3)                          |       | 6/8/2007               |       | 7.00                                | %          | 120,000                                                      |       | —                                                           |       |
| Oliver Kendall  Kelley                         |       | 4/1/2011               |       | 8.50                                | %          | 5,000,000                                                    |       | 6,000,000                                                        |       |
| Jack B. Kelley,  Inc.                          |       | 9/20/2011              |       | 7.50                                | %          | 1,828,330                                                    |       | 4,041,620                                                        |       |
| First Capital –  revolving line of credit |       | 4/13/2009              |       | Greater of  7% or Prime + 1.5% |       | 1,476,697                                                    |       | —                                                           |       |
| First Capital -  term                          |       | 4/13/2011              |       | Greater of  7% or Prime + 1.5% |       | 4,985,285                                                    |       | —                                                           |       |
| Bruce Ivey                                     |       | 3/31/2010              |       | 7.00                                | %          | 36,887                                                       |       | 43,024                                                           |       |
| First Capital -  term                          |       | 12/20/2006             |       | Prime +3                            | %          | 1,000,000                                                    |       | —                                                           |       |
| Marc Weill  convertible notes                  |       | 1/11/2007              |       | 8.00                                | %          | 1,250,000                                                    |       | —                                                           |       |
| Tom Groos  convertible note                    |       | 1/25/2007              |       | 8.00                                | %          | 250,000                                                      |       | —                                                           |       |
| Evolution  Capital                             |       | 8/24/2006              |       | 8.00                                | %          | 5,000,000                                                    |       | —                                                           |       |
| Greenwich Power                                |       | 30  days upon  demand  |       | 7.00                                | %          | 1,000,000                                                    |       | —                                                           |       |
| Castlerigg  Master Investments                 |       | 9/5/2006               |       | 8.00                                | %          | 5,000,000                                                    |       | —                                                           |       |
| Radcliffe SPC                                  |       | 9/5/2006               |       | 8.00                                | %          | 2,500,000                                                    |       | —                                                           |       |
| Capital Ventures                               |       | 9/5/2006               |       | 8.00                                | %          | 2,500,000                                                    |       | —                                                           |       |
| Southern Bio  Fuels                            |       | 6/29/2006              |       | 7.25                                | %          | 1,100,054                                                    |       | —                                                           |       |
| Other                                          |       |                   |       |                                |       | 2,860                                                        |       | —                                                           |       |
| Less debt  discount                            |       |                   |       |                                |       | (13,924,629                                                  | )          | —                                                           |       |
| Total notes  payable                           |       |                   |       |                                |       | 22,304,392                                                   |       | 12,696,570                                                       |       |
| Less current  portion of notes payable         |       |                   |       |                                |       | 7,857,480                                                    |       | 2,428,952                                                        |       |
| Long –term portion of  notes payable      |       |                   |       |                                |       | $                                                            | 14,446,912 |                                                             | $          | 10,267,618 |   |

 

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(1)   On June 30, 2005, the Company entered into(and on July 7, 2005 completed the transaction contemplated by) a Note andWarrant Purchase Agreement with certain investors, pursuant to which theCompany issued $3,000,000 principal amount of 8% Secured Convertible PromissoryNotes and related securities. Pursuant to the Note and Warrant PurchaseAgreement, the Company sold to the investors an aggregate of $3,000,000principal amount of 8% secured convertible promissory notes, together withwarrants to purchase an aggregate of 12,000,000 shares of the Company’s commonstock, and an additional investment right entitling the holders to purchasefrom the Company up to an additional $3,000,000 of 8% secured convertiblepromissory notes and warrants to purchase an aggregate of 12,000,000 shares ofthe Company’s common stock. These notes are secured by a continuing securityinterest in certain of the Company’s assets pursuant to the terms of a securityagreement among the Company and its wholly owned subsidiaries BC&D and OGC,and the investors. These notes are recorded at their fair value based on theallocation of the fair value of the convertible notes and related warrants. Thenotes accrete interest in the amount of $70,930 per month until maturity orconversion by the investors. Additional terms of the 8% secured convertiblenotes include:

·       Unless converted orredeemed as described below, the 8% secured convertible notes are due onDecember 30, 2007.

 

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·       8% annual interest, payablesemi-annually in arrears beginning December 1, 2005. The interest is payableeither in cash or at the Company’s option (subject to the satisfaction ofcertain conditions) in shares of the Company’s common stock valued at 92.55% ofthe volume weighted average price of the Company’s common stock for the 5trading days prior to the payment date.

·       While the notes areoutstanding, if the Company issues equity or equity linked securities at aprice lower than the conversion price, then the conversion price of these 8%secured convertible notes will be reduced to the same price.

·       The notes are convertibleat any time at the option of the holder into shares of the Company’s commonstock at a conversion price of $0.25 per share. The conversion price is alsosubject to adjustment upon the occurrence of certain specified events,including stock dividends and stock splits, mergers or consolidations, orcertain issuances of common stock at a price below the initial conversion priceof $0.25 per share.

·       The number of shares of theCompany’s common stock acquired by any holder upon conversion of the notes islimited to the extent necessary to ensure that following the conversion thetotal number of shares of the Company’s common stock beneficially owned by theholder does not exceed 4.999% of our issued and outstanding common stock.

·       The Company can prepay allor any portion of the principal amount of the notes, plus any accrued butunpaid interest at 120% of face amount, but only if certain conditions aresatisfied, including an effective registration. If the Company should elect toprepay the notes, the holders will have 30 calendar days to convert the notesinto shares of our common stock. If the Company elects to prepay the notes, itmust do so pro-rata amongst the holders.

(2)           Convertible notes dueto former owners of OGC Pipeline, LLC.

(3)           The Company repaid thisnote to MAC Partners LP during the third quarter of 2006.

**9.ROYALTY PAYABLE**

The Company has various royalty arrangements with non-workinginterest owners. As of June 30, 2006 the Company owed royalties of $817,789 tonon-working interest owners.

**10.EXTRAORDINARY ITEM**

EffectiveMarch 31, 2005 the Company executed a Compromise of Debt Agreement with Koch.This agreement effectively reduced the principal and interest obligation on thenote payable assumed in the acquisition of OGC in February 2005. The principaland interest was reduced to $1,100,000 as full payment on the pipeline assetsresulting in forgiveness of debt in the amount of $2,182,686 in principal andaccrued interest. The Company made payments totaling $100,000 to Koch duringthe second quarter of 2005. In July 2005, the remaining balance of $1,000,000was paid in full.

