e10qsb

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2007


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50842

Earth Biofuels, Inc.

(Exact name of small business issuer specified in its charter)


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

3001 Knox Street, Suite 403
Dallas, TX 75205
(Address of principal executive offices)
(214) 389-9800
(Issuer’s telephone number)

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

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

As of May 15, 2007, there were 246,017,970, shares of the registrant’s common stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No þ

PART I FINANCIAL INFORMATION

Item 1.

EARTH BIOFUELS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands except share amounts)


	June 30,			December 31,
	2007			2006
Current Assets
Cash and cash equivalents	$	534		$	291
Investments in equity securities		47			285
Trade accounts receivable, net of allowances totaling $0 and $109		3,287			3,019
Inventory, finished goods		737			785
Prepaid expenses and other current assets		4,696			1,471
Advances to related parties		1,310
Notes receivable from related parties		2,704			857

Total Current Assets		13,315			6,708
Property, Plant and equipment, net of accumulated depreciation of $9,416 and $7,854		27,817			27,015
Investments and advances		13,836			40,860
Investment — related party		30			100
Notes receivable from related parties		14,909			5,824
Deferred financing fees		2,393			2,445

Goodwill, net of impairment of $10,623 and $315 in 2007 and 2006, respectively		26,986			30,032
Prepaid and other long term assets		4,212			747


Total Assets	$	103,498		$	113,731

Current Liabilities

Accounts payable	$	7,914		$	8,064
Accrued interest payable		30,926			11,944
Payables to related parties		4,537			6,826
Demand Notes		288			250
Line of Credit		1,574			5,679
Short term convertible promissory notes, net of discount of $34,220 and $39,633		19,380			13,967
Income taxes payable		1,818			1,818

Total Current Liabilities		66,437			48,548
Long term debt		24,000			—

Total liabilities		90,437			48,548

Commitments and contingencies
Stockholders’ Equity
Preferred stock, $.001 par value, 15,000,000 shares authorized, 0 shares issued and outstanding		—			—
Common stock, $.001 par value, 400,000,000 shares authorized, 240,425,887 and 233,047,225 shares issued and outstanding		240			233
Additional paid-in capital		152,603			145,555
Other comprehensive income		—			(570	)
Treasury stock at cost (279,200 shares)		—			(463	)
Accumulated deficit		(139,782	)		(79,572	)

Total Stockholders’ Equity		13,061			65,183


Total Liabilities and Stockholders’ Equity	$	103,498		$	113,731

See accompanying notes to consolidated financial statements

EARTH BIOFUELS, INC.

Statements of Operations

(Unaudited)

($ in Thousands Except Per Share Amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
				(Restated)						(Restated)
Sales revenue	$	6,742		$	9,006		$	13,387		$	17,623
Cost of sales		5,794			7,849			12,086			17,403

Gross profit		948			1,157			1,301			220

Compensation		1,407			5,348			6,521			11,652
Other selling, general and administrative		3,462			5,995			6,818			8,590
Depreciation and amortization		1,243			521			2,195			754

Net loss from operations		(5,164	)		(10,707	)		(14,233	)		(20,776	)

Other income (expense)
Interest income		208			9			205			33
Loss on sale of fixed assets		—			—			(121	)		—
Interest expense		(13,551	)		(3,065	)		(29,674	)		(3,140	)
Loss on equity investments		(4,192	)		—			(4,192	)		—
Impairment losses		(10,623	)		—			(10,938	)		—
Loss on marketable securities		(852	)		—			(852	)		—
Loss on Derivatives		—			(401	)		—			(401	)
Other expenses		(508	)		23			(405	)		43

Total other income (expense)		(29,518	)		(3,434	)		(45,977	)		(3,465	)

Net loss	$	(34,682	)	$	(14,141	)	$	(60,210	)	$	(24,241	)


Net loss per common share

Basic and diluted net loss	$	(0.17	)	$	(0.07	)	$	(0.29	)	$	(0.12	)

Weighted average shares		204,160			196,649			204,160			196,649

See accompanying notes to consolidated financial statements

EARTH BIOFUELS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Six Months Period Ended June 30, 2007

(Unaudited)


	Common						Additional		Other
	Stock			Common			Paid		Comprehensive			Treasury			Accumulated
	Shares			Stock at Par			in Capital		Income (Loss)			Stock			Deficit			Totals
Balance 12/31/06 (restated)		233,047		$	233		$	145,555	$	(570	)	$	(463	)	$	(74,965	)	$	69,790
Shares issued for cash		3,068			3			1,522		—			—			—			1,525
Shares issued for services		6,281			6			3,874					—			—			3,880
Shares issued for exercise of warrants		250			1			—		—			—			—			1
Shares issued for related party payables		1,000			1			510		—			—			—			511
Unrealized loss on marketable securities		—			—			—		(127	)		—			—			(127	)

Realized losses		—			—			—		570			—			—			570

Treasury Stock		279			—			—		—			463			—			463

Shares issued to escrow		2,500			2			—		—			—			—			2
Forfeiture of shares		(6,000	)		(6	)		—		—			—			—			(6	)
Net Changes in discounts on convertible debt and long term debt issued with warrants		—			—			1,142		—			—			—			1,142
Net loss		—			—			—		—			—			(60,210	)		(34,682	)

Balance June 30, 2007		240,426		$	240		$	152,603	$	—		$			$	(139,782	)	$	13,061

See accompanying notes to consolidated financial statements

EARTH BIOFUELS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Month Periods Ended June 30, 2007 and 2006

(Unaudited)


	Six Months Ended June 30,
	2007			2006
				(Restated)
Cash Flows from Operating Activities:
Net Loss	$	(60,210	)	$	(24,239	)
Loss on sales of fixed assets		121			—
Losses on marketable securities		697			—
Depreciation		1,635			772
Amortization of debt issuance costs		561			—
Impairment of investments		4,192			—
Goodwill impairment		10,938			—
Loss on derivatives		—			401
Share-based compensation expense		3,875			10,063
Debt discount amortization		5,410			2,550
Changes in assets and liabilities:
Decrease (increase) in:
Trade accounts receivable		(268	)		(2,435	)
Notes receivable		—			(100	)
Inventory		45			(6	)
Prepaid expenses & other current assets		(3,224	)		970
Advances to related parties		(1,310	)		(2,343	)
Notes receivable from related party		(1,847	)		476
Increase (decrease) in:
Accounts payable and accrued expenses		(149	)		91
Accrued interest payable		18,982			—

Net cash provided by (used in) operating activities		(20,555	)		(13,800	)

Cash Flows From Investing Activities:
Cash paid for investment		(91	)		(1,175	)
Advances on payments to related parties		(1,779	)		—	)
Cash paid for advances on investments		—			(12,695
Repayments from investments and advances		2,355			—
Cash paid for purchases of fixed assets		(2,558	)		(3,480	)

Net cash used in investing activities		(2,073	)		(17,350	)

Cash Flows From Financing Activities:
Proceeds from issuance of common stock		1,534			6,743
Proceeds from long term debt and line of credit		30,036			20,750
Repayments of long term debt and line of credit		(8,653	)		—
Proceeds from sale of treasury stock		463			—
Cash paid for debt issuance cost		(509	)		(975	)

Net cash provided by financing activities		22,871			26,518

Net increase (decrease) in cash		243			(4,632	)

Cash and cash equivalents
Beginning of period		291			5,070

End of period	$	534		$	437


Supplemental Cash Flow Disclosures:
Cash paid for income taxes	$	—		$	—
Cash paid for interest		2,904			339

See accompanying notes to consolidated financial statements

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Earth Biofuels, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Earth’s Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2006 as reported elsewhere in this Form 10-QSB have been omitted.

Tax Credits — Earth files federal excise tax returns each quarter, claiming refundable biodiesel mixture tax credits. Such credits amounted to approximately $898,000 and $512,000 for the six months and three months ended June 30 2006, respectively. The were no refundable tax credits received as of June 30, 2007. These credits are accounted for on a gross basis and included as part of sales revenues.

Marketable Securities — In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities are marked to market with gains and losses being reflected as unrealized for “available for sale” securities, and realized gains or losses for “trading securities”. At June 30, 2007 the market value of investments in equity securities was approximately $47,000. The change in fair value during the period has been determined to be other than temporary based on the deteriorations in the credit ratings of the investee, and the related losses on the investment totaling $705,000 is included in earnings as of June 30, 2007.

NOTE 2 — GOING CONCERN

Earth has incurred significant losses from operations and as of June 30, 2007, has limited financial resources. These factors raise substantial doubt about our ability to continue as a going concern.

During the six months ended June 30, 2007 Earth received net proceeds of $29 million from the issuance of new debt. We used the net proceeds in concert with other funds, to continue to execute our business plan and to finance the working capital needs of our Bio-diesel and LNG operations.

Earth has implemented cost saving measures, primarily in its Bio-diesel operations, by implementing cost controls designed to reduce unnecessary expenditures and operate production activities within the current economic constraints with which Earth currently operates. Earth will take additional cost savings measures, if necessary, to enhance its liquidity position. Earths’ management is attempting to seek strategic alternatives, including the pursuit of additional investors for strategic acquisitions or a merger with other businesses. Management intends to complete construction of the underlying investment projects through partnerships with other interested investors, so to provide the additional capital needed to grow and enhance its alternative fuel production and distribution operations. The accompanying financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

Subsequent to the quarter ended June 30, 2007, the note holders of our $52.5 million in private placement offerings dated July 24, 2006, filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation on the company. The Company has filed a request for a hearing on this issue and has submitted a business plan to the courts. A hearing was set for September 10, 2007. There are several outcomes that may occur pursuant to this hearing, any of which cannot be reasonably estimated at this time.

NOTE 3 — RESTATEMENTS

On November 22, 2006, Earth acquired 100% ownership of its parent Apollo International’s liquified natural gas business for 18,844,222 common shares.

Under the guidance in Statement of Financial Accounting Standards (SFAS) No. 141 transactions between companies under common control are to be accounted for at the historical cost basis. The transaction between Earth and the LNG business was a transaction between entities under common ownership and therefore recorded no adjustment for the fair value of the assets acquired. Earth follows the guidance included in Accounting Principles Board Opinion 16 by applying the pooling method in accounting for this acquisition.

In accordance with SFAS 141, operating results for the first six months of 2006, has been restated to furnish comparative information by including the LNG business.

NOTE 4 — INVESTMENTS, ADVANCES AND NOTES RECEIVABLE FROM RELATED PARTIES

Amounts representing the Company’s percentage interest in the underlying net assets of other significant subsidiaries, and less-than-majority-owned companies in which a significant ownership percentage interest is held, are included in “Investments and advances”. There were minimal related operations during the three months ended June 30, 2007 and as such the Company’s share of the net income of these companies is $0 in the consolidated statement of income. Evidence of loss in value that might indicate impairment of investments in companies accounted for on the equity method is assessed to determine if such evidence represents a loss in value of the Company’s investment that is other than temporary. Examples of key indicators include a history of operating

losses, negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment or geographic region. If evidence of an other than temporary loss in fair value below carrying amount is determined, impairment is recognized. In the absence of market prices for the investment, discounted cash flows are used to assess fair value.

Investments and advances consist of the following entities and amounts as of June 30, 2007:


	Method of	Investment		Advances		Total
Description	Accounting	($ in 000’s)		($ in 000’s)		($ in 000’s)
Investments
Truckers Corner	Equity	$	1,120	$	4,530	$	5,650
American Earth	Equity		—		—		—

Letters of Intent
Systems Management Solutions, Inc.	Cost		—		—		—
Vertex Processing, LP	Cost		—		—		—
Biodiesel Investment Group and Bunge North America	Cost		4,976		—		4,976
Earth Ethanol and Liquafaction Corporation	Cost		—		—		—
Earth Ethanol and HPS Development, L.L.C.	Cost		—		—		—
Cordele Industrial	Cost		—		10		10
Dineh-bi-Keya	Cost		—		50		50
DFI-Albemarle Bio-Refinery, Inc.,	Cost		—		3,150		3,150
Total		$	6,096	$	7,740	$	13,836

Investments

Truckers Corner - 50% interest in retail facility located in Hillsboro, TX for bio-diesel distribution. Increased investment ownership during the three months ended June 30, 2007 to 50% with additional advances of $369,000.

American Earth Fuels Company — 51% interest (proposed) in this start up entity located in Dallas, TX created to pursue acquisitions of retail sites for Bio-diesel distribution. During 2006, we deposited $250,000 related to a potential contract to purchase certain retail locations in Texas. In addition, advances totaling $77k had been made. Subsequent to year-end, this deposit was forfeited and the advances were written off due to the business decision to disband operations related to the retail locations.

Advances on Letters of Intent

Systems Management Solutions, Inc. (“SMS”) Advance on letter of intent for this bio-diesel production facility in San Antonio, TX — Investment deemed impaired for $22k plus note receivable $788,000

Vertex Processing, LP Bio-diesel production facility in Houston, TX — On May 2, 2006, Earth entered into a letter of intent with Vertex Energy, L.P., which contemplated a joint venture in which a newly created company would own and operate a biodiesel production facility on the Houston Ship Channel

in Houston, Texas. As contemplated by the letter of intent, Vertex Energy would acquire a 49% interest in the newly created company in exchange for contributing to the new operating company real property and improvements, including an existing chemical processing facility. Earth would acquire a 51% interest in the operating company in exchange for the payment of $2,500,000 and the issuance of 1,500,000 shares of our common stock to Vertex Energy. These shares were issued in October, 2006 and had a fair market value of $4,320,000. In addition advances of $550,000 have been made.

On February 5, 2007, Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract and a motion for new trial was granted. We believe these allegations are substantively without merit, and are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. Due to the lack of continuing operations at this location the investment amount is deemed impaired. The company has recorded losses of $2,435,000 during the first quarter 2007 and $2,543,000 during the second quarter 2007, resulting in total estimated impairments of $4,978,000.

Biodiesel Investment Group and Bunge North America Bio-diesel production facility located in Danville, Illinois — Additional investment of $75,000 during the three months ended June 30, 2007

Earth Ethanol and Liquafaction Corporatoin, Ethanol production facility in Moses Lake, Washington — Amended agreement with 5 day termination notice by third party-additional advances of $239,000 — all deemed impaired due to new termination notice $664,000.

Earth Ethanol and HPS Development, L.L.C. Ethanol production facility Plaquemines Parish, Louisiana — Litigation settled, whereby Earth received $4 million in cash, a $18 million note receivable and a non-compete agreement in settlement.

On August 31, 2006, Earth entered into letters of intent with HPS Development, L.L.C. which contemplated a joint venture in which a newly created limited liability company would own and operate a fuel ethanol distillery located on the Mississippi River in Plaquemines Parish, Louisiana. As contemplated by the letters of intent, HPS Development was to acquire a 50% interest in the newly created limited liability company in exchange for contributing to the new operating company real property and improvements, including a currently idle ethanol distillery. Earth was to acquire a 50% interest in the operating company for a purchase price consisting of cash in the amount of $50.0 million and the issuance of 5,829,005 shares of our common stock to HPS development in addition to the assumption of a $40.0 million debt obligation to be incurred by the operating company in connection with the renovation of the facility. We anticipated the renovation of this facility would take 12 to 14 months, after which time we estimated the plant would have an ethanol production capacity of 60-80 MMGPY.

Earth had paid approximately $27 million towards the project when a breach of contract occurred. No shares or warrants had been issued at this time, or subsequently related to the project. Earth filed a claim for breach of contract and default by SLE under the terms of the agreement. The Claim involved enforcement of certain rights under a contribution and purchase agreement regarding the construction and operation of the ethanol plant in Belle Chasse, Louisiana that we entered into with HPS/SLE wherein HPS/SLE agreed to contribute plant and

property to a new company and we agreed to provide capital necessary to obtain a fifty percent ownership interest in Earth Ethanol and collectively, to help Earth Ethanol begin the construction and retrofitting work necessary to bring the plant online. One such issue in our Claim included Earth Ethanol’s learning that HPS, via SLE, attempted to sell a portion of the facilities’ equipment to an unaffiliated third-party, namely, Southridge Ethanol, Inc., a wholly-owned subsidiary of Southridge Enterprises, Inc. This sale could have increased construction costs. In order to protect and preserve our assets of the Company, Earth Ethanol notified Southridge of its interests. Southridge cancelled its planned purchase.

Earth settled with HPS during June 2007, whereby Earth received $4 million in cash and a non interest bearing note for $18 million. In addition, HPS signed an agreement not to compete valued at $5 million. The note is payable thru 2015. Earth has reported its non interest bearing note at its fair market value of $14,377,000. $2 million in principal is due within the next year,and is included in notes receivable from related parties current assets. The value assigned to the non-compete agreement was determined to be impaired and losses totaling $5,000,000 were recorded.

Cordele Industrial – Investment in a Cellonistic production facility located in Cordele ,Georgia. New investment in second quarter.

Dineh-bi-Keya - Cellonistic production facility located in Texas. New investment in second quarter.

DFI-Albemarle Bio-Refinery, Inc. Ethanol production facility located in Albemarle, North Carolina.

Other investments -During the second quarter Earth made advances towards projects related to cellonistic fuel. These advances totaled $60,000.

Notes receivable from related parties —

Notes receivable from related parties consists of notes related to investments bearing market rates from 4.85% to 6.25%, with collateral of underlying physical assets, and maturities in 2 to 6 years. Total notes receivable as of June 30, 2007 are as follows:


	2007
Description	($ in 000’s)
Truckers Corner	$	359
DFI		2,172
HPS		14,377
Apollo affiliates		8
AIRO		697

Total		17,613
Less current portion		(2,704	)

Long term notes receivable from related parties	$	14,909

Advances to related parties —

Earth made advances totaling $1,310,000 as of June 30, 2007 to our affiliates of the company. These affiliates include parties which provided legal services to us totaling $310,000, and advances to a subsidiary of our parent company Apollo Resources totaling $1,000,000. These monies were repaid subsequent to the quarter ended June 30, 2007.

Investment in related party –

Earth has an investment in Blue Wireless, a publicly traded telecommunication company, which also provides information technology support to Earth. We owned shares in Blue Wireless previously valued at $100,000. Due to the decline is the shares value, which has been deemed other than temporary, we wrote down our investment to $30,000, based on the most recent publicly quoted market price. In addition, Earth had previously advanced Blue Wireless $160,000, which has been deemed uncollectible and was written off to bad debt expense in the quarter ended June 30, 2007.

NOTE 6 — INTANGIBLE ASSETS

Goodwill recorded on Earth’s balance sheet reflects the purchase price of Earth’s acquisitions exceeding the fair market value of the net assets. At June 30, 2007, Earth had recorded approximately $26,986,000 of goodwill related to its acquisition of its LNG businesses, and $3,981,280 related to the acquisition of Distribution Drive, reduced by $315,000 during the first quarter of 2007. In addition, other intangible assets consisted of a license costing approximately $2,200,000 for the sales of a brand name biodiesel product, which had an unamortized balance of $2,012,000 as of March 31, 2007.

Earth has determined that, based on the impairment tests performed on Earth as a separate business unit from the LNG business, the intangible assets related to goodwill from the acquisition of Distribution Drive and the license for the brand name have been impaired. As such the carrying amounts of approximately $3,666,000 and $2,012,000 have been written down to zero and charged against earnings.

NOTE 7 — DEMAND NOTES —

Earth has several demand notes totaling $288,132 as of June 30, 2007. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.

NOTE 8 — LINE OF CREDIT

Our LNG subsidiary obtained a new $5 million revolving credit facility in March, 2007, and used the proceeds to repay a former line of credit. This facility is advanced at up to 85% of accounts receivable. Interest of prime plus 2% is payable monthly.

NOTE 9 — LONG TERM DEBT

On February 28, 2007, our LNG subsidiary borrowed $15 million under a term loan due in 3 years, with interest accruing at LIBOR plus 1% and payable monthly in advance. The loan is secured by the our LNG plant facility in Topock, Arizona. Warrant Purchase and Registration Right agreements allow the purchase of up to 13,549,816 common shares at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $3,674,702. Amortization on the related debt discount totaled $202,560 for the three months ended June 30, 2007.

On March 23, 2007, Earth borrowed $9 million under a term loan due in 3 years with interest payable at LIBOR plus 1%. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility, Warrant Purchase and Registration Right agreements allow the purchase of up to 6,774,908 of common shares at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $1,654,643. Amortization on the related debt discount totaled $95,888 for the three months ended June 30, 2007.

In June 2007, the lenders exchanged their rights to purchase the warrants in lieu of additional fees totaling $3 million. These fees are payable at maturity of the debt and are being accrued monthly. In accordance with EITF 96-19 — “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”, Earth evaluated the present value of cash flows under the new terms of the debt instruments and determined the change to be less than 10%, and therefore, this change was not considered debt extinguishment. As such, a charge of $4,935,612 was made against the remaining discount on the original debt, and against additional paid in capital, as per this modification of terms. Total financing fee expense was $509,000 as of June 30, 2007.

In connection with these facilities interest reserves were escrowed totaling $1,053,000 for interest payments due the first twelve months.

Long-term debt was zero as of June 30, 2006, and consisted of the following (in thousands) as of June 30, 2007:


Term debt facilities	$	24,000
Unamortized discounts		0

		24,000
Less current installments		0

Long-term debt, less current installments	$	24,000

The following table sets forth our future debt payment obligations as of March 31, 2007:


	Debt Outstanding
	at June 30, 2007
1 year or less	$	0
2 years		0
3 years		24,000
4 years		0
5 years		0
Thereafter		0

Total future payments	$	24,000

NOTE 10 — STOCKHOLDERS’ EQUITY

Warrants —

Warrants granted consisted of the following for the six months ended June 30, 2007.


	Remaining			2006
Description	Life	Exercise Price		Warrants
May 4, 2006 convertible debt-(debt repaid), warrants issued to investor	8 – 9 years	$	2.00		920,810
May 26, 2006 convertible debt-(debt repaid), warrants issued to investor and placement agent	8 – 9 years	$	3.84		768,750
June 7, 2006 convertible debt-(debt repaid), warrants issued to investor and placement agent	8 – 9 years	$	2.93		1,545,000
July 10, 2006 convertible debt (debt repaid), warrants issued to investor and placement agent	9-10 years	$	2.50		1,515,000
July 21,2006 warrants issued for consulting fees	9-10 years	$	.25		4,000,000
July 24, 2006 convertible debt, warrants issued to investors	9-10 years	$	2.90		9,051,725
August 11, 2006 convertible debt, warrants issued to investors and placement agent	9-10 years	$	2.90		189,655
January 19, 2007, promissory notes, warrants issued to note holders	9-10 years	$	.01		375,000
February 28, 2007, long term debt, warrants issued to note holders	9-10 years	$	.36		13,549,816
March 23, 2007, long term debt, warrants issued to note holders	9-10 years	$	.30		6,774,908

The weighted average exercise price for all warrants outstanding as of June 30, 2007 was $.47 per share. During the three months ended June 30, 2007, 20,124,688 shares were forfeited and 125,000 shares were exercised.

All warrants have a five-year or ten year expiration. The warrant fair value was determined by using the Black Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) risk-free interest rate, (2) expected warrant life is the actual remaining life of the warrants as of the year end, (3) expected volatility was 100%-400%, and (4) zero expected dividends.

A summary of our stock warrant activity and related information at June 30, 2007 is as follows:


	Number of Shares					Weighted Average
	Under Warrant			Exercise Price		Exercise Price
Warrants outstanding at December 31, 2006		17,990,940		$	.25-3.84	$	1.02
Issued		20,699,724		$	.01-.36	$	.25
Exercised		(250,000	)	$	.01	$	(.01	)
Forfeited		(20,324,724	)	$	.30-.36	$	(.25	)
Expired		—			—		—

Warrants outstanding and exercisable at June 30, 2007		18,115,940		$	.01-$3.84	$	1.01

In summary there were warrants for 18,115,940 shares of common stock, and conversion options for 18,482,760 shares outstanding both totaling 36,598,700 as of June 30, 2007. Due to net losses or anti-dilutive features these warrants and conversion options were not presented on the Consolidated Statement of Operations.

Share-based Compensation —

During the three months ended June 30, 2007, Earth issued 91,258 restricted shares, valued at approximately $16,836 of Earth’s common stock to employees for services rendered, and 191,659 restricted shares, valued at approximately $40,248, of Earth’s common stock for consulting services. In addition, 6,000,000 shares issued to a former board member were cancelled and not reissued, with an original value of $3,902,915.

There have been no stock options granted through June 30, 2007.

NOTE 11 — RELATED PARTY TRANSACTIONS

Advances

As of June 30, 2007, Earth owed the following related parties $4,537,000 as follows:


	2007
Description	($ in 000’s)
Apollo International Resources, Inc.	$	3,628
LNG affiliates		909

Total	$	4,537

Apollo International Resources, Inc. is our majority stockholder of Earth, and LNG is our wholly owned subsidiary of Earth.

Amounts advanced from related parties were used to fund operations and investments of Earth. All related party payables are classified as current due to management’s intent to pay the amounts owed during the following fiscal year.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Registration Payments

In December 2006, we adopted EITF 00-19-2 “Accounting for Registration Payment Arrangements”, for the year ended December 31, 2006. In connection with our securities purchase agreements and the related registration agreements of the company, registration penalties were incurred for non timely filing of a registration statement, and effectiveness of a registration statement, equal to 2.5% per month with a maximum penalty of 12.5%. As of June 30, 2006 these penalties total $6,652,500 and are being classified as accrued interest with a related charge to interest expense.

NOTE 13 — SEGMENT INFORMATION

We have two segments. Earth LNG, Inc. is managed separately, as this business has a distinct customer base and requires different strategic and marketing efforts with liquefied natural gas production, distribution and marketing operations. There are no inter-segment revenues or expenses.

Certain segment data is included in the table below as follows:


	LNG			Earth Biofuels			Consolidated
	($ in 000’s)			($ in 000’s)			($ in 000’s)
Six months ended June 30, 2007
Revenue	$	12,512			875			13,387
Income (Loss) from operations	$	1,412			(111	)		1,301
Interest Expense	$	(1,401	)		(28,273	)		(29,674	)
Net Loss for the six months ended June 30, 2007	$	(1,890	)		(58.320	)		(60,210	)
Property, plant and equipment, net	$	10,974			16,843			27,817
Total Assets	$	45,149			58,349			103,498
Current Liabilities	$	506			65,931			66,437

Municipal customers represents approximately 58% of our LNG revenues in 2007 to date.

NOTE 14 — SUBSEQUENT EVENTS

Subsequent to June 30, 2007, the note holders of our $52.5 million in private placement offerings dated July 24, 2006, filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation on us. A hearing was set for September 10, 2007. There are several outcomes that may occur pursuant to this hearing, any of which cannot be reasonably estimated at this time.

H.C. Wainwright & Co., Inc. (“HCW”) commenced arbitration against us on July 20, 2006, asserting a claim for breach of contract relating to a March 7, 2006 letter allegedly appointing them as our placement agent for a limited time for the sale of our securities. They are seeking an award of unpaid commissions, warrants for the purchase our common stock, and attorneys’ fees and costs. An Award of Arbitration was granted in July 2007, in the absence of representation by Earth, and we were ordered to pay $5,656,000 with 9% interest calculated annually, attorney fees of $118,887.10, and an arbitration fee of $35,120. This matter was thought to be settled by actions taken previously by us. We are currently deciding whether to pursue additional legal action against HC Wainwright for fraud. In addition, Earth is appealing this award and losses, if any, cannot be reasonably estimated at this time.