**11.RELATED PARTY TRANSACTIONS**

The Company entered into a management servicesagreement with DGMAC, LLC effective March 15, 2005. Under the terms of thisagreement the Company is charged $40,000 monthly for services provided byDennis McLaughlin, its Chief Executive Officer and Chairman of the Board.

The Company entered into a management servicesagreement with Johnny Flame Consulting, LLC effective March 15, 2005. Under theterms of the agreement the Company is charged $15,000 monthly for servicesprovided by Christopher Chambers, its Corporate Secretary.

The Company entered into a management services agreement with MAC Partners, LP (“MAC”) effective November 12, 2004. Under the terms of this agreement the Company is charged $45,000 monthly for general administration, human resources, turnkey office and legal services. At the inception of this contract MAC provided the services of Mr. J. Mark Ariail and Mr. Wayne McPherson, the Company’s Chief Financial Officer and Chief Operating Officer. Effective March 15, 2005, Mr. Ariail and Mr. McPherson’s services were no longer provided by MAC and they became employees of the Company. On February 15, 2005, MAC loaned the Company $112,015 through a promissory note bearing interest at 7% per annum. This promissory note was paid in full during the second quarter of 2005.

 

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On January 17, 2005 the Company entered into a Bill ofSale and Assignment Agreement whereby it conveyed ownership of two generatorsand a gas plant, valued at approximately $500,000, to Sovereign StrategicPartners, Ltd. (“Sovereign”) in exchange for a promissory note in the amount of$495,000. This note was secured by an Agreement of Pledge pursuant to which20,000,000 shares of Blue Wireless and Data, Inc. (“Blue”) were contributed ascollateral. Subsequently, the Company entered into a Capital Lease Agreementwith Sovereign whereby Sovereign leased the generators and gas plant to theCompany. The Company subsequently assigned the Sovereign promissory note to MACin exchange for 495,000 shares of convertible preferred stock of Blue. Thisconvertible preferred stock was written off during the fourth quarter of 2005.Mr. McLaughlin currently serves as the Chairman of the Board of Blue and Mr.Chambers serves as Blue’s President.

During the first quarter of 2005, the Company issued150,000 shares of its common stock valued at $222,000 to Blue to be pledged ascollateral for an equipment loan for Blue. During the second quarter of 2005 anadditional 681,818 shares of the Company’s common stock valued at $136,364 wereissued directly to Blue’s vendor for additional collateral required on theequipment loan due to fluctuations in the Company’s stock price. During thefirst quarter of 2006, both issuances of the Company’s common stock werewritten off when the Company reached an agreement with the vendor to allow thevendor to liquidate the shares to satisfy an unpaid loan balance. During thesecond quarter of 2006, the Company agreed to forgive the debt associated withthe issuances of the Company’s common stock in exchange for 5,000,000 shares ofBlue. The Company now owns approximately 35% of Blue. Mr. McLaughlin currentlyserves as the Chairman of the Board of Blue and Mr. Chambers serves as Blue’sPresident.

During the fourth quarter of 2005, the Company issued500,000 shares of its common stock valued at $145,000 to Mammoth Corporation toprovide partial security for a loan in the amount of $125,000 the makers ofwhich are Blue, TKM and Dennis McLaughlin, the Company’s Chief ExecutiveOfficer and Chairman. During the second quarter of 2006, the 500,000 shares ofthe Company’s common stock were returned to the Company and subsequentlycancelled upon repayment of the loan. Mr. McLaughlin serves as Blue’s Chairmanof the Board and is a Director of TKM. Christopher Chambers the Company’sCorporate Secretary and Director serves as Blue’s Corporate Secretary andDirector.

At December 31, 2005 the Company’s 63% ownedsubsidiary Earth had outstanding accounts payable to DGMAC, LLC for $81,479.DGMAC, LLC is a company operated by Dennis McLaughlin the Chairman and CEO ofthe Company and Earth. In addition, Earth had outstanding accounts payable andnote payable totaling $139,603 and $139,134 to Bruce Blackwell, a Director ofEarth. Also Earth owed Peter Bell, the former owner of Distribution Drive, acurrent employee of Earth, a note payable of $96,033. As of June 30, 2006,these debts have been paid in full.

DGMAC, LLC is owed $75,000 by Apollo Drilling. Thisamount remains unpaid at June 30, 2006.

**12.SUPPLEMENTAL CASH FLOW INFORMATION**

Significantnon-cash transactions are summarized as follows:

|                                                       | ** ** | **June 30,  2006** | ** ** | **June 30,   2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| Common stock  issued for services                     |       | $                       | 12,034,883 |                          | $          | 2,166,639 |   |
| Common stock  issued to acquire assets                |       | $                       | 8,257,388  |                          | $          | — |   |
| Common stock  issued in acquisition of subsidiary     |       | $                       | —     |                          | $          | 4,000,000 |   |
| Common stock  issued for investment in joint ventures |       | $                       | —     |                          | $          | 1,526,000 |   |
| Gain on  extinguishment of debt                       |       | $                       | —     |                          | $          | 2,182,686 |   |
| Stock pledged for note  payable                       |       | $                       | —     |                          | $          | 1,000,000 |   |

 

**13.SEGMENT INFORMATION**

The Company maintainsthree operating segments. Apollo Production and Operating, Inc. is the holdingcompany that contains the Company’s oil and gas production operations andpipeline gas transmission

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operations. Apollo Alternative Fuels, LLC is theholding company which contains the Company’s bio diesel production anddistribution operations. Apollo LNG, Inc. is the holding company which containsthe Company’s LNG production, distribution and marketing operations.