ITEM 2. Management’s Discussion and Analysis.

The following discussion and analysis should be read in conjunction with Earth’s Financial Statements, together with the notes to those statements, included in Item 7 of this Annual Report on Form 10-KSB.

Overview

The principal business of Earth is the domestic production, supply and distribution of alternative based fuels consisting of biodiesel, ethanol and liquid natural gas. Earth produces pure biodiesel fuel (B100) for sale directly to wholesalers, and to be used as a blend stock to make B20 biodiesel. Biodiesel is a non-toxic, biodegradable diesel fuel made from soybean and other vegetable oils, and used or recycled oils and fats. Earth utilizes vegetable oils such as soy and canola oil as raw material (feedstock) for the production of biodiesel fuel. Earth’s primary bio-diesel operations are located in Oklahoma and Texas. Earth also has investments in various Ethanol plants. Ethanol is another renewable alternative fuel. Ethanol, also known as ethyl alcohol or grain alcohol, and is produced primarily from corn and wheat. Earth also produces and distributes liquefied natural gas, or lng, which is natural gas in its liquid form. Liquid natural gas is primarily methane with only small amounts of other hydrocarbons. Earth’s primary operations are in Arizona and California.

Our primary sources of revenue for the three months ended June 30, 2007 are from the sale of biodiesel fuels and lng. Our sales revenue is a function of the volume we sell and the price at which we sell. The volume of our sales is largely dependent upon demand and our ability to distribute the product. The selling prices we realize for our products are largely determined by the market supply and demand, which in turn, is influenced by industry factors over which we have little, if any, control, such as the price of gasoline and other alternative energy sources. We blend and market our biodiesel directly to fuel stations. For our biodiesel products the distribution strategy includes supplying B100 for storage and blending terminals, controlling the blending point, and obtaining exclusive agreements with terminal chains throughout the United States. We have entered into agreements with oil companies with the capability to deliver to fleet, agricultural and retail fueling terminals, and retail service stations, to expand biodiesel consumption in their local areas. For our lng products the production facility is located in Topock, AZ, is just one mile east of the Arizona border with California. The plant has a maximum capacity of 86,000 gallons per day, and is currently running at approximately 96% efficiency. The facility is strategically located in close proximity to its primary metropolitan markets along the west coast to minimize transportation costs. The plant’s natural gas feedstock supply is fed by an El Paso Natural Gas pipeline.

Our gross profit is derived from our total revenues less our cost of sales. Our cost of sales is affected by the price of our purchases of biodiesel and natural gas on the open market, which are also affected by supply and demand, and the cost of raw materials used in the production process, such as soy oil and natural gas. As we implement our facility construction and expansion strategy, we expect our cost of sales to be impacted by our cost of raw materials used in production.

Continuing Losses. We have had net losses from operations each year since inception, and there can be no assurance that we will be profitable in the future. Our financial results depend upon many factors that impact our results of operations including sales prices of natural gas, soy oil and corn, the volume of sales of liquefied natural gas, biodiesel and ethanol, availability of and the level and success of production, development and distribution activities and financial resources to meet cash flow needs. Earths’ management is attempting to seek strategic alternatives, including the pursuit of additional financing for strategic acquisitions or a merger with other businesses. The Company has incurred significant losses from operations and as of June 30, 2007, and has limited financial resources. These factors raise substantial doubt about our ability to continue as a going concern. Management intends to raise capital through private securities offerings, secure collateralized debt financing and use these sources of capital to grow

and enhance its alternative fuel production and distribution operations. If additional funds are raised by issuing debt, we may be subject to restrictive covenants that could limit our operating flexibility. Earth’s performance will also be affected by prevailing economic conditions. Many of these factors are beyond Earth’s control. There can be no assurance that adequate funds will be available when needed and on acceptable terms, or that a strategic alternative can be arranged. The accompanying financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

During the fourth quarter of fiscal 2006 Earth completed the acquisition of the LNG business. The acquisition of the LNG business marked the initial entrance of Earth into the liquefied natural gas production business. The acquisition added the largest producer of wholesaler vehicle-quality LNG in the western US and Mexico, and has allowed Earth to be more diversified. Earth believes this acquisition will be a major part of establishing future financial stability. The LNG company acquisitions have produced revenues in excess of $50 million over the preceding two fiscal years.

In response to soaring fuel costs, and to avail itself of government subsidies and tax incentives, Earth has pursued a strategy of developing renewable forms of energy, such as biodiesel and ethanol. Consequently, Earth has acquired various interests in companies in Texas, N. Carolina, New Orleans, Illinois and Washington. We are working with other partners to build and refurbish plants in order to produce substantial quantities of renewable, domestic fuel.

Subsequent to year end 2006 Earth obtained several credit facilities totaling $29 million with various lenders to finance the working capital needs of its Biodiesel and LNG operations. Our partners in various Ethanol plants are raising additional equity through performance bonds and USDA guaranteed loans.

Earth has implemented cost saving measures, primarily in its Bio-diesel operations, by implementing cost controls designed to reduce unnecessary expenditures and operate production activities within the current economic constraints with which Earth currently operates. Earth will take additional cost savings measures, if necessary, to enhance its liquidity position.
Subsequent to the quarter ended June 30, 2007, the note holders of our $52.5 million in private placement offerings dated July 24, 2006, filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation on the company. The Company has filed a request for a hearing on this issue and has submitted a business plan to the courts. A hearing was set for September 10, 2007. There are several outcomes that may occur pursuant to this hearing, any of which cannot be reasonably estimated at this time.

Results of Operations

Comparison of Six Months Ended June 30, 2007

To Six Months Ended June 30, 2006

The following table sets forth selected data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of operations.


	Six Months Ended
	June 30,
	2007			2006
Revenues:
Sales revenue		100	%		100	%

Cost of sales		90	%		99	%

Gross profit		10	%		1	%
Compensation		49	%		66	%
Other selling, general and administrative		51	%		49	%
Depreciation and amortization		16	%		4	%

Net loss from operations		(106	)%		(118	)%
Interest expense		222	%		18	%
Impairments		113	%		0	%
Net (loss)		(450	)%		(138	)%

Revenue. Total revenue for the six months ended June 30, 2007 decreased $4.2 million, or 24%, to approximately $13.3 million from approximately $17.6 million in 2006. The decrease in total revenue is primarily the result of decreased sales of biodiesel.

Cost of Sales. The types of expenses included in the cost of sales line item include the cost of raw materials, inbound freight charges, purchasing and receiving costs, terminal fees for storage and loading of biodiesal, petro fees, chemicals, and related costs of production.
Cost of sales for six months ended June 30, 2007 decreased $5.3 million, or 31%, to approximately $12.1 million from approximately $17.4 million for 2006. Our cost of goods sold is mainly affected by the cost of biodiesel, vegetable oil, and other raw materials. The decrease in cost of sales is primarily the result of decreased sales of biodiesel.

Compensation. Compensation for six months ended June 30, 2007 decreased approximately $5.1 million and related primarily to shares issued to consultants for employees and consulting services issued in 2006. The shares issued as share based compensation were valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).

Other Selling, General and Administrative Expenses. The types of expenses included in the selling, general and administrative expenses line item include salaries and benefits, office expenses, insurance, professional services, travel and other miscellaneous expenses.
Other selling, general and administrative expenses for six months ended June 30, 2007 decreased approximately $1.8million from approximately $8.6 million for the same period in 2006. The 2007 costs decrease consists of reductions in consulting, marketing, professional, administrative and travel expenses.

Depreciation and Amortization. Depreciation and amortization for the six months ended June 30, 2007 increased to approximately $2.2 million from $754,000 for the same period in 2006. The increase in depreciation and amortization is related primarily to purchases of plant and equipment.

Interest Expense. Interest expense related primarily to short term convertible debts and long term debts for the six months ended June 30, 2007was approximately $29.7 million from $3.1 million for the same period in 2006. Interest expense consisted primarily of interest fees, late charges and registration penalties related to defaults on agreements in late 2006 and 2007.

Comparison of Three Months Ended June 30, 2007

To Three Months Ended June 30, 2006


	Three Months Ended
	June 30,
	2007			2006
Revenues:
Sales revenue		100	%		100	%

Cost of sales		86	%		87	%

Gross profit		14	%		13	%
Compensation		21	%		59	%
Other selling, general and administrative		51	%		67	%
Depreciation and amortization		18	%		6	%

Net loss from operations		(77	)%		(119	)%
Interest expense		201	%		34	%
Impairments		220	%		0	%
Net (loss)		(514	)%		(157	)%

Revenue. Total revenue for the three months ended March 31, 2007 decreased $1.7 million, or 21%, to approximately $6.7 million from approximately $9 million in 2006. The decrease in total revenue is primarily the result of decreased sales of biodiesel.

Cost of Sales. Cost of sales for three months ended March 31, 2007 decreased $2 million, or 26%, to approximately $5.8 million from approximately $7.8 million for 2006. Our cost of goods sold is mainly affected by the cost of biodiesel, vegetable oil, and other raw materials. The decrease in cost of sales is primarily the result of decreased sales of biodiesel in 2007.

Compensation. Compensation for three months ended March 31, 2007 decreased approximately $3.9 million and related primarily to shares issued to consultants for employees and consulting services in 2006. The shares issued as share based compensation were valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses for three months ended March 31, 2007 decreased approximately $2.5 million from approximately $5.9 million for the same period in 2006. The decrease consists of reductions in consulting, marketing, professional, administrative and travel expenses during 2007.

Depreciation and Amortization. Depreciation and amortization for three months ended March 31, 2007 increased to approximately $1,243,000 million from $521,000 for the same period in 2006. The increase in depreciation and amortization is related primarily to purchases of plant and equipment.

Interest Expense. Interest expense related primarily to short term convertible debts and long term debts for three months ended March 31, 2007 was approximately $13.5 million from $3.1 million for the same period in 2006. Interest expense consisted primarily of interest fees and the amortization of debt discounts. Interest expense consisted primarily of interest fees, late charges and registration penalties related to defaults on agreements in late 2006 and 2007

Liquidity and Capital Resources

Overview. Our principal sources of liquidity consist of cash and cash equivalents, cash provided by operations and issuances of debt and equity securities. In addition to funding operations, our principal short-term and long-term liquidity needs have been, and are expected to be, the debt service requirements of our senior convertible notes, the acquisition and construction of new facilities, capital expenditures and general corporate purposes. In addition, as our production operations ramp up, we anticipate significant purchases of soy oil, corn and other inputs necessary for biodiesel and ethanol production. During the six months ended June, 30, 2007 our cash and cash equivalents increased by approximately $243,000 million from the same period in 2006, primarily as the result of obtaining new credit facilities in the first quarter of 2007.

Net cash used in operating activities was approximately $20.6 million for six months ended June 30, 2007 compared to net cash used in operating activities of approximately $13.8 million for the same period in 2006. The increase in net cash flow used in operating activities relates to increasing operating costs as we ramp-up our operations, including higher cost of good sold, other selling, general and administrative expenses and interest expense.

Net cash used in investing activities was approximately $2.71 million for six months ended June 30, 2007 compared to net cash used in investing activities of approximately $17.5 million for the same period in 2006. The decrease in net cash used in investing activities related to purchases of fixed assets of $3.5 million during 2006 for our Durant facility, and a decrease of $13.9 million related to investments and advances related to letters of intent and investments we have entered into to own and operate biodiesel and ethanol facilities.

Net cash provided by financing activities was $22.9 million for six months ended June 30, 2007 compared to net cash provided by financing activities of approximately $26.5 million for the same period in 2006. Cash flows

provided by financing activities during six months ended June 30, 2007 relate primarily to new credit facilities totaling $30 million, less the repayment of prior debts of $8.7 million. In addition, $1.5 million relates to proceeds from the issuance of common stock.

We incurred net losses and negative cash flows from operations of approximately $60.2 million and $20.5 million, respectively, for the six months ended June 30, 2007. Of the net losses for the six months ended June 30, 2007 approximately $3.8 million relates to shares issued to employees and nonemployees for services rendered, and approximately $5.4 million relates to amortization of debt discounts. We had approximately $534,000 in cash and cash equivalents at June 30, 2007. Our working capital deficit at six months ended June 30, 2007 was approximately $53.1 million.

Current and Future Financing Needs —

Our limited operating history makes evaluating our business and prospects difficult. Our limited operating history and recent acquisitions make it difficult to evaluate our current business and prospects or to accurately predict our future revenues or results of operations. Our revenue and income potential are unproven, and our business plan is constantly evolving. The market for alternative fuels is evolving and we may need to continue to modify our business plan to adapt to these changes. As a result, we are more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.

Some of these risks relate to our potential inability to: effectively manage our business and operations; successfully maintain our low-cost structure as we expand the scale of our business; and manage rapid growth in personnel and operations.

We have a history of operating losses and we anticipate losses for the foreseeable future. Unless we are able to generate profits and positive cash flow we may not be able to continue operations. We incurred consolidated net losses from operations of approximately $8 million, before depreciation and non-cash share based compensation, for the six months ended June 30, 2007. We expect operating losses to continue for the foreseeable future as we incur expenditures for start up business operations and until the additional investors are obtained and construction of all plants are completed. With increased on-going operating expenses, we will need to generate significant revenues to achieve profitability. Consequently, we may never achieve profitability. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future.

For the year ended December 31, 2006, the report of our independent registered public accounting firm stated that our financial statements were prepared assuming that we would continue as a going concern. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate and increase profits, and obtain additional investors and necessary funding from outside sources.