Certain segment data isincluded in the table below as follows:
|                                 | ** ** | **Production and  Operating** | ** ** | **Alternative  Fuels** | ** ** | **LNG**     | ** ** |
|---------------------------------|------------|------------------------------------|------------|------------------------|------------|-------------|------------|
| **Period  Ended June 30, 2006** | ** ** | ** **                         |       |                   |       |        |       |
| Revenue                         |       | $                                  | 1,943,664  |                   | $          | 4,794,042   |       | $ | 12,829,123 |   |
| Operating loss                  |       | $                                  | (2,709,584 | )                      | $          | (16,196,395 | )          | $ | (2,930,428 | ) |
| Long – lived  assets       |       | $                                  | 14,315,495 |                   | $          | 26,743,235  |       | $ | 11,486,512 |   |
|                            |       |                               |       |                   |       |        |       |
| **Period Ended June 30, 2005**  |       |                               |       |                   |       |        |       |
| Revenue                         |       | $                                  | 190,358    |                   | $          | —      |       | $ | — |   |
| Operating loss                  |       | $                                  | (311,102   | )                      | $          | (8,885      | )          | $ | — |   |
| Long – lived assets        |       | $                                  | 4,477,079  |                   | $          | 86,055      |       | $ | — |   |

 

**14.SUBSEQUENT EVENTS**

On July 21, 2006, the Company entered into aSecurities Purchase Agreement with an accredited investor whereby the Companyreceived $8,000,000 before payment of commissions and expenses, in exchange for$8,000,000 notes (the “Notes”), bearing interest at 7% and maturing on May 31,2011. The Notes are exchangeable at a price of $1.00 per share, into Company-ownedshares of common stock of Earth, a majority owned subsidiary of the Company.This agreement contains a detachable and separate right to an option topurchase, from the Company, an additional 8,000,000 shares of common stock ofEarth owned by the Company.

Also on July 21, 2006, the Company agreed to assume a$1,000,000 note payable that Earth had with the same lender that participatedin the $8,000,000 Securities Purchase Agreement described above. The lender returnedthe original note to Earth for cancellation. This note was replaced with a$1,000,000 Exchangeable Promissory Note, with the same terms as described above.

Both agreements contain a Registration RightsAgreement with the purchaser, pursuant to which the Company has agreed to causeEarth to register the shares associated with the Notes and the option topurchase additional shares no later than 60 days following the date on whichthe Company receives a request from the note holder to register the commonstock of Earth.

On July 25, 2006, the Company entered into aSecurities Purchase Agreement with an accredited investor relating to the saleand issuance of 13,157,895 shares of common stock of the Company, par value$.001 per share at $0.38 per share for gross proceeds of approximately$5,000,000 before payment of commissions and expenses. The Company also issueda five-year warrant exercisable into 16,447,369 shares of its common stock atan exercise price of $0.38 per share, subject to adjustment in certaincircumstances. The warrants include a cashless exercise feature under certaincircumstances when there is not an effective registration statement availablefor the resale of the shares of the Company’s common stock issuable uponexercise of the warrants.

In connection with the placement, on July 25, 2006,the Company also entered into a Registration Rights Agreement with thepurchaser, pursuant to which it has agreed to file a resale registrationstatement covering the Shares and the shares of Common Stock underlying theWarrants. The Company is obligated to file the registration statement within 90days after the closing, and cause the registration statement to becomeeffective within 120 days of the closing, or 180 days in the event theregistration statement is reviewed by the Securities and Exchange Commission.In the event the Company fails to satisfy such obligations, and under certainother circumstances as set forth in the Registration Rights Agreement, it willbe required to pay liquidated damages equal to 1.5% of the aggregate investmentamount paid by the purchaser for the Shares and Warrants, with an aggregate capof 12.5% on such liquidated damage payments.

The private placement was conducted pursuant toSection 4(2) of the Securities Act of 1933, as amended, and Rule 506promulgated thereunder.

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The Company expects to use the proceeds from bothfinancings mentioned above for general working capital purposes.

*(Thefollowing g events pertain to Earth, the Company’s majority owned subsidiary)*

On July 10, 2006, Earth entered into asecurities purchase agreement, pursuant to which it issued, onJuly 11, 2006, a senior convertible note with a principal amount of$5.0 million to one institutional investor.  The note carries an 8%coupon, payable quarterly, and may be redeemed by Earth at par at any time priorto its initial maturity date in October 2006.  The note is notconvertible by the holder until after October 2006, at which time thematurity date may be extended to January 2007 at the holder’soption.  The notes are convertible into Earth’s common stock at a conversionprice equal to the greater of $1.00 per share or 75% of the weighted averageprice per share of its common stock on a five-day volume weighted average priorto closing.  Earth also issued five-year warrants to purchase an aggregateof 1,500,000 shares of its common stock to the investor and five-year warrantsto purchase 15,000 shares of its common stock to Earth’s placement agent, bothat an exercise price of $2.50 per share.  On July 24, 2006,Earth used a portion of the net proceeds from its July 24, 2006offering to repay in full the remaining unpaid principal and accrued and unpaidinterest on the note issued on July 11, 2006.

On July 12, 2006, subsequent to majorityshareholder approval, Earth filed an amendment to its certification ofincorporation with the Secretary of State of Delaware in which the number ofauthorized shares of common stock was increased from 250,000,000 to 400,000,000shares.

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

On July 24, 2006, Earth entered into asecurities purchase agreement pursuant to which it issued $52.5 millionaggregate senior convertible notes that are due in 2011 to eightinstitutional investors.  The notes initially carry an 8% coupon, payablequarterly, and are convertible into shares of its common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certainfinancial milestones.  The notes will begin to amortize in equal,quarterly payments beginning in 2007.  In connection with theissuance of the notes, Earth also issued five-year warrants to purchase9,051,725 shares of common stock to the investors and five-year warrants topurchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90per share.  Earth used the net proceeds from this offering to repay infull the remaining unpaid principal and accrued and unpaid interest on its$20.0 million aggregate principal amount of senior convertible promissory notesissued in May, June and July of 2006, and expects to use the remainingproceeds from the offering for its program of building and acquiring interestsin biodiesel and ethanol production facilities, and for other general corporatepurposes.

On July 31, 2006, Earth commenced productionof biodiesel fuel from its production facility located in Durant,Oklahoma.  Earth plans to sell the fuel produced by this facility underits brand name “BioWillie” to local markets in Oklahoma and Texas.

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Overview**

The Company derives its revenue primarily from monthlyoil and natural gas production sales, rental fees related to its gas pipelineand sales of bio diesel fuel and LNG. During the first quarter of 2005, theCompany started its alternative fuels business segment designed to complementthe growing need for alternative energy sources versus the increasing demand oftraditional oil and natural gas energy sources. In December of 2005, theCompany added an oil and gas production company and businesses related to theproduction and sale of LNG. The Company also focused on raising capital throughprivate placements of its common stock and securing collateralized debtfinancing essential to providing the capital to expand its business segments.