We may have difficulty raising additional capital, which could deprive us of necessary resources to grow our business and achieve our business objectives and expansion strategy. We expect to continue to devote capital resources to fund our business plan. Our ability to raise additional fundings depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the prices of various commodities, particularly the prices of ethanol, soybean, corn, natural gas and unleaded gasoline. We might not have access to the funding required for the expansion of our business or such funding might not be available to us on acceptable terms. Given our current indebtedness, and limited liquidity and access to financial markets and required amounts of cash flow required to service our debt, we have increased our financial risks and have decreased the amount of funds available for our growth strategy, thereby making it more challenging to implement our strategy in a timely manner. Because our common stock is listed on the NASD OTC Bulletin Board, many investors may not be willing or allowed to purchase it or may demand steep discounts. Sufficient additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. If we are unable to raise additional funds when we need them, we may have to severely curtail our operations and expansion plans.

If we fail to remain current on our reporting requirements, we could be removed from the over-the-counter bulletin board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Companies trading on the over-the-counter bulletin board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13 in order to maintain price quotation privileges on the over-the-counter bulletin board.

There is significant volatility in our stock price. The trading price of our common stock on the over-the-counter bulletin board has been and continues to be subject to wide fluctuations. The market price of our common stock could be subject to significant fluctuations in response to various factors and events, including, among other things, the depth and liquidity of the trading market of our common stock, quarterly variations in actual or anticipated operating results, growth rates, changes in estimates by analysts, market conditions in the industry, announcements by competitors, regulatory actions and general economic conditions. In addition, the stock market from time to time experiences significant price and volume fluctuations, which may be unrelated to the operating performance of particular companies. As a result of the foregoing, our operating results and prospects from time to time may be below the expectations of public market analysts and investors. Any such event would likely result in a material adverse effect on the price of our common stock. In addition, the trading price of our common stock will continue to be volatile in response to factors including the following, many of which are beyond our control: variations in our operating results; announcements of technological innovations, new products or new services by us or our competitors; changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; our failure to meet analysts’ expectations; changes in operating and stock price performance of other energy companies similar to us; fluctuations in oil and gas prices; conditions or trends in the oil and gas and alternative fuels industry; additions or departures of key personnel; and future sales of our common stock.

The loss of any of our key personnel would likely have an adverse effect on our business. Our future success depends, to a significant extent, on the continued services of our key personnel, including plant managers. Our loss of any of these key personnel most likely would have an adverse effect on our business. Competition for personnel throughout the industry is intense and we may be unable to retain our current management and staff or attract, integrate or retain other highly qualified personnel in the future. If we do not succeed in retaining our current management and our staff or in attracting and motivating new personnel and plant managers, our business could be materially adversely affected.

We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights or increased costs. Our future success depends to a significant degree upon the protection of our proprietary technology. The misappropriation of our proprietary technology would enable third parties to benefit from our technology without paying us for it. Although we have taken steps to protect our proprietary technology, they may be inadequate and the unauthorized use thereof could have a material adverse effect on our business. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail.

Our expansion plans, including with respect to the sites in Texas, Oklahoma, Tennessee, Kentucky, Illinois and Mississippi, are subject to significant risks and uncertainties with respect to timing of completion, financing of construction costs and our ability to timely realize the benefits we anticipate of these additional sites. Accordingly, investors should not place undue reliance on our statements about our expansion plans or their feasibility in the timeframe anticipated or at all.

Our construction costs could increase to levels that would make construction of new facilities too expensive to complete or unprofitable. Our construction costs could materially exceed budgets, which may adversely affect our financial condition and our anticipated operating results. We believe that contractors, engineering firms, construction firms and equipment suppliers increasingly are receiving requests and orders from other biodiesel/ethanol companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial or commercial terms. We may suffer significant delays or cost overruns as a

result of a variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our facilities. Any new facility that we may complete may not operate as planned.

Our results of operations and financial condition will be significantly affected by the market price for biodiesel and the co-products from biodiesel production. Price and supply are subject to and determined by market forces over which we have no control. In 2005, approximately 75 million gallons of biodiesel were produced. In May 2006, the National Biodiesel Board estimated there were 65 active biodiesel plants producing an estimated 395 million gallons of biodiesel annually, with another 50 biodiesel plants under construction and 8 plants which are undergoing expansions. By the end of 2008, the National Biodiesel Board estimates there could be 714 million gallons of capacity. Biodiesel plants are operating or have been proposed in at least 39 states. In addition, investors should understand that we face a competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by the companies that supply our inputs. Cargill, Inc., a large supplier of soybean oil, is constructing a 37.5 million gallon biodiesel plant in Iowa Falls. Another large corporation and supplier of soybean oil, Archer Daniels Midland Co., plans to construct a 50 million gallon biodiesel plant in North Dakota. These plants will be capable of producing significantly greater quantities of biodiesel than the amount we will produce. Furthermore, these plants may not face the same competition we do for feedstock as the companies that own them are suppliers of the feedstock. In light of such competition, there is no assurance that we will be able to compete effectively in the industry. We may generate less income as a result, which would decrease the value of your shares.

Although the price of diesel fuel has increased over the last several years and continues to rise, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in the loss of some or all of your investment.

The success of our operations and business growth and expansion strategy depends upon our ability to raise additional equity and debt financing and our ability to generate sufficient cash flow from operations. We expect to continue to devote capital resources to fund our business plan. In order to support the initiatives envisioned in our business plan, we intend to raise additional funds through the sale of equity, debt or a combination of the two. Our operating performance and ability to raise additional financing depends on many factors beyond our control, including the prevailing economic conditions, state of the capital markets, the market price of our common stock and other risks and uncertainties including the prices of various commodities, particularly the prices of ethanol, soybean, corn, natural gas and petroleum diesel gasoline, our dependence on key suppliers and adverse changes in governmental incentives and governmental regulation. We might not have access to the funding required for the expansion of our business or such funding might not be available to us on acceptable terms. We might finance the expansion of our business with additional indebtedness or by issuing additional equity securities. The amount of any additional indebtedness could be substantial. We could face financial risks associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service our debt, or associated with issuing additional stock, such as dilution of ownership and earnings. An increase in our debt would decrease the amount of funds available for our growth strategy, thereby making it more challenging to implement our strategy in a timely manner, or at all. If future cash flows and capital resources are insufficient to meet our debt obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or debt financing. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to continue operations.

We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy. Earth acquired a liquid natural gas (“LNG”) production company in November 2006. This company is the largest producer and wholesaler of vehicle-quality liquid natural gas in the United States and is one of only five production facilities in the

country that produces clean liquid natural gas. This company offers turnkey fuel solutions, and leases storage, fuel dispensing equipment and fuel loading facilities. The LNG markets include transportation alternative fuel for transit systems, seaports, local delivery fleets and locomotive switch engines. This gas also has industrial and agricultural applications. Earth currently produces 82,000 gallons per day. Earth expects revenues will increase approximately $12 million per year related to LNG sales.

Management is focusing on expanding and improving its biodiesel production and distribution operations. Through acquisition, organic growth and funding via collateralized loans and private placement offerings, Earth plans to continue to increase the profitability of its operations necessary to support operations.

On February 28, 2007 and March 1, 2007 our LNG subsidiary obtained several credit facilities totaling $15 million and $5 million, respectively. The loan is secured by the LNG plant facility in Topock, Arizona. The $5 million revolving credit facility is advanced at the rate of 85% of accounts receivable. On March 23,2010, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years. The loan is secured by the Durant plant facility in Durant, Oklahoma.

Earth’s continued existence is dependent upon its ability to take advantage of acquisition opportunities, raise capital through private securities offerings, secure collateralized debt financing and use these sources of capital to grow and enhance its biodiesel, LNG, and ethanol production and distribution operations. Earth has also continued to raise capital through a variety of private securities offerings of its common stock. The current investments and properties status along with capital needs are as follows:


		%			Investment				Note				Future	Future Cash	Sources of
Name	Industry	Ownership			Amount		Advances		Receivable		Total		Obligations	Requirement	Capital
	(As of June 30, 2007 $ in 000’s)
Investments:

Truckers	Retail center		50	%		1,120	$	4,530	$	359	$	6,009	Construction	Estimated $3m	Seeking new investors/lenders

Corner-costs Hillsboro, Texas		(Also partially owned by Willie Nelson)

SMS- San Antonio, TX	Biodiesal - Letter of Intent (LOI)					—		—		—		—	Currently in default; total investment impaired

Vertex Houston, Texas	Biodiesal-Letter of Intent *(1,600k shares issued valued At $4,320k or $2.70 per share)					—		—		—		—	Currently in litigation; total investment impaired

Biodiesel Investment	Biodiesal plant		10	%		4,976		—		—		4,976	None	None	Subscription agreements with investors totaling Group-Illinois $39m on project

Moses Lake-Washington (Liquifaction LP)	Ethanol plant	80% (amended to ~15%)				—		—		—		—	Construction costs Subject to 5 day notice termination	$9.5m	Additional investors to contribute to total estimated project of $58m

HPS- New Orleans	Ethanol Plant-LOI					—		14,377		—		14,377	None	None	Litigation settled for $5m Non-compete and $22m Note Receivable

DFI-North Carolina	Ethanol plant-LOI					—		3,150		2,172		5,322	None	None	Additional investors to contribute to total project of $25m
(Note: All investments are recorded using the cost or equity method of accounting. There were no current operations on any investments, and thus there are no related equity investment entries to record profits and losses. All future sources of capital are to be from other investment groups unrelated to Earth. As a result at this time Earth is not required to put in any additional funding until other equity partners have been obtained. As other investors do come on board Earth will finalize letters of intent and record any liabilities as required by the agreements.)

Advances-Related Parties:

Blue Wireless	Technology	10% (Earth CEO is also on BOD of Blue)				30		—		—		30	None	Provider of IT services	Operations

Airo	Technology	0% (Note assigned From Blue Wireless)				—		—		697		69	7 None	None	Note receivable

Other Properties:

Grenada, Mississippi	Truck Stop		100	%		—		—		—		—	None	None	Cash flow provided from retail operations


		%			Investment			Note			Future	Future Cash	Sources of
Name	Industry	Ownership			Amount		Advances	Receivable	Total		Obligations	Requirement	Capital
					(As of June 30, 2007 $ in 000’s)
Other Properties (continued):

Grenada, Mississippi	Office space	0% (owned by director of Earth)				—	—	—		—	Lease obligations	$568,006-(Lease payments)	Cash flow provided from retail operations

Meridian- Mississippi	Pilot Bio- Diesel Operations		100	%		—	—	—		—	None	None	Pilot operations with fixed assets only- sold in 2007

Subsidiaries:

Durant Biofuels, Oklahoma	Biodiesal Plant	100% *(2,933k shares issued for acquisition valued at $7,157k, or $2.70 per share) (part of PP&E costs)				15,778	—	—		15,778	Note payable incurred for construction costs~$9m	Methanol Recovery System- Est cost $3.5m	Durant operations

Earth Biofuels Distribution Co.-Texas	Biodiesal	100% * (6,667k shares issued for acquisition of the company valued at $4,210k or .63 per share) (Goodwill of $3,981 on acquisition deemed impaired)				—	—	—		—	None-Royalty Contract payable to W. Nelson for $2 cents a gallon on all sales	Contract-w/ Motiva for biodiesal sales-contract cancelled in 2007	Motiva Sales

American Earth Fuels Co. LLC- Texas	Retail bio Stations		100	%		—	—	—		—	Determined to disband operations for this subsidiary And to record add’l Losses of $46k.	None-had previously put down payment of $250k on gas stations written off 12/31/06	NA

Earth Biofuels Co. LLC-Texas	Biodiesal Technology		50	%		—	—	—		—	None	None	Construction contracts To build biodiesal plants

Earth LNG Texas (including subsidiaries-Arizona LnG, LLC And Applied LNG Technologies USA, LLC) (LNG companies acquired from Parent Apollo Resources for 18,224k shares valued At $39.3million/parents basis)	Liquified Natural gas		100	%		39,567	—	—		39,567	$15m Note payable- 3 yr term note	None	LNG operations

Earth Ethanol Inc.	Ethanol		100	%		—	—	—		—	None	None	Created to hold Investment in HPS

The original business plans were to grow our ethanol and biodiesel production capacity significantly over the next several years. During the year ended 2006 the Company was in discussions relating to the proposed entry into three separate joint ventures for the following three sites listed in the table below:

Letters of Intent:



	New Orleans	Houston Facility-	North Carolina Facility-
	Facility-“HPS”	“Vertex”	“DFI”
Location	Plaquemines Parish,	Houston Shipping Channel,	Martin County, North
	Louisiana	Houston, Texas	Carolina
Ownership	50%	51%	51%
Anticipated closing month	August 2006	August 2006	August 2006
Purchase Price
Cash	$50,000,000 plus	$2,500,000	$25,000,000
	assumption of debt
Shares of our Common Stock	5,829,005	1,500,000	5% of shares of common
			stock of Earth Ethanol, Inc.
Months scheduled to be completed	12-14 months	1 month	Phase I: 12-14 months
			Phase II: 6 months after
			Phase I
Annual capacity (MMPGY)	60-80	10-20	Phase I: 55
			Phase II: additional 50-55

Subsequent to the above letters of intent the following occurred during the remainder of 2006 and into 2007.

HPS-

On August 31, 2006, Earth entered into letters of intent with HPS Development, L.L.C. which contemplated a joint venture in which a newly created limited liability company will own and operate a fuel ethanol distillery located on the Mississippi River in Plaquemines Parish, Louisiana, approximately nine miles southeast of New Orleans. As contemplated by the letters of intent, HPS Development was to acquire a 50% interest in the newly created limited liability company in exchange for contributing to the new operating company real property and improvements, including a currently idle ethanol distillery. Earth will acquire a 50% interest in the operating company for a purchase price consisting of cash in the amount of $50.0 million and the issuance of 5,829,005 shares of our common stock to HPS Development in addition to the assumption of a $40.0 million debt obligation to be incurred by the operating company in connection with the renovation of the facility. We anticipated the renovation of this facility will take 12 to 14 months, after which time we estimated the plant would have an ethanol production capacity of 60-80 MMGPY.

Earth had paid approximately $27 million towards the project when a breach of contract occurred (the funds were provided by the Securities Purchase Agreement dated July 24, 2006 totaling $52.5 million). No shares or warrants had been issued at this time, or subsequently related to the project. Earth filed a claim for breach of contract and default by SLE under the terms of the agreement. The Claim involved enforcement of certain rights under a contribution and purchase agreement regarding the construction and operation of the ethanol plant in Belle Chasse, Louisiana that we entered into with HPS/SLE wherein HPS/SLE agreed to contribute plant and property to a new company and we agreed to provide capital necessary to obtain a fifty percent ownership interest in Earth Ethanol and collectively, to help Earth Ethanol begin the construction and retrofitting work necessary to bring the plant online. One such issue in the Claim included Earth Ethanol’s learning that HPS, via SLE, attempted to sell a portion of the facilities’ equipment to an unaffiliated third-party, namely, Southridge Ethanol, Inc., a wholly-owned subsidiary of Southridge Enterprises, Inc. This sale could have increased construction costs. In order to protect and preserve the assets of the Company, Earth Ethanol notified Southridge of its interests. Southridge subsequently chose to not seek the acquisition of such equipment. In 2007, Earth entered into a settlement agreement with HPS during June 2007, whereby Earth received $4 million in cash and a non interest bearing note for $18 million. In addition, HPS signed an agreement not to compete valued at $5 million. The note is payable thru 2015.

Vertex-

Shares were issued to Vertex totaling 1.6 million shares valued at $4,320,000 at the date of issuance. No additional cash fundings were made and subsequently due to cash flow and market conditions production declined and the parties could not come to a final agreement. On February 5, 2007, Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract and fraud and subsequently a default judgment was entered in the amount of $5,070,640; thereafter a motion for new trial was granted. As a result of these actions the investment of $4,320,000 was written down to zero.

DFI-

On June 7, 2006, we entered into a letter of intent with and DFI Group, Inc. and Albermarle Bio-Refinery, Inc., which contemplates a joint venture in which Albermarle Bio-Refinery will convert into a limited liability company and own and operate an ethanol facility in Martin County, North Carolina. As contemplated by the letter of intent, Albermarle Bio-Refinery will acquire a 49% interest in the newly created company in exchange for contributing to the converted operating company real property and improvements, including permits and plans. One of our wholly owned subsidiaries to be formed will acquire a 51% interest in the operating company in exchange for a purchase price consisting of cash in the amount of $25.0 million and the issuance of shares of common stock of the new subsidiary equal to 5% of the total authorized shares of such subsidiary. A new ethanol production facility will be constructed by the new operating company in two phases. We anticipate that the construction of phase I of the facility will take approximately 12 to 14 months, after which time we estimate the plant will produce approximately 55 MMGPY. We anticipate that the construction of phase II will take approximately six months after the completion of phase I, after which time we estimate the plant will produce approximately an additional 55 MMGPY.

In connection with the non-binding letter of intent, we have loaned an aggregate of $5.2 million to Albermarle Bio-Refinery, Inc. for the purposes of permitting, engineering and site improvements. In exchange for the loan, Albermarle Bio-Refinery, Inc. issued us two promissory notes, each of which bears interest at 4.85% and matures one year from the date of the note. Principal and accrued interest are due at maturity. Upon the closing of the transaction, the notes will automatically convert into equity of the new operating company and the purchase price payable by us will be reduced by the amount of any remaining principal and accrued and unpaid interest. Our rights and obligations set forth in the non-binding letter of intent are subject to the negotiation and execution of definitive documentation. We can make no assurances that the final terms of the transaction will conform to the terms of the letter of intent or that the parties will even enter into definitive documents.

Under the DFI letter of intent, Earth has funded a total of $5,322.000, which have been rolled into convertible notes. There have been no additional funds or shares issued, and the Company is currently in search of additional investors to the project in order to raise capital and finalize the agreement.

Additional investments entered into during the year ended 2006 were as follows:

Truckers Corner-

Earth has an investment which consists of a retail facility which was formerly called Willie’s Place at Carl’s Corner. It is currently under renovations and is expected to be open the summer of 2007. The truck stop complex will offer many amenities for truckers and travelers. The features will include two restaurants, a convenience store, gift shop, Willie Nelson memorabilia, the original 850-seat theater, media and gaming lounges, laundry facilities, private showers, and BioWillie ^® brand biodiesel fuels.

Earth advanced cash and issued 125,000 shares of stock valued at $260,000 for the initial investment in this limited partnership. The cash and shares totaled approximately $1,120,000. Subsequent advances and notes receivable have been made toward the construction of the above noted facility. Earth is currently looking for additional investors in order to complete the project.

SMS-

On May 5, 2006, Earth signed a letter of intent to acquire a biodiesel production facility from Systems Management Solutions, Inc. The facility, located near San Antonio, Texas, currently supplied most of its production of biodiesel to us, and was in the process of expanding its production capacity. The facility’s current biodiesel production capacity is 6 MMGPY. Earth had a note receivable totaling approximately $788,000, and had made other advances totaling $22,000. Subsequently it has been noted that the property owner of the land being used by the plant filed bankruptcy. Due to lack of current operations, the investment has been deemed impaired and losses totaling $810,000 have been recorded.

Biodiesel Investment Group-

On September 21, 2006, Earth invested $5 million for an equity interest in a newly-formed company named “Biodiesel Investment Group”. Biodiesel Investment Group and Bunge North America, Inc. (“Bunge”), one of the nation’s leading agribusiness firms, have partnered to start the construction of a biodiesel plant with an annual capacity of 45 million gallons. Once completed, the plant will be Illinois’ largest biodiesel production plant. It is anticipated that Earth will enter into an off-take agreement with the new Illinois LLC for some portion of the biodiesel production output of the plant. Earth plans to market its share of the new plant’s production to local and other new markets under its “BioWillie” brand name. Construction is still in the beginning stages, and estimates are that it will take a year to 18 months to complete. As of June 30, 2007 the Group is seeking additional equity investors.

Moses Lake, Washington

Effective December 20, 2006, Earth Ethanol, Inc. (the “Company), a Delaware corporation and a wholly-owned subsidiary of Earth Biofuels, Inc., entered into an Acquisition Agreement (“Agreement”) with Liquafaction Corporation, a Washington corporation, Newco Liquafaction, Inc., a Washington corporation, and Earth Ethanol of Washington, LLC (herein, “Earth-Washington”), a Delaware limited liability company. Under the Agreement, the Company will acquire an eighty percent ownership of Earth-Washington, which will own an ethanol production facility located in Moses Lake, Washington. The facility, initially built to produce up to 6 million gallons per year, is being expanded to produce up to 36 million gallons per year by the fourth quarter of 2008. The Agreement contemplates incremental ethanol production beginning in June of 2007. Under terms of the Agreement, the Company will pay consideration of approximately 60% in common stock of Earth Biofuels and 40% cash. Initial cash payments totaling approximately $7.13 million were due over the next four months and all remaining cash and stock payments totaling approximately $43.3 million shall be paid as the plant reaches specified ethanol production milestones. Should the plant reach certain performance criteria in advance of planned production levels, then a bonus of approximately $7.6 million may be paid in restricted stock. The Agreement also contains customary provisions for transactions of this type, including provisions regarding construction phases, performance standards, representations and warranties, indemnifications, restrictive covenants, and confidentiality requirements

Initial cash payments of $7.13 million were actually due over the first four to five months of 2007 during the construction of the ethanol plant with an initial production capacity of 12 million gallons per year, which was estimated to be completed by August 16, 2007 with hopes of sooner completion dates. However, only the initial payments totaling $100,000 had been made as December 31, 2006, and were recorded as an investment. There were also additional progress payments of between $25,000 and $1.3 million each to be made under the original agreement, however, some of these payments were not made by the Company due to negative cash flows. On May 27, 2007 the other parties to the agreement filed a default notice. Subsequently, the agreement was amended, however, on June 20, 2007 the other parties filed another default notice. The Company has again renegotiated the agreement and has funded approximately $686k as of June 30, 2007. The other party to the agreement has the right to terminate this agreement with any 5 day notice, and is also required to provide certain assets to the company before payment is due. In addition, construction of the underlying plant has not commenced at this point in time. As such, even though the acquisition agreement provides for future cash payments, these are not probable liabilities of the company as defined by Statement of Financial Accounting Concepts No. 6. Con 6 states that liabilities are probable future

sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets to other entities in the future as a result of past transactions or events. Based on the past transactions above this investment by Earth Biofuels was considered uncertain as of the year end December 31, 2006, and thus $7.3 million in liabilities was not deemed appropriate to accrue at the time. As of June 30, 2006, the Company is looking for other investors to either take Earth out of the investment or contribute to the investment before construction of the plant will begin. Due to the subsequent receipt of a new termination notice, this investment was deemed impaired and was written off to earnings.

Subsidiaries:

Earth Biofuels Technologies-USA

Effective February 28, 2006, Earth signed an agreement to become the exclusive licensor in the United States for the proprietary biodiesel production technology of Biodiesel Brazil, a company owned by the renowned Dr. Miquel J. Dabdoub. A professor from the University of São Paulo in Brazil, Dr. Dabdoub is founder and chairman of Biodiesel Brazil and a world authority on the production of biodiesel. Dr. Dabdoub holds a number of patents and proprietary technologies relating to the production and usage of biodiesel fuel. As a world-renowned biodiesel authority and the holder of proprietary technologies relating to the construction of biodiesel facilities, he is an expert in the efficiencies, output capacities, and quality control measures relating to biodiesel production and processing. Earth holds the exclusive rights to Dr. Dabdoub’s technologies throughout North and South America.

Dr. Dabdoub, a professor at the University of São Paulo, Brazil, holds a number of patents and proprietary technologies related to the production and usage of biodiesel fuel. He has played, and continues to play, a key role in the development of Europe and Brazil’s biodiesel industries by consulting on a number of high-producing facilities, and has worked with several major automobile manufacturers to develop optimal engine technologies for the utilization of biodiesel fuel.

On May 4, 2006, we agreed with Dr. Miguel Dabdoub to form a technology company by the name of “Earth Biofuels Technology Company, LLC,” to be owned 50% by us and 50% by Dr. Dabdoub. In exchange for our 50% interest, we paid $225,000, and we issued 1,800,000 shares of our common stock valued at $4,410,000 to Dr. Dabdoub and Apollo Resources issued 100,000 shares of its common stock to Dr. Dabdoub. Based on Earth’s evaluation of the transactions the value of the Earth shares were expensed as consulting fees, in connection with the use of Dr. Dabdoub expertise. Dr. Dabdoub, an expert in the field of biodiesel production facility technologies, has contributed an exclusive license to the technology company to make use of his proprietary technologies, for use in North America. Accordingly, the purpose of the new entity is to utilize Dr. Dabdoub’s proprietary technologies, to design and construct biodiesel production facilities, both for us directly and for third parties. Additionally, we will use Mr. Dabdoub’s expertise to assess potential acquisitions of biodiesel production facilities, and to assist in the due diligence process for our other business opportunities. This company is to be funded from construction contracts obtained.

EBT will provide design and flow processes and then will act as a general contractor by hiring subcontractors from the surrounding areas to build the facilities. EBT will hire key personnel (such as plant manager, safety manager and chemists) at least two months prior to completion of construction, in order for such personnel to be properly trained and ready for plant operation and management. We will be highly dependent upon Dr. Miguel Dabdoub to design and assist with oversight of the construction of our plants. We expect that we will also be highly dependent upon Dr. Miguel Dabdoub’s experience and ability to train personnel in operating our plants. If the completed plants do not operate to the level anticipated by us in our business plan, such failure could cause us to halt or discontinue production of biodiesel, which could damage our ability to generate revenues and reduce the value of your shares.We will be highly dependent upon the technology provided by Dr. Miguel Dabdoub for use in our biodiesel plants. Failure of the technology could cause us to halt or discontinue production of biodiesel, which could damage our ability to generate revenues and reduce the value of your shares. We will be highly dependant upon the technology supplied by EBT (which originated with Dr. Dabdoub) for our biodiesel plants. Failure of the technology could cause us to halt or discontinue production of biodiesel, which could damage our ability to generate revenues and reduce the value of your

shares. An assertion by a third party as to the rights to the technology could cause us to halt or discontinue production of biodiesel, which could damage our ability to generate revenues and reduce the value of your shares.

The single barrier to market for most potential producers has been the cost associated with building a quality plant. While inexpensive compared to most energy projects, the cost of technology has still been relatively high, resulting in the elimination from the arena of many sound projects. Based on these observations, the mission of this company was formed. Earth Biofuels Technology will offer an advanced biodiesel plant to the market at a relatively low cost, utilizing the highest quality technology and equipment available on the market.

Earth LNG, Inc.- Topock, Arizona

Earth LNG, Inc. is a wholly owned sub of Earth Biofuels, Inc. Earth owns a liquefied natural gas (LNG) processing facility in Topock, Arizona, that currently produces over 80,000 gallons of vehicle-grade LNG per day. LNG produced by the plant is sold primarily to municipal and commercial fleet customers located along the west coast of California. The domestic LNG business is in line with the core focus of Earth Biofuels, which is the production and marketing of clean-burning alternative fuels that help reduce dependence on foreign oil.

Earth LNG, Inc is the largest producer and wholesaler of vehicle-quality lng in the Western United States and Mexico. Earth offers turnkey fuel solutions, including clean lng fuel (99% methane gas) and delivery, equipment storage, fuel dispensing equipment and fuel loading facilities. The plant where natural gas is liquefied is located in Topock, Arizona, where the insulated storage tanks are kept below ground. Feedstock sources for LNG include pipeline gas, landfill gas and virtually any other methane sources. Earth’s distribution of lng is accomplished through the largest and most effective lng distribution infrastructure in the industry. LNG has access to approximately 54 trailers, and over 50 customer locations for the 82,000 gallons per day market share. Government mandates, incentive programs, grants and tax credits encourage companies and municipalities to convert to the use of lng.