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*CriticalAccounting Policies*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the accompanying financial statements and related footnotes. Management basesits estimates and assumptions on historical experience, observance of industrytrends and various other sources of information and factors. Actual resultscould differ from these estimates. Critical accounting policies are defined asthose that are reflective of significant judgments and uncertainties, andpotentially could result in materially different results under differentassumptions and conditions.

*RevenueRecognition*

Oil and natural gas production revenue is recognizedat the time and point of sale after the product has been extracted from theground. Revenue from pipeline rental fees for natural gas transmission is basedon volume of Mcf of natural gas metered monthly. Revenue from product sales ofbio diesel fuel and other sales related to service station operations are pointof sale transactions. The Company uses the sales method of accounting for LNGrevenues. Under this method, revenues are recognized based on actual volumes ofLNG sold to customers.

*BusinessCombinations*

Business combinations are accounted for using thepurchase method. Under the purchase method the Company reports the acquiredentities assets and liabilities at fair market value. Any excess of the fairmarket value of the consideration given over the fair market value of the netassets acquired is reported as goodwill. If the fair market value of theconsideration given is less than the fair market value of the net assetsacquired, the resulting excess of fair value of acquired net assets over thecost of the acquired entity is allocated, on a pro rata basis, against certainassets acquired in the business combination. If any excess over cost remainsafter reducing certain assets to zero, the remaining excess is recognized as anextraordinary gain. The operating statements of the Company for purchase methodcombinations report combined results only for the period subsequent to thecombination.

**RESULTSOF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO THETHREE MONTH PERIOD ENDED JUNE 30, 2005**

*Revenue*

TheCompany recorded revenue of $10,107,606 in the second quarter of 2006 comparedto revenue of $41,866 for the same period in 2005. The increase reflects theCompany’s acquisition of its LNG businesses in December of 2005, whichcontributed $6,098,115 of LNG sales for the second quarter of 2006. Inaddition, the Company’s bio diesel production and sales subsidiary contributed$2,907,923 of revenue during the second quarter of 2006. The addition ofMountain States, an oil and gas production company, acquired in December of2005, contributed to increased oil and gas production revenue of $1,101,568compared to $41,866 of oil and gas production revenue in 2005.

# *Gross Profit (Loss)*

Grossprofit increased to $208,253 in the second quarter of 2006 compared to a grossloss of $52,860 for the same period in 2005. The increase in gross profit isattributable to improved margins related to the Company’s LNG and biodieselproduction and sales operations. LNG operations experienced gross profit of$869,084 primarily due to increased efficiencies related to its LNG plantoperations. These increased efficiencies resulted in a decrease in expenses ofcommodities related to LNG production and reduced freight expenses. Also,during the first quarter of 2006 the Company experienced a plant shut-down inorder to perform necessary improvements, which directly impacted the increasedplant efficiencies experienced during the second quarter of 2006. As a result,the increase freight and higher than normal purchases of LNG, to satisfy customercontracts, did not reoccur in the second quarter of 2006. In addition, theCompany’s continued effort to replace lower margin fixed priced contracts withmore favorable indexed priced contracts continues to be a focus of improvingmargins. Gross profit for the Company’s biodiesel sales and productionoperations was $288,493. This increase reflects increased sales of biodieseland the realization of federal tax subsidies of $898,152. These increases wereoffset by gross losses recorded by the Company’s oil and gas productionoperations. These oil and gas operations recorded a gross loss of $949,324primarily related to increased lease operating expenses related torefurbishment costs to bring wells back online. The gross loss of $52,860 forthe period ended June 30, 2005, relates to lease operating costs for theCompany’s oil and gas operations.

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*Selling,General and Administrative Expenses*

Selling,general and administrative expenses were $15,277,239 in the second quarter of2006 compared to $2,818,795 in the same period in 2005.

The increase in selling, general and administrativeexpenses is attributable to $10.0 million of non cash share based compensationexpense recorded by Earth, the Company’s biodiesel production and salessubsidiary. These shares of Earth are primarily for consulting services toEarth. Also contributing to the increase in selling, general and administrativeexpenses was increased salaries and benefits of $1.6 million, primarily relatedto the acquisitions by the Company since June of 2005. In addition, the Companyincurred increases in expenses related to its growth of $0.5 million for legalcosts, $0.3 million of business insurance, and $0.2 million for accounting andauditing expenses, $0.2 million related to sales and marketing, and $0.6million for regulatory compliance and investor relations. These costs wereoffset by approximately $0.6 million of non cash stock issuance executivecompensation costs incurred by the Company in 2005, which did not recur in2006.

*Otherincome (expense), net*

TheCompany recorded an increase in other net expenses of $472,280 compared toother net expenses of $30,121 primarily due to increased interest expense of$3,460,947 related to increased debt balances and accretion of derivativeliabilities and financing expenses of $3,312,000 related to warrants issued toinvestors during the second quarter of 2006. These expenses were offset by$4,088,829 of gains related to the Company’s minority interest benefit of thelosses experienced by Earth and Apollo Drilling, as well as, $1,543,409 of gainrelated to derivative liabilities recorded at fair value. In addition, theCompany realized $590,027 from the sale of pipeline related assets.

**RESULTSOF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO THE SIXMONTH PERIOD ENDED JUNE 30, 2005**

*Revenue*

TheCompany recorded revenue of $19,566,829 in the first six months of 2006compared to revenue of $190,358 for the same period in 2005. The increasereflects the Company’s acquisition of its LNG businesses in December of 2005,which contributed $12,829,123 of LNG sales for the first six months of 2006. Inaddition, the Company’s bio diesel production and sales subsidiary contributed$4,794,042 of revenue during the first six months of 2006. The addition ofMountain States, an oil and gas production company, acquired in December of2005, contributed to increased oil and gas production revenue of $1,943,664compared to $190,358 of oil and gas production revenue in 2005.

# *Gross Loss*

Grossloss increased to $2,183,788 in the first six months of 2006 compared to agross loss of $62,574 for the same period in 2005. The increase in gross lossis primarily attributable to losses at the Company’s oil and gas operations.Oil and gas field operations reported a gross loss of $2,402,885 compared to$62,574 in 2005, primarily due to increased refurbishment costs related tobringing wells back online. LNG operations experienced a small gross loss of$186,808 reflecting improvements in efficiencies at its LNG plant. Gross lossfor the first quarter of 2006 was $1,055,892 for LNG operations. The Company’sbiodiesel operations recorded gross profit of $407,355 for the first six monthsof 2006 related to increased biodiesel sales.

*Selling,General and Administrative Expenses*

Selling,general and administrative expenses were $25,297,241 in the first six months of2006 compared to $4,523,014 in the same period in 2005.

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The increase in selling, general and administrativeexpenses is attributable to $10.0 million of non cash share based compensationexpense recorded by Earth, the Company’s biodiesel production and salessubsidiary. These shares of Earth are primarily for consulting services toEarth. In addition, the Company had an additional increase of $0.7 million ofnon cash expense for consulting services for its corporate operations. TheCompany expensed $3.0 million for permits related to its biodiesel and ethanolplant projects. Other increases in selling, general and administrativeexpenses, primarily caused by the Company’s growth since June of 2005, relatedto $1.0 million related to contract services primarily related to its LNGoperations administration, $2.7 million in salaries and employee benefits, $0.8for regulatory compliance and investor relations, $0.6 million for travelrelated expenses, $0.6 million for sales and marketing, $0.5 million forequipment rental primarily related to LNG trailer leases,  $0.4 million for accounting and auditing and$0.3 million related to business insurance.

*Otherincome (expense), net*

TheCompany recorded an increase in other net income of $1,896,388 compared toother net expenses of $96,249 primarily due to $6,260,389 of gains related tothe Company’s minority interest benefit of the loses experienced by Earth andApollo Drilling, as well as, $1,543,409 of gain related to derivative liabilitiesrecorded at fair value. In addition, the Company realized $687,842 from thesale of pipeline related assets. The Company also recorded a gain on marketableequity securities of $493,081. These gains were offset by increased interestexpense of $3,867,8090 related to increased debt balances and accretion ofderivative liabilities and financing expenses of $3,312,000 related to warrantsissued to investors during the second quarter of 2006.

**Liquidityand Capital Resources**

Cash used in operating activities was $12,926,713 inthe first six months of 2006 compared to $1,621,554 in 2005. The increase isprimarily related to the increase in net loss experienced by the Company in thefirst six months of 2006 and decreases in prepaid and other assets..

Net cash used in investing activities was $19,624,101in the first six months of 2006 compared to cash used in investing activitiesof $2,058 in 2005. This decrease reflects $14.5 million of cash paid for investmentsin joint ventures related to biodiesel and ethanol plants as well as naturalgas leases. In addition, the Company purchased $6.0 of property, plant andequipment primarily related to improvements to its LNG plant, biodiesel plant,and machinery and equipment related to drilling rig equipment and oil and gasproduction equipment.

Net cash provided by financing activities was$31,071,991 in the first six months of 2006 compared to $1,572,331 in 2005.This increase reflects increased proceeds from convertible debt instruments andother notes totaling $25,108,510, sales of common stock totaling $11,042,359and net borrowings on the Company’s line of credit related to its LNGoperations of $1,476,697. This increase was offset by repayments of outstandingnotes and leases of $5,634,575 and prepaid debt issuance costs of $975,000.

Duringthe period ending June 30, 2006, the Company recorded a net loss of $25,584,641.Since the Company completed its initial acquisition of BC&D on October 28,2004, the Company has accumulated losses aggregating $55.2 million. The Company’scontinued existence is dependent upon its ability to take advantage ofacquisition opportunities, raise capital through private securities offerings,secure collateralized debt financing and use these sources of capital to growand enhance its oil and gas production, gas pipeline transmission operationsand its biodiesel and LNG sales and production. The following addresses theCompany’s efforts regarding its recent acquisitions and financings.

*Acquisitions*

Duringthe fourth quarter of fiscal 2004 the Company completed the acquisition of BC&D.The acquisition of BC&D marked the initial entrance of the Company into theoil and natural gas production business. During the first quarter of fiscal2005, the Company completed the acquisition of OGC. The OGC acquisition added apipeline network to the Company’s assets enabling the Company to diversify intothe oil and gas transmission business. In addition, in December of 2005, theCompany acquired another oil and gas production company Mountain States whichadded approximately 50 oil and gas wells to the Company’s operations. Also inDecember of 2005, the Company acquired businesses specializing in LNG sales andproduction. The Company believes these acquisitions will be a major part ofestablishing future financial stability. The Mountain States and LNG companyacquisitions have produced revenue in excess on $20 million over the precedingtwo fiscal years.

TheCompany has acquired an interest in Earth. Earth produces and distributedbio-diesel fuel. Earth’s assets consist primarily of a biodiesel refinery andrefueling station. In response to soaring fuel costs, and to avail itself ofgovernment subsidies and tax incentives, the Company has pursued a strategy ofdeveloping renewable forms of energy, such as bio diesel. Consequently, onFebruary 25, 2005 the Company acquired a 50% interest in Earth, aMississippi-based

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company and onAugust 19, 2005, acquired an additional 30% ownership interest. OnSeptember 13, 2005, the Company executed a share exchange with Meadows Springs,Inc. whereby the Company contributed its 80% interest in Earth in exchange for21,000,000 shares of the common stock of Meadows Springs. As a consequence ofthe share exchange the Company maintained a controlling interest in MeadowsSprings of approximately 89% and Earth remains an indirect subsidiary of theCompany. As of May 18, 2006, the Company owned 129,381,182 shares of commonstock of Earth Biofuels representing a 63.83% majority ownership.

Inaddition, on May 12, 2006 the Company entered into a Securities Purchase Agreementwith Siam Imports, Inc. (“Siam”) whereby the Company sold its wholly ownedsubsidiary Apollo Drilling Company, LLC (“Apollo Drilling”) to Siam in exchangefor 13,700,000 shares of common stock of Siam. As a consequence of theSecurities Purchase Agreement the Company maintained a controlling interest inSiam of approximately 91.70% and Apollo Drilling remains an indirect subsidiaryof the Company. As of August 18, 2006, the Company owned 19,900,000 shares ofcommon stock of Siam representing an 82.06% majority ownership.

*Financing*

OnJuly 7, 2005 the Company completed a $3.0 million financing consisting ofconvertible notes with related warrants. The Company collateralized certain ofits oil and gas assets and properties along with its pipeline assets to securethis funding. This financing enabled the Company to pay in full the mortgagedue on its pipeline assets and fund working capital.