The production facility is located in Topock, AZ, is just one mile east of the Arizona border with California. The plant has a maximum capacity of 86,000 gallons per day, and is currently running at approximately 94% efficiency. The facility is strategically located in close proximity to its primary metropolitan markets along the west coast to minimize transportation costs. The plant’s natural gas feedstock supply is fed by an El Paso Natural Gas pipeline. Other feedstock sources for LNG production can come from landfill gas or other methane sources like agricultural biomass facilities.

The market in the U.S. for clean, vehicle-grade LNG today revolves around Los Angeles, California. California has solidly adopted LNG as a vehicle fuel and has passed legislation in support of spreading further its use in the state. This market has been the focus of Earth’s efforts for over ten years.

Los Angeles, including urban portions of the city, plus Orange County, Riverside and San Bernardino counties, collectively was designated the South Coast Air Quality Management District (SCAQMD). This area of 10,743 square miles is home to over 16 million people (the second most populated urban area in the United States) and is one of the smoggiest areas in the United States today. California encourages and provides money to assist individual and fleet owners to acquire vehicles that are LNG powered.

Earth LNG’s primary customers in California are municipal fleets such as Port Yard Tractors, Orange County buses and garbage trucks, Orange County Transportation (city buses), as well as commercial vehicles like those belonging to United Parcel Service in the Los Angeles area, and overnight return-to-base, garbage-disposal fleets up and down the California coast. Special cryogenic tank trailers are used to transport ultra-cold liquefied natural gas from manufacture to small-scale storage for end users. Earth LNG owns several of these specialty trailers and through its relationship with the Jack B. Kelley trucking company, has access to the nation’s largest fleet of these trailers.

Jack B. Kelley was a previous shareholder in Apollo LNG and holds ~15% of the outstanding shares of Apollo Resources, (Earth’s parent corporation). Apollo LNG sold its shares in the lng business in November 2006 to Earth, along with Jack B. Kelley’s interests. Apollo received 9,422,111 millions shares of Earth Biofuels, and the Jack B. Kelley and related entities received 9,422,111 shares also. This transaction was accounted for as a pooling of interest on Earth’s

books, whereby the same basis as was held by the prior shareholders carried over at book value of $39,300,000 to Earth Biofuels.

Additional monies from lenders were obtained during the first quarter of 2007, totaling $15 million, to provide working capital for Earth. The Earth LNG business is the guarantor and primary debtor on the underlying amount. The note is cross collateralized by the Durant plant as well. As part of the agreement, interest reserves for the first year were withheld from the proceeds. The note has accrued interest at the approximate rate of 15% for the first six months of the debt. The principle is due at maturity in three years.

This subsidiary is self sustaining from current operations, and continues to obtain new customers in the market, thereby increasing profit margins.

Critical Accounting Policies and Estimates

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

Revenue Recognition — The geographic location of our customer base is primarily in the Texas and California markets, although management intends to expand operations throughout the Southeastern and Southwestern United States. Sales are recorded at net realizable value, net of allowances for returns, upon shipment of products to customers. We record revenue from federal incentive programs related to the production of biodiesel when we have produced, sold, blended the biodiesel, and completed all the requirements of the applicable incentive program. These are accounted for on a gross basis.

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

Accounting for Stock Based Compensation — We use the principles defined in SFAS 123, “Accounting for Stock-Based Compensation,’ to account for stock options, awards and warrants. Under this pronouncement, we determine the fair value of awards, options and warrants using the Black-Scholes Option Price Calculation model, and recognize the fair market value of the options, awards and warrants when granted or vested.

Accounting for Derivatives — Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our structured borrowings, are separately valued and accounted for on our balance sheet. Fair values for exchange-traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

In September 2000, the Emerging Issues Task Force issued EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,” which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in earnings. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required. In accordance with SFAS 133 and EITF 00-19, we determined that several of the outstanding warrants to purchase our common stock and the embedded conversion feature and certain other features of several of our financial instruments should be separately accounted for as assets or liabilities. Our financial statements reflect the fair value of these warrants and the conversion and other embedded derivatives

features on our balance sheet and the unrealized changes in the values of these derivatives in our consolidated statements of operations as “Gain (loss) on derivative liability.” As the notes which included derivatives were paid or converted during the quarter, there is no derivative liability at year end 2006.

Net Loss Per Share Data — Basic and diluted net loss per common share are presented in conformity with the SFAS No. 128, “Earnings Per Share”. Diluted net loss per share is the same as basic net loss per share as the inclusion of outstanding warrants until their exercise would be anti-dilutive.

Reclassifications — Certain previously reported amounts have been reclassified to conform to the current presentation.

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Impairment of Long-Lived Assets — In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, Earth reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. Earth assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.

Debtor’s Accounting for a Modification or Exchange of Debt Instruments — Statement of Financial Accounting Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” requires an exchange of debt instruments with substantially different terms to be accounted for as debt extinguishment.

In November 2006, the Emerging Issues Task Force issued EITF Issue 98-19, “Accounting for a Modification or Exchange of Debt Instruments”, which states that an exchange or modification is considered substantial when the present value of cash flows under the new debt instrument is at least 10% different from the present value of the remaining cash flows under the terms of the original instrument, and should be accounted for in accordance with FAS 140. If the changes are not considered substantial then the new terms are deemed to be modifications and not debt extinguishments.

Off-Balance Sheet Arrangements

At June 30, 2007 Earth had no obligations that would qualify to be disclosed as off-balance sheet arrangements.

Contractual obligations

Current Debt Obligations —

In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share. Earth used the net proceeds from this offering to repay in full the remaining unpaid principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of senior convertible promissory notes issued in May, June and July 2006, and expects to use the remaining proceeds from the offering for its program of building and acquiring interests in biodiesel and ethanol production facilities, and for other general corporate purposes.

On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in March, 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share.

Earth has several demand notes totaling $200,000 as of March 31, 2007. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.

On January 19, 2007 Earth obtained proceeds totaling $750,000 from three separate individuals and companies. In connection with this debt Earth issued warrants for common stock totaling 375,000 shares, exercisable at $.01 per share for 10 years. The notes were repaid in March 2007. At the date of original issuance the warrants had a relative fair value of $750,000. Amortization on the debt discount totaled $750,000 for the six months ended June 30, 2007.

The LNG subsidiary obtained a new revolving credit as of March 31, 2007, and used the proceeds to repay a former line of credit. Earth obtained a $5 million revolving credit facility which is advanced at the rate of 85% of accounts receivable. Interest of prime plus 2% is payable monthly

On March 23, 2007, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility, In connection with these facilities interest reserves were escrowed totaling $1,053,000 for interest payments due the first twelve months.

Leases —

On October 17, 2005, EBO leased a truck stop in Grenada, Mississippi from RBB Properties, LLC which is controlled by R. Bruce Blackwell, a shareholder and Director of Earth. The lease agreement provides for monthly payments of $10,000 over a five year term. EBO is responsible for operations and repair and maintenance of the facility.

Risk Factors

Feedstocks, natural gas, petroleum products and chemical prices have fluctuated in response to changing market forces. The impacts of these price fluctuations on earnings have varied. For any given period, the extent of actual benefit or detriment will be dependent on the price movements of individual types of feedstocks, taxes and other government impacts, price adjustment lags in long-term contracts, and natural gas production volumes. Accordingly, changes in benchmark prices for these raw materials only provide a broad indicator of changes in the earnings experienced in any particular period. In these very competitive environments, earnings are primarily determined by margin capture rather than absolute price levels of products sold. Operating margins are a function of the difference between what a produces pays for its raw materials and the market prices for the range of products produced. These prices in turn depend on global and regional supply/demand balances, inventory levels, plant operations, import/export balances and weather. Such conditions, along with the capital-intensive nature of the industry and very long lead times associated with many of our projects, underscore the importance of obtaining a strong financial position.

Earth’s revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.

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

	•		the ability to quickly bring new production capacity on stream;

	•		the fluctuating prices of feedstocks and natural gas;

	•		the ability to raise the necessary capital to fund working capital, execute mergers, acquisitions and asset purchases;

The market in which Earth competes is intensely competitive and actions by competitors could render its services less competitive, causing revenue and income to decline;

The ability to compete depends on a number of factors outside of Earth’s control, including:

	•		the prices at which others offer competitive services, including aggressive price competition and discounting;

	•		actions taken by the Federal Government or State Governments to remove subsidies and tax credits associated with the biodiesel business;

	•		large swings in the price of oil which will affect the price at which Earth can purchase fuel supplies;

	•		the ability of competitors to undertake more extensive marketing campaigns;

	•		the extent, if any, to which competitors develop proprietary tools that improve their ability to compete; and

	•		the extent of competitors’ responsiveness to customer needs.

Earth may not be able to compete effectively on these or other factors. If Earth is unable to compete effectively, market position, and therefore revenue and profitability, would decline.

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

Future success will depend upon Earth’s ability to enhance existing products and to introduce new products to meet the requirements of customers in a rapidly developing and evolving market. Present or future products may not satisfy the needs of the market. If Earth is unable to anticipate or respond adequately to its customers’ needs, lost business may result and financial performance will suffer.

Earth is dependent on a limited number of key personnel, and the loss of these individuals could harm its competitive position and financial performance.

Earth’s business consists of the production, marketing, distribution and sale of biodiesel fuel, LNG and ethanol through Earth’s network of wholesale and retail outlets and, accordingly, its success depends upon the efforts, abilities, business generation capabilities and project execution of its executive officers. Earth’s success is also dependent upon the managerial, operational and administrative skills of its executive officers. The loss of any executive officer could result in a loss of customers or revenue, and could therefore harm Earth’s financial performance.

Earth’s ability to secure debt and equity financing could have an adverse effect on Earth’s financial health.

The inability to raise capital to fund working capital needs may:

	•		increase Earth’s vulnerability to general adverse economic and industry conditions;

	•		limit Earth’s ability to fund future working capital and other general corporate requirements; and

	•		limit Earth’s flexibility in planning for, or reacting to, changes in Earth’s business and the industry in which it operates.

There can be no assurance that Earth’s business will generate sufficient cash flow from operations or that future borrowings will be available to it in an amount sufficient to enable it to obtain debt or to fund other liquidity needs.

Forward Looking Statements

Certain disclosure and analysis in this report, including information incorporated by reference, includes forward-looking statements that are subject to various risks and uncertainties. In addition to statements of historical fact, this Annual Report on Form 10-KSB contains forward-looking statements. The presentation of future aspects of Earth’s business found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Without limiting the generality of the foregoing words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” or “could” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements.

These forward-looking statements are subject to certain events, circumstances, assumptions, risks and uncertainties that may cause Earth’s actual results to be materially different from any future results expressed or implied by Earth in those statements. Some of these risks might include, but are not limited to, the following:

	•		volatility or decline of Earth’s stock price;

	•		potential fluctuation in quarterly results;

	•		ability of Earth to earn revenues or profits;

	•		sufficiency of revenues to cover operating costs;

	•		availability and cost of raw materials;

	•		any impact of competition, competitive products, and pricing;

	•		adequacy of capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;

	•		ability to commercialize its technology or to make sales;

	•		overall expected growth in the alternative fuels industry;

	•		changes in interest rates and capital market conditions;

	•		changes in laws and other regulatory actions;

	•		acquisitions of business enterprises, including the ability to integrate acquired businesses effectively;

	•		litigation with or legal claims and allegations by outside parties; and

•

other assumptions described in this report, as well as other reports filed with the United States Securities and Exchange Commission, underlying such forward-looking statements.

There is no assurance that Earth will be profitable. Earth may not be able to successfully develop, manage or market its products and services, Earth may not be able to attract or retain qualified executives and technology personnel, Earth’s products and services may become obsolete, government regulation may hinder Earth’s business, and additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in Earth’s businesses.

Earth undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents Earth files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB filed by Earth and any Current Reports on Form 8-K filed by Earth.

Item 3. Controls and Procedures

Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Sec’s rules and forms.

Changes were made in our internal control over financial reporting during our last fiscal quarter to which this Quarterly Report on Form 10-QSB relates that have materially affected our internal control over financial reporting. Based on their evaluation, as of June 30, 2007, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective.

Extension of Compliance Date for Management’s Report on Internal Control Over Financial Reporting

Earth is a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act. On September 21, 2005, the Securities and Exchange Commission extended the compliance dates for non-accelerated filers concerning the provisions of Exchange Act Rule 13a-15(d) or 15d-15(d), whichever applies, requiring an evaluation of changes to internal control over financial reporting requirements with respect to Earth’s first periodic report due after the first annual report that must include management’s report on internal control over financial reporting. A company that is a non-accelerated filer must begin to comply with these requirements for its first fiscal year ending on or after December 15, 2007. In addition, the compliance period was extended to the amended portion of the introductory language in paragraph 4 of the certification required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers’ responsibility for establishing and maintaining internal control over financial reporting for Earth, as well as paragraph 4(b). The amended language must be provided in the first annual report required to contain management’s internal control report and in all periodic reports filed thereafter. The extended compliance dates also apply to the amendments of Exchange Act Rules 13a-15(a) and 15d-15(a) relating to the maintenance of internal control over financial reporting.

Under the internal control reporting provisions of the Exchange Act, management will be responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Earth’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Earth; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts

and expenditures of Earth are being made only in accordance with authorizations of management and directors of Earth; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Earth’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Prior to the extended deadline in 2007, management will conduct an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management will determine whether Earth’s internal control over financial reporting is effective. Management’s assessment of the effectiveness of Earth’s internal control over financial reporting will be audited by an independent registered public accounting firm and stated in their report which will be included in Earth’s Form 10-KSB filing.