OnFebruary 7, 2006, the Company finalized negotiations to provide a $3.5 millionline of credit for working capital related to its oil and gas assets acquiredin the BC&D acquisition. The Company plans to use this capital to restartproduction. The credit line is subject to a borrowing base and funds are preapproved and borrowed for production purposes only at the discretion of thelender. This facility bears interest at the prime rate + 3.0% and matures onFebruary 1, 2007. At August 18, 2006 the Company had borrowed $726,263 on thiscredit line.

OnApril 13, 2006, the Company completed an $8.0 million loan agreement to fundworking capital for its LNG businesses. This facility consists of a three year$3.0 million revolver, collateralized by the receivables of ALT, and a fiveyear $5.0 million term loan collateralized by the remaining assets of ALT andArizona LNG, which consists primarily of an LNG plant. The facility bearsinterest at the greater of 7% or the prime rate + 1.5%. At June 30, 2006 theCompany had borrowed $4.9 million on the term loan and $1.4 million on the lineof credit. The Company plans to use this facility to enhance its operations andprovide working capital.

OnJune 20, 2006 the Company completed a $1.0 million loan agreement to fundworking capital for its drilling subsidiary. This loan bears interest at Prime+ 3% and matures December 20, 2006. The Company plans to use this loan torefurbish its drilling rig assets and fund working capital. This loan has beenprovided by the same lender that provided the $8.0 million loan agreement forthe Company’s LNG businesses and is collateralized with the same assets.

OnJuly 21, 2006, the Company entered into a Securities Purchase Agreement with anaccredited investor whereby the Company received $8,000,000 before payment ofcommissions and expenses, in exchange for $8,000,000 notes (the “Notes”),bearing interest at 7% and maturing on May 31, 2011.The Notes are exchangeable ata price of $1.00 per share, into Company-owned shares of common stock of Earth,a majority owned subsidiary of the Company. This agreement contains adetachable and separate right to an option to purchase, from the Company, anadditional 8,000,000 shares of common stock of Earth owned by the Company. (*See Footnote 14, Subsequent Events*)

On July 25, 2006, the Company entered into aSecurities Purchase Agreement with an accredited investor relating to the saleand issuance of 13,157,895 shares of common stock of the Company, par value$.001 per share at $0.38 per share for gross proceeds of approximately$5,000,000 before payment of commissions and expenses. The Company also issueda five-year warrant exercisable into 16,447,369 shares of its common stock atan exercise price of $0.38 per share, subject to adjustment in certaincircumstances. The warrants include a cashless exercise feature under certaincircumstances when there is not an effective registration statement availablefor the resale of the shares of the Company’s common stock issuable uponexercise of the warrants. (*See Footnote 14,Subsequent Events*)

TheCompany’s bodiesel subsidiary, Earth has been able to raise approximately $24.2million over the first half of 2006. $17.5 million relates to convertible debt,*(see footnote 3 below),*and $6.7 millionrelates to sales from the issuance of Earth’s common stock. This capital willbe used to for the acquisition of an ethanol plant, two biodiesel

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productionfacilities and for other general corporate purposes, including working capitalto support growth and capital expenditures associated with new projectdevelopment.

On July 10, 2006, Earth entered into asecurities purchase agreement, pursuant to which it issued, on July 11, 2006,a senior convertible note with a principal amount of $5.0 million to oneinstitutional investor.  The note carries an 8% coupon, payable quarterly,and may be redeemed by Earth at par at any time prior to its initial maturitydate in October 2006.  The note is not convertible by the holderuntil after October 2006, at which time the maturity date may be extendedto January 2007 at the holder’s option.  The notes are convertibleinto Earth’s common stock at a conversion price equal to the greater of $1.00per share or 75% of the weighted average price per share of its common stock ona five-day volume weighted average prior to closing.  Earth also issuedfive-year warrants to purchase an aggregate of 1,500,000 shares of its commonstock to the investor and five-year warrants to purchase 15,000 shares of itscommon stock to Earth’s placement agent, both at an exercise price of $2.50 pershare.  On July 24, 2006, Earth used a portion of the netproceeds from its July 24, 2006 offering to repay in full theremaining unpaid principal and accrued and unpaid interest on the note issuedon July 11, 2006.

On July 24, 2006, Earth entered into asecurities purchase agreement pursuant to which it issued $52.5 millionaggregate senior convertible notes that are due in 2011 to eightinstitutional investors.  The notes initially carry an 8% coupon, payablequarterly, and are convertible into shares of its common stock at $2.90 pershare.  In 2007, the coupon may decline to 6% upon Earth achievingcertain financial milestones.  The notes will begin to amortize in equal,quarterly payments beginning in 2007.  In connection with theissuance of the notes, Earth also issued five-year warrants to purchase9,051,725 shares of common stock to the investors and five-year warrants topurchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90per share.  Earth used the net proceeds from this offering to repay infull the remaining unpaid principal and accrued and unpaid interest on its$20.0 million aggregate principal amount of senior convertible promissory notesissued in May, June and July of 2006, and expects to use the remainingproceeds from the offering for its program of building and acquiring interestsin biodiesel and ethanol production facilities, and for other general corporatepurposes.

 The Company has also continued to raisecapital through a variety of private securities offerings of its common stock.During the first half of 2006, the Company has been able to raise $4.3 millionthrough private equity sales to accredited investors. In addition, the Companyrecently completed a $5.0 million financing through a sale of its common stockin July of 2006. In addition, in July of 2006, the Company also raised $8.0million in exhchange for $8.0 million notes bearing interest at 7%. These notesare exchangeable into shares of common stock of Earth, a majority ownedsubsidiary of the Company.

Managementbelieves these recent financings greatly enhance its ability to execute itsbusiness plan an mitigate its risk of its continuing as a going concern.

Managementis focusing on expanding and improving its oil and natural gas productionoperations, leveraging its opportunities regarding its pipeline assets andcontinuing to develop its biodiesel and LNG production and sales throughacquisition, organic growth and funding via collateralized loans, privateplacement offerings and convertible debt instruments. The Company plans tocontinue to increase the profitability of its operations necessary to supportoperations.

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

*The Company’s Liquidity Plan*

Recent operating results give rise to concerns aboutthe Company’s ability to generate cash flow from operations sufficient to makescheduled debt payments as they become due. The Company’s has completed recentfinancings, described above, to help fund its working capital needs. As of June30, 2006, the Company continued to seek other financing from privateplacements, convertible debt instruments and other acquisitions to expand itsopportunities in the areas of oil and gas production, oil and gas transmissionand biodiesel and LNG production and sales. The Company has implemented costsaving measures, primarily in its oil and gas operations, by implementing costcontrols designed to reduce unnecessary expenditures and operate productionactivities within the current economic constraints with which the Companycurrently operates. The Company will take additional cost savings measures, ifnecessary, to enhance its liquidity position.

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The Company’s need to raise additional equity or debtfinancing and the Company’s ability to generate cash flow from operationssufficient to make scheduled payments on its debts as they become due willdepend on its future performance and the Company’s ability to successfullyraise capital and implement business and growth strategies. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the Company’s control. If future cash flows andcapital resources are insufficient to meet the Company’s debt obligations andcommitments, the Company may be forced to reduce or delay activities andcapital expenditures, obtain additional equity capital or restructure orrefinance its debt. In the event that the Company is unable to do so, theCompany may be left without sufficient liquidity and it may not be able to meetits debt service requirements. In such a case, this could result in asubstantial portion of the Company’s indebtedness becoming immediately due andpayable. As a result, the Company may not be able to continue operations due toliens, collateralized notes or other secured positions placed on the Company’sassets.

*Off-Balance Sheet Arrangements*

# At June 30, 2006 the Companyhad no obligations that would qualify to be disclosed as off-balance sheetarrangements.

RiskFactors

TheCompany’s revenue and operating results may fluctuate significantly fromquarter to quarter, and fluctuations in operating results could cause its stockprice to decline.

TheCompany’s revenue and operating results may vary significantly fromquarter-to-quarter due to a number of factors. In future quarters, operatingresults may be below the expectations of public market analysis or investors,and the price of its common stock may decline. Factors that could causequarterly fluctuations include:

·                                          theability to secure new significant contracts during a quarter; and

·                                          theability to raise the necessary capital to fund working capital, executemergers, acquisitions and asset purchases.

The market in which the Company competes is intenselycompetitive and actions by competitors could render its services lesscompetitive, causing revenue and income to decline.

The ability to compete depends on a number of factorsoutside of the Company’s control, including:

·                                          theprices at which others offer competitive services, including aggressive pricecompetition and discounting;

·                                          theability of competitors to undertake more extensive marketing campaigns;

·                                          theextent, if any, to which competitors develop proprietary tools that improvetheir ability to compete; and

·                                          theextent of competitors’ responsiveness to customer needs.

The Company may not be able to compete effectively onthese or other factors. If the Company is unable to compete effectively, marketposition, and therefore revenue and profitability, would decline.

TheCompany must continually enhance its services to meet the changing needs of itscustomers or face the possibility of losing future business to competitors.

Future success will depend upon the Company’s abilityto enhance existing services and to introduce new services to meet the requirementsof customers in a rapidly developing and evolving market. Present or futureservices may not satisfy the needs of the market. If the Company is unable toanticipate or respond adequately to its customers’ needs, lost business mayresult and financial performance will suffer.

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TheCompany is dependent on a limited number of key personnel, and the loss ofthese individuals could harm its competitive position and financialperformance.

The Company’s business consists primarily of thedelivery of oil and natural gas and, accordingly, its success depends upon theefforts, abilities, business generation capabilities and project execution ofits executive officers. The Company’s success is also dependent upon themanagerial, operational and administrative skills of its executive officers.The loss of any executive officer could result in a loss of customers orrevenue, and could therefore harm the Company’s financial performance.

TheCompany’s ability to secure debt and equity financing could have an adverseeffect on the Company’s financial health.

The inability to raise debt to fund working capitalmay:

·                                          requirethe Company to dedicate a substantial portion of its cash flows to pay downdebt;

·                                          increasethe Company’s vulnerability to general adverse economic and industryconditions;

·                                          limitthe Company’s ability to fund future working capital and other generalcorporate requirements; and

·                                          limitthe Company’s flexibility in planning for, or reacting to, changes in theCompany’s business and the industry in which it operates.

The ability to make payments on and to refinance theCompany’s debt will depend on financial and operating performance, which mayfluctuate significantly from quarter to quarter and is subject to prevailingeconomic conditions and to financial, business and other factors beyond theCompany’s control.

There can be no assurance that the Company’s businesswill generate sufficient cash flow from operations or that future borrowingswill be available to it in an amount sufficient to enable it to pay debt or tofund other liquidity needs. The Company may need to refinance all or a portionof its debt on or before maturity. The Company can give no assurance that itwill be able to refinance any of its debt on commercially reasonable terms orat all.

“SafeHarbor” Statement Under The Private Securities Litigation Reform Act:

With the exception of historical information, thematters discussed in this report are “forward looking statements” as that termis defined in Section 21E of the Securities Exchange Act of 1934.

Cautionary andForward Looking Statements

Inaddition to statements of historical fact, this Form 10-QSB containsforward-looking statements. The presentation of future aspects of the Companyfound in these statements is subject to a number of risks and uncertaintiesthat could cause actual results to differ materially from those reflected insuch statements. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. Without limiting the generality of the foregoing words such as “may,”“will,” “expect,” “believe,” “anticipate,” “intend,” or “could” or the negativevariations thereof or comparable terminology are intended to identifyforward-looking statements.

Theseforward-looking statements are subject to numerous assumptions, risks anduncertainties that may cause the Company’s actual results to be materiallydifferent from any future results expressed or implied by the Company in thosestatements.

Someof these risks might include, but are not limited to, the following:

(a)                                  volatilityor decline of the Company’s stock price;

(b)                                 potentialfluctuation in quarterly results;

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(c)                                  failureof the Company to earn revenues or profits;

(d)                                 inadequatecapital to continue or expand its business, inability to raise additionalcapital or financing to implement its business plans;

(e)                                  failureto commercialize its technology or to make sales;

(f)                                    rapidand significant changes in markets;

(g)                                 litigationwith or legal claims and allegations by outside parties; and

(h)                                 insufficientrevenues to cover operating costs.

Thereis no assurance that the Company will be profitable, the Company may not beable to successfully develop, manage or market its products and services, theCompany may not be able to attract or retain qualified executives andtechnology personnel, the Company’s products and services may become obsolete,government regulation may hinder the Company’s business, and additionaldilution in outstanding stock ownership may be incurred due to the issuance ofmore shares, warrants and stock options, or the exercise of warrants and stockoptions, and there exist other risks inherent in the Company’s businesses.