There were no changes in Earth’s internal controls that have materially affected, or are reasonably likely to materially affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

H.C. Wainwright & Co., Inc. (“HCW”) commenced arbitration against us on July 20, 2006, asserting a claim for breach of contract relating to a March 7, 2006 letter allegedly appointing H.C. Wainwright our placement agent for a limited time for the sale of our securities. H.C. Wainwright is seeking an award of unpaid commissions, warrants for the purchase our common stock, and attorneys’ fees and costs. Earth filed an answering statement on August 25, 2006, and denied that it was liable to HCW for breach of contract. Among other things, Earth asserts that any agreement was terminated prior to any alleged breach, HCW failed to perform as promised, and HCW made material misrepresentations of fact to induce Earth in to the alleged agreement. The arbitration proceeding is at an early stage and no discovery has been taken or dates established. Earth intends to vigorously defend this claim. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain.

An Award of Arbitration was granted in July 2007, in the absence of representation by Earth. Earth was ordered to pay $5,656,000 with 9% interest calculated annually, attorney fees of $118,887.10, and an arbitration fee of $35,120. This matter was thought to be settled by actions taken previously by the Company. Earth is currently deciding whether to take legal action against HC Wainwright for fraud. In addition, Earth is appealing this award and losses, if any, cannot be reasonably estimated at this time.

On May 13, 2006, Earth Biofuels, Inc. (the “Company”) signed a Letter of Intent to acquire a 51% equity interest in Vertex Energy, LP, a company that owns a chemical processing facility adjacent to the Houston Ship Channel in Houston, TX. .On February 5, 2007 Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract and fraud and subsequently a default judgment was entered in the amount of $5,070,640; thereafter a motion for new trial was granted. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. The company is in the process of filing a countersuit.

We have counterclaimed this action claiming fraud and fraudulent inducement. We have petitioned the court seeking declatory judgment and declaring the agreement and the Limited Partnership Agreement set aside, and all of the assets of Vertex Processing be awarded to Earth. In addition, the Company has petitioned the court to require Vertex and Gehrig to be responsible for the payment of the outstanding obligations, liabilities and indebtedness of Vertex due to their fraudulent conduct. Losses, if any, cannot be reasonably estimated at this time.

Two mechanics liens and breach of transportation agreement regarding freight bills were filed against the Durant property and LNG, respectively, in December, 2006. The mechanics liens were filed on December 18, 2006, for $1,704,259 by Lloyd Plyler Construction, and on December 21, 2006, for $104,889 by Simplex Grinnell, LP. These liens and freight bills have been released and resolved subsequent to year end.

These mechanic liens were paid off in 2007.

Effective December 20, 2006, Earth Ethanol entered into an Acquisition Agreement (“Agreement”) with Liquafaction Corporation , a Washington corporation, Newco Liquafaction, Inc., a Washington corporation , and Earth Ethanol of Washington, LLC (herein, “Earth-Washington”), a Delaware limited liability company . Subsequent to year end Liquafaction Corporation has filed for termination of agreement due to prior default on funding requirements. Earth Ethanol is currently reinitiating this investment. Subsequent to year end Earth Ethanol and Liquafaction entered into an amended acquisition agreement. Under terms of the amended agreement, the Company will pay consideration of approximately 40% in common stock of Earth Biofuels and 60% cash. This project is also referred to as Moses Lake. As stated above in item number 3, the Company has again renegotiated the agreement and has funded approximately $686k as of June 30, 2007. The other party to the agreement has the right to terminate this agreement with any 5 day notice, and is also required to provide certain assets to the company before payment is due. In addition, construction of the underlying plant has not commenced at this point in time. As such, even though the acquisition agreement provides for future cash payments, these are not probable liabilities of the company as defined by Statement of Financial Accounting Concepts No. 6. Con 6 states that liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets to other entities in the future as a result of past transactions or events. In addition, the statements note that the presence or absence of future economic benefit that can be obtained and controlled by the entity can often be discerned reliably only with hindsight. Based on the past transactions above this agreement, and or investment by Earth Biofuels was considered uncertain as of the year end December 31, 2006, and thus $7.3 million in liabilities, and other shares payable was not deemed appropriate to accrue at the time. As of June 30, 2006, the Company is looking for other investors to either take Earth out of the investment or contribute to the investment before construction of the plant will begin. There are no estimated losses to be incurred on this investment and default noted above.

On or about April 19, 2007, JM Allen & Associates, Inc. filed a civil action in the District Court of Rusk County, Texas for the 4th Judicial District of Texas, entitled JM Allen & Associates, Inc. v. Earth Biofuels, Inc., alleging fraudulent inducement and non-performance under a series of oral alleged agreements to provide labor and materials in the aggregate amount of $1,900,000; and also filed a request for disclosure, admissions, interrogatories, and request for production of documents. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain.

Earth argues that only $400k of work and services was provided. This case is currently stayed until the involuntary Chapter 7 petition has been resolved.

Breaches related to the Security agreements and underlying accredited investors (Castlerigg Master Investments, Ltd, Evolution Master Fund, Ltd, Kings Road Investments, Ltd, Capital Ventures International, Radcliffe SPC, Ltd, Cornell Capital Partners, LP, Cranshire Capital LP,

Portside Growth and Opportunity Fund Gundyco ITF Excalibur Limited Partnership and Whalehaven Capital Fund Ltd)were made related to the periods October 1,2006 through March, 2007, and pursuant to the registration requirements of the Registration Rights Agreement, each dated July 24, 2006, and August 11, 2006, respectively. Further, Earth executed confessions of judgment in the approximate amount of $15,956,731, in favor of the accredited investors.

As stated in our response for item number 4, on July 11, 2007, a petition for involuntary Chapter 7 bankruptcy was filed against Earth Biofuels, Inc. (the “Company”) by Castlerigg Master Investments Ltd., Radcliffe SPC Ltd., Portside Growth and Opportunity Fund, Cornell Capital Partners LP and Evolution Master Fund Ltd (collectively, the “Noteholders”). The Company intends to vigorously contest the involuntary bankruptcy filing and expects to prevail upon conclusion of a trial on the merits.

Item 2. Equity Securities and Use of Proceeds

Market for Registrant’s Common Equity

Earth’s common stock is traded on the OTCBB under the symbol EBOF. The stock prices set forth below represent the highest and lowest sales prices per share of Earth’s common stock as reported by the OTCBB. The

prices reported in the following table reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions.


Quarter Ended	High		Low
June 30, 2007	$	.20	$	.18
March 31, 2007		.41		.39
December 31, 2006		1.29		.98
September 30, 2006		2.35		2.25
June 30, 2006		3.15		2.85
March 31, 2006		2.65		2.44
December 31, 2005		1.20		.35
September 30, 2005		.92		.24

Holders of Record

As of July 31, 2007, there were approximately 196 holders of record of Earth’s common stock, although we believe that there are additional beneficial owners of our common stock who own their shares in “street name.”

Dividends

There have been no cash dividends declared on our common stock since our company was formed. Dividends are declared at the sole discretion of our board of directors. It is not anticipated that any dividends will be declared for the foreseeable future on our common stock.

Equity Compensation Plan Information

Our Board of Directors and a majority of our stockholders adopted a written stock option and award plan in 2006. This plan provides for the grant of options or restricted share amounts for up to 5,000,000 shares of common stock. From time to time our Board of Directors has in the past, and may in the future, issue to consultants or other third parties common stock, and options or warrants that are not pursuant to the plan for compensatory purposes or pursuant to financings. The table below sets forth certain information as of December 31, 2006 regarding the shares of our common stock granted or issuable upon exercise of options or warrants granted as compensation for services.


			Number of Securities
			Remaining Available for
	Number of Securities		Future Issuance Under
	Issued or Issuable Upon		Equity Compensation Plans
	Exercise of Outstanding		(Excluding Securities in
	Options, Warrants and		the First Column of This
Description	Rights		Table)
Compensatory common stock awards approved by security holders		5,000,000		0
Compensatory common stock awards and warrants or options not approved by security holders		14,365,812		N/A

Description of Securities

Common Stock — As of June 30, 2007, Earth had 240,425,887, shares of its common stock issued and outstanding; 400,000,000 shares authorized. Common stock holders have full voting rights.

Preferred Stock — As of June 30, 2007, the there were no shares of its preferred stock issued or outstanding, and 15,000,000 shares are authorized.

Debt securities and Warrants —

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

Due to ongoing renegotiations with the above investors, Earth did not make the first quarterly interest payments due October 1, 2006, or register the underlying securities within 30 days from closing in accordance with the original securities purchase agreement dated July 24, 2006 and August 11, 2006. As such, penalties and interest totaling approximately have accrued at the default rate of 15% interest, plus 1.5% for the amount outstanding for registration penalties, and an 18% late charge. Subsequent to year end Earth brought all coupon rate interest current totaling $1,574,222.

At the date of original issuance the warrants had a relative fair value of $18,808,359, and Earth recognized a beneficial conversion feature in the amount of $42,906,599 based on the intrinsic value of the conversion feature. Amortization on the debt discount totaled $3,273,933 for the year ended December 31, 2006.

Unless converted or redeemed as described above, the 8% secured convertible notes are due in 2007.

During the second and third quarters of 2006, Earth received $22.5 million in proceeds from various investors in relation to convertible notes including warrants. The conversion features and exercise prices were at different variable market prices. In addition certain of Earth’s convertible debts were convertible into an indeterminate number of shares. As such, Earth evaluated the application of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“SFAS No. 133”), and EITF 00-19 for these convertible debts, as well as warrants for 3,389,560 shares issued in connection with the debt offerings. Based on the guidance in SFAS No. 133 and EITF 00-19, Earth concluded that instruments were required to be accounted for as derivatives and required Earth to bifurcate and separately account for the conversion features of the convertible debt as embedded derivatives. The conversion features and the warrants met the attributes of a liability and Earth therefore recorded the fair value of the conversion features and the warrants as current liabilities during these quarters.

Earth recorded the fair value of the conversion features and the warrants on it’s balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statement of operations as “Gain (loss) on derivatives”. Some of the debts were converted on July 14, 2006, and the remaining instruments were repaid with the proceeds from the July 24, 2006 issues. Based on Earth’s analysis and application of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“SFAS No. 133”), the derivative liabilities were reversed as appropriate. The remaining discounts were reversed to additional paid in capital, and the repaid debt derivative liability amounts were reversed to gain on derivatives.

Registration Rights —

Earth was obligated under Registration Rights Agreements to file, on the 30th day following the agreements a Registration Statement with the SEC registering for resale shares of common stock, and shares of common stock underlying investor warrants and certain of the placement agent warrants, issued in connection with the private offerings. If (i) Earth did not file the Registration Statement within the time period prescribed, or (ii) Earth failed to

file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act of 1933, within five trading days of the date that Earth is notified (orally or in writing, whichever is earlier) by the SEC that the Registration Statement will not be “reviewed,” or is not subject to further review, or (iii) the Registration Statement filed or required to be filed under the Registration Rights Agreement was not declared effective by the SEC on or before 120 days following March 23, 2005, or (iv) after the Registration Statement is first declared effective by the SEC, it ceases for any reason to remain continuously effective as to all securities registered there under, or the holders of such securities are not permitted to utilize the prospectus contained in the Registration Statement to resell such securities, for more than an aggregate of 45 trading days during any 12-month period (which need not be consecutive trading days) (any such failure or breach being referred to as an “Event,” and for purposes of clause (i) or (iii) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five-trading day period is exceeded, or for purposes of clause (iv) the date on which such 45-trading day-period is exceeded being referred to as “Event Date”), then in addition to any other rights the holders of such securities may have under the Registration Statement or under applicable law, then, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured and except as disclosed below, Earth is required to pay to each such holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.5% per month of the aggregate purchase price paid by such holder pursuant to the Securities Purchase Agreement relating to such securities then held by such holder. If Earth fails to pay any partial liquidated damages in full within seven days after the date payable, Earth is required to pay interest thereon at a rate of 15% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to such holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages are to apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.

Such non-filing of the registration statement impacted and breached those certain Registration Rights Agreements with Earth and certain investors including Lance Bakrow, Tom Groos, Marc Weill, Josh Cohen, Kamunting Street Master Fund, Ltd., and K Street Emerald Fund, LLC. Subsequent to the forbearance agreement the securities are now required to be registered as of May 15, 2007.

The Registration Rights Agreement also provides for customary piggy-back registration rights whereby holders of shares of Earth’s common stock, or warrants to purchase shares of common stock, can cause Earth to register such shares for resale in connection with Earth’s filing of a Registration Statement with the SEC to register shares in another offering. The Registration Rights Agreement also contains customary representations and warranties, covenants and limitations.

Change in Securities and Use of Proceeds —

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS —

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

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

On April 28, 2006, we entered into a securities purchase agreement, pursuant to which we issued 6,400,000 shares of our common stock to accredited investors, in consideration for the payment of approximately $3.2 million. We will use the proceeds, in concert with other funds, to acquire a 50% equity interest in an entity, which will own and operate a planned ethanol plant in New Orleans, Louisiana. The purchase agreement provides for an additional issuance of 6,400,000 shares of our common stock, if we have not timely consummated the acquisition of the equity interest in the planned New Orleans ethanol plant discussed below.

Contemporaneously with the execution and delivery of the securities purchase agreement, we entered into a registration rights agreement, pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issued pursuant to the securities purchase agreement. The sale of these shares of our common stock to accredited investors was made in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act. The 6,400,000 shares issued to an accredited investor included registration rights therein. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.