TheCompany undertakes no obligation to publicly revise these forward-looking statementsto reflect events or circumstances that arise after the date hereof. Readersshould carefully review the factors described in other documents the Companyfiles from time to time with the Securities and Exchange Commission, includingthe Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB filed bythe Company and any Current Reports on Form 8-K filed by the Company.

**Controlsand Procedures**

Basedon the evaluation of the Company’s disclosure controls and procedures as of theend of the period covered by this quarterly report, Dennis G. McLaughlin, thePresident and Chief Executive Officer and J. Mark Ariail, Chief FinancialOfficer, have concluded that, in their judgment, the Company’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Company, including the Company’s subsidiaries, in the reportsit files, or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized, and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Managementnecessarily applied its judgment in assessing the costs and benefits of suchcontrols and procedures. The Company’s disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their objectives. TheCompany’s executive officers, listed above, have concluded that the Company’sdisclosure controls and procedures are effective at that reasonable assurancelevel. There were no changes in the Company’s internal controls over financialreporting during the Company’s last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

**PART II – OTHER INFORMATION**

**Item 1.    Legal Proceedings**

On March 7, 2005, the Company received notice that ithas been named as a defendant, among others, by plaintiffs Donnie Hill, aformer employee of the Company, and BC&D Operating Co., Inc. Case No.CV-2005-128 in the Fifth Judicial District Court, State of New Mexico, for theCounty of Lea. The plaintiffs allege breach of contract related to certainstock purchase agreements with the preceding owner of BC&D, breach ofcontract related to Mr. Hill’s employment agreement with the preceding owner ofBC&D, breach of covenant of good faith and fair dealing, negligentmisrepresentation, fraudulent misrepresentation, violation of the New MexicoSecurities Act by the preceding owner of BC&D, civil conspiracy, callingfor the appointment of a receiver for the assets and business affairs ofBC&D, constructive trust, declaratory judgment related to the Companyelection as successor operators and lastly punitive damages related to theabove allegations. These allegations stem from the Company’s execution of ashare exchange agreement with TKM, whereby the Company gained control of 100%of the assets of BC&D.

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On August 31, 2005, the parties agreed to settle thecase. Under the terms of the settlement the Company will pay to the plaintiffsa) $125,000 in cash, with which the Company has complied; (b) payment in theform of the Company’s common stock totaling $300,000, payable over 6 months; ofwhich the Company has made payments totaling $152,473; (c) 260,000 shares ofthe Company’s common stock; and (d) the issuance of common stock with a valueof $63,000 dated August 31, 2005, with which the Company has complied.

On March 16, 2006, the parties agreed to settleoutstanding amounts due in items (b) and (c) above by payment of $167,720 on orbefore June 1, 2006 in reference to item (b) and payment of $146,250 on orbefore August 1, 2006 in reference to item (c).

The Company’s has complied by remitting the agreedupon cash payments and considers this matter closed.

H.C. Wainwright & Co., Inc. commenced anarbitration against the Company’s majority owned subsidiary Earth, on August 9,2006, asserting a claim for breach of contract relating to a June 6, 2005letter allegedly appointing H.C. Wainwright Earth’s non-exclusive placementagent for a limited time for the sale of certain securities. H.C. Wainwright isseeking an award of unpaid commissions, warrants for the purchase of Earth’scommon stock, and attorneys’ fees and costs. The arbitration proceeding is atan early stage and no discovery has been taken or dates established. Earth isscheduled to file an answering statement on August 25, 2006. Earth denies thatit is liable to H.C. Wainwright for breach of contract and intends tovigorously defend this claim.

The Company has become subject to various claims andother legal matters in the course of conducting its business. The Companybelieves that neither such claims and legal matters nor the cost of prosecutingand/or defending such claims and legal matters will have a material adverseeffect on the Company’s results of operations, financial condition or cashflows. No material claims are currently pending; however, no assurances can begiven that future claims, if any, may not be material.

**Item 2.    Change in Securities and Use of Proceeds**

Duringthe second quarter ended June 30, 2006, the Company issued 13,306,561 shares ofits common stock, via private placement. The common stock was sold at pricesranging from $0.27 to $0.99 per share to accredited investors. The aggregatepurchase price was $2,270,137.

**Item 3.    Defaults upon Senior Securities**– None

**Item 4.    Submission of Matters to a Vote of SecurityHolders**– None

**Item 5.    Other Information** – None

**Item 6.    Exhibits and Reports on Form 8-K**

Reports on Form8-K.
| Date of Filing | ** ** | **Subject**                                                                                                                                                                                                                                                      |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| April 5, 2006  |       | Appointment of Philip N. Smith and George G.  Lowrance to the Company’s Board of Directors.                                                                                                                                                                 |
| May 8, 2006    |       | Announcement of a Letter of Intent for the  acquisition of a biodiesel production facility from Systems Management  Solutions, Inc. by the Company’s majority owned subsidiary Earth Biofuels,  Inc.                                                        |
| May 9, 2006    |       | Announcement of sale of a portion of the Company’s  pipeline assets to Cimmarron Gathering, LP.                                                                                                                                                             |
| May 19, 2006   |       | Announcement that the Company had entered into a  Securities Purchase Agreement with Siam Imports, Inc.                                                                                                                                                          |
|           |       |                                                                                                                                                                                                                                                             |
| **Exhibits.**  | ** ** | ** **                                                                                                                                                                                                                                                       |
| Exhibit 10.1   |       | Loan and Security Agreement dated April 14, 2006  among Applied LNG Technologies USA, L.L.C., Arizona LNG, L.L.C., Fleet Star,  Inc., Alternative Fuels Technologies, LLC, and Renewable Alternative Fuels,  LLC (Borrowers) and FCC, LLC, d/b/a/ First Capital. |
| Exhibit 31.1   |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) under the Securities Act on 1934.                                                                                                                                                           |
| Exhibit 31.2   |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) under the Securities Act on 1934.                                                                                                                                                           |
| Exhibit 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.                                                                                                            |
| Exhibit 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.                                                                                                            |

** **

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**SIGNATURES**

Pursuant to therequirement of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized this 24th day of August, 2006.
|        | Apollo Resources  International, Inc. |
|--------|---------------------------------------|
|   |                                  |
|   | /s/ Dennis G.  McLaughlin, III        |   |
|   | Dennis G.  McLaughlin, III            |
|   | Chief Executive  Officer              |

 

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