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

On June 12, 2006, we issued 537,500 shares of our common stock to Biodiesel Venture, L.P. and 537,500 shares of our common stock to Willie H. Nelson in connection with a sublicense agreement entered into on April 1, 2006 with Biodiesel Venture, L.P., pursuant to which Biodiesel Venture granted us an exclusive sublicense to use the trademark “BioWillie” which is licensed to Biodiesel Venture pursuant to a master license with Mr. Nelson, the owner of the trademark. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.

On July 13, 2006, holders of convertible notes issued during January through June of 2006, exercised their conversion option and the Company issued an aggregate of 3,000,000 shares of common stock in exchange for the conversion of notes with an aggregate principal amount of $1.5 million. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act. The related debt, which was converted to shares, included registration rights therein. As of the year end these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.

In addition, on July 21, 2006, Apollo Resources entered into a securities purchase agreement with Greenwich Power, LLC and Greenwich Power II, LLC, pursuant to which Apollo Resources issued notes exchangeable for shares of our common stock held by Apollo Resources and options to purchase our common stock held by Apollo Resources. In connection with this transaction, Apollo Resources agreed to cause us to grant these Apollo Resources note holders registration rights with respect to the shares of common stock underlying the convertible notes and options. We have acknowledged and agreed to comply with the terms of the registration rights agreements between Apollo and these note holders. In connection with this transaction, Lance Backrow, who is the sole manager of both Greenwich Power entities, purchased a warrant to purchase 4,000,000 shares of our common stock at an exercise price of $0.25 per share. Mr. Backrow paid us $100,000 for the issuance of this warrant. We granted Mr. Backrow certain registration rights with respect to the shares of common stock issuable upon exercise of this warrant. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.

$.01 per share for 10 years. The notes were repaid in March 2007. At the date of original issuance the warrants had a relative fair value of $750,000. Amortization on the debt discount totaled $750,000 for the three months ended March 31, 2007.

On February 28, 2007, our LNG subsidiary obtained several credit facilities totaling $15 million. The $15 million term loan is due and payable in 3 years, with interest accruing at libor plus 1,000 basis points and payable monthly in advance. The loan is secured by the LNG plant facility in Topock, Arizona. In connection with this facility Warrant Purchase and Registration Right agreements were issued to purchase 13,549,816 of the Company’s common stock at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $3,105,394.

On March 23, 2007, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility, Warrant Purchase and Registration Right agreements were issued to purchase 6,774,908 of the Company’s common stock at $.30 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $1,605,960.

During the quarters ending June 30, 2006 and September 30, 2006, we issued convertible notes and warrants to institutional investors in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act as follows:

	•		On May 4, 2006, we issued a $1.0 million convertible, secured promissory note, bearing interest at 7%, payable within thirty days upon demand by the holder, and convertible into shares of our common stock at a conversion price of $1.086 per share. We also issued the investor a warrant to purchase 920,810 shares of our common stock, exercisable until May 31, 2001 at the lesser of $2.00 per share or 80% of the average trading price of our common stock for the thirty trading days prior to the exercise of the warrant. We used the net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for other general corporate purposes. We granted the note holder certain registration rights with respect to the shares of common stock underlying the convertible note and the warrant. The note and warrant and a corresponding guarantee given by Apollo Resources, our majority stockholder, were subsequently cancelled by the holder in connection with Apollo Resources’ closing on July 21, 2006 of a securities purchase agreement with Greenwich Power.

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

	•		On June 2, 2006, we issued a convertible note with a principal amount of $500,000 to one individual. The note bore interest at 8% per year, which was payable on July 28, 2006, August 28, 2006, January 28, 2007 and April 28, 2007. The note had a maturity date of April 28, 2007. The note was convertible into shares of our common stock at a conversion price equal to the lesser of $0.50 per share or 70% of the weighted average price per share of our common stock. We used the net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for other general corporate purposes. We granted the note holder

certain registration rights with respect to the shares of common stock underlying the convertible notes. On July 13, 2006, the holder of the note exercised its option to convert the notes, and we issued an aggregate of 1,000,000 shares of our common stock to such holder in exchange for the cancellation of the note.

	•		On June 7, 2006, we issued $10 million aggregate principal amount of senior convertible notes to four institutional investors. The notes carried an 8% coupon, payable quarterly, and were redeemable by us at par at any time prior to their initial maturity date in September 2006. The notes were not convertible until after September 2006, at which time the maturity date was extendable to December 2006 at the holder’s option. The notes were convertible into our common stock at a conversion price equal to the greater of $1.00 per share or 70% of the weighted average price per share of our common stock on a five-day volume weighted average prior to closing. We also issued to the investors five-year warrants to purchase an aggregate of 1,500,000 shares of common stock to the investors and five-year warrants to purchase 45,000 shares of common stock to our placement agent, at an exercise price of $2.93 per share. We used the net proceeds from the sale, in concert with other funds, to continue to execute our business plan, specifically the construction or acquisition of additional biodiesel and ethanol facilities, and for other general corporate purposes, including working capital. We granted the investor certain registration rights with respect to the shares of common stock underlying the convertible notes and warrants. The remaining unpaid principal and accrued and unpaid interest on these notes were repaid in full with a portion of the net proceeds from the senior convertible promissory notes we issued in July 2006. The warrants remain outstanding.

	•		On July 10, 2006, Earth entered into a securities purchase agreement, pursuant to which Earth issued an 8% senior convertible note with a principal amount of $5.0 million to one institutional investor. Earth also issued five-year warrants to purchase an aggregate of 1,500,000 shares of common stock to the investor and five-year warrants to purchase 15,000 shares of common stock to Earth’s placement agent, both at an exercise price of $2.50 per share. On July 24, 2006, Earth used a portion of the net proceeds from its July 24, 2006 offering to repay in full the remaining unpaid principal and accrued and unpaid interest on this note.

	•		On July 13, 2006, holders of convertible notes issued during January through June of 2006, exercised their conversion option and Earth issued an aggregate of 3,000,000 shares of common stock in exchange for the conversion of notes with an aggregate principal amount of $1.5 million.

	•		On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that are due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share. Earth used the net proceeds from this offering to repay in full the remaining unpaid principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of senior convertible promissory notes issued in May, June and July 2006, and expects to use the remaining proceeds from the offering for its program of building and acquiring interests in biodiesel and ethanol

			production facilities, and for other general corporate purposes.

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

	•		On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in March, 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share. The shares issued to an accredited investor included registration rights therein. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.

Item 3. Defaults upon Senior Securities

See footnote 2 in “Notes to Restated Consolidated Financial Statements” under Item 1.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

ITEM 6. EXHIBITS

The following documents are filed as part of this report:


Exhibit
Number		Description

3.01		Certificate of Incorporation (filed as Exhibit 3.1 to the Report on Form 10-QSB for the period ending September 30, 2005 and incorporated herein by reference)

3.02		Bylaws (filed as Exhibit 3.2 to the Report on Form 10-QSB for the period ending September 30, 2005 and incorporated herein by reference)

10.1		Merger Agreement dated March 31, 2006 by and among Earth Biofuels, Inc., Southern Bio Fuels, Inc. and certain affiliates of Southern Bio Fuels, Inc. (filed as Exhibit 10.1 to the Report on Form 8-K filed April 10, 2006 and incorporated herein by reference)

10.2		Stock Purchase Agreement dated October 1, 2005 by and between The Wing Sail Company and Earth Biofuels, Inc. (filed as Exhibit 10.1 to the Report on Form 8-K filed December 14, 2005 and incorporated herein by reference)

10.3(1)		Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and William O. Locket, Jr.

10.4(1)		Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and Morgan Freeman.

10.5(1)		Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and Bruce Blackwell.

10.6(1)		Lease Agreement dated October 2005 by and between R. Bruce Blackwell and Earth Biofuels, LLC.

10.7(1)		Intercompany Credit Agreement dated January 1, 2006 by and between Earth Biofuels, Inc. and Apollo Resources International, Inc.

10.8(1)		Registration Rights Agreement dated January 27, 2006 by and between Earth Biofuels, Inc. and Tom Groos.


Exhibit
Number		Description

10.9(1)		Earth Biofuels, Inc. Convertible Promissory Note dated January 27, 2006 issued by Earth Biofuels, Inc. in favor of Tom Groos.

10.10(1)		Registration Rights Agreement dated January 30, 2006 by and between Earth Biofuels, Inc. and Marc Weill.

10.11(1)		Earth Biofuels, Inc. Convertible Promissory Note dated January 30, 2006 issued by Earth Biofuels, Inc. in favor of Marc Weill.

10.12(1)		Membership Interest Purchase Agreement dated March 1, 2006 by and between Earth Biofuels, Inc. and Dr. Miguel J. Dabdoub.

10.13(1)		Registration Rights Agreement dated March 29, 2006 by and between Earth Biofuels, Inc. and Josh Cohen.

10.14(1)		Earth Biofuels, Inc. Convertible Promissory Note dated March 29, 2006 issued by Earth Biofuels, Inc. in favor of Josh Cohen.

10.15(1)		Registration Rights Agreement dated March 31, 2006 by and between Earth Biofuels, Inc. and Tom Groos.

10.16(1)		Earth Biofuels, Inc. Convertible Promissory Note dated March 31, 2006 issued by Earth Biofuels, Inc. in favor of Tom Groos.

10.17(1)		Letter of Intent dated June 13, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.

10.17(1)		Letter of Intent dated June 13, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.

10.18(1)		Agreement dated August 2, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.

10.19		Securities Purchase Agreement dated April 28, 2006, by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 10, 2006).

10.20		Registration Rights Agreement dated April 28, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 10, 2006).

10.21(1)		Registration Rights Agreement dated May 4, 2006 by and between Earth Biofuels, Inc. and Greenwich Power, L.L.C.

10.22(1)		Convertible Secured Promissory Note-Bridge Loan dated May 4, 2006 issued by Earth Biofuels, Inc. in favor of Greenwich Power, L.L.C.

10.23(1)		Warrant to Purchase Shares of Common Stock of Earth Biofuels, Inc. dated May 4, 2006 issued to Greenwich Power, L.L.C.

10.24(1)		Unconditional Guaranty of Payment and Performance dated May 4, 2006 executed by Apollo Resources International, Inc. in favor of Greenwich Power, L.L.C.

10.25(1)		Letter of Intent dated May 13, 2006 by and between Earth Biofuels, Inc. and Vertex Energy, LP.

10.26		Securities Purchase Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).

10.27(1)		Amended and Restated Securities Purchase Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the schedule thereto.

10.28		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006, issued to Evolution Master Fund, Ltd. (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).

10.29(1)		Warrant No. 1r to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006 issued to Evolution Master Fund, Ltd.

10.30(1)		Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006 issued to Cowen & Company LLC.

10.31		8% Senior Convertible Note dated May 26, 2006 issued by Earth Biofuels, Inc. in favor of Evolution Master Fund, Ltd. (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).


Exhibit
Number		Description

10.32		Registration Rights Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).

10.33(1)		Amended and Restated Registration Rights Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the signature pages thereto.

10.34(1)		Registration Rights Agreement dated June 2, 2006 by and between Earth Biofuels, Inc. and Marc Weill.

10.35(1)		Earth Biofuels, Inc. Convertible Promissory Note dated June 2, 2006 issued by Earth Biofuels, Inc. in favor of Marc Weill.

10.36(1)		Convertible Promissory Note, dated May 31, 2006, made by Albemarle Bio-Refinery, Inc. in favor of Earth Biofuels, Inc.

10.37(1)		Convertible Promissory Note, dated July 19, 2006, made by Albemarle Bio-Refinery, Inc. in favor of Earth Biofuels, Inc.

10.38		Securities Purchase Agreement dated June 7, 2006 by and among Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.39		Registration Rights Agreement dated June 7, 2006, by and among Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.8 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.40		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures International (incorporated by reference to Exhibit 4.6 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.41(1)		Warrant No 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures International.

10.42		8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Capital Ventures International (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.43		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Castlerigg Master Investments Ltd. (incorporated by reference to Exhibit 4.5 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006)

10.44		8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Castlerigg Master Investments, Ltd (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.45		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd for and on behalf of the Class A Convertible Crossover Segregated Portfolio (incorporated by reference to Exhibit 4.7 of the Current Report of Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006)

10.46(1)		Warrant No 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover Segregated Portfolio.

10.47		8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Radcliffe SPC, Ltd. for and on the behalf of the Class A Convertible Crossover Segregated Portfolio (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).

10.48(1)		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company LLC.

10.49(1)		Warrant No. 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company LLC.

10.50(1)		Consulting Agreement dated June 9, 2006 by and between Earth Biofuels, Inc. and Herb Meyer.

10.51(1)		Securities Purchase Agreement dated July 10, 2006 by and between Earth Biofuels, Inc. and the purchasers signatory thereto.


Exhibit
Number		Description

10.52(1)		Registration Rights Agreement dated July 10, 2006 by and between Earth Biofuels, Inc. and the purchasers signatory thereto.

10.53(1)		8% Senior Convertible Note dated July 11, 2006 issued by Earth Biofuels, Inc. to Castlerigg Master Investments Ltd.

10.54(1)		Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master Investments Ltd.

10.55(1)		Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master Investments Ltd.

10.56(1)		Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Cowen & Company LLC.

10.57(1)		Registration Rights Agreement dated July 21, 2006 by and between Apollo Resources International, Inc. and Greenwich Power, LLC and acknowledged by Earth Biofuels, Inc.

10.58(1)		Registration Rights Agreement dated July 21, 2006 by and between Apollo Resources International, Inc. Greenwich Power II, LLC and acknowledged by Earth Biofuels, Inc.

10.59(1)		Registration Rights Agreement dated July 21, 2006 by and between Earth Biofuels, Inc. and Lance A Bakrow.

10.60(1)		Warrant to Purchase Shares of Common Stock of Earth Biofuels, Inc. dated July 21, 2006 to Lance A. Bakrow.

10.61		Securities Purchase Agreement dated July 24, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).

10.62		Registration Rights Agreement dated July 24, 2006 among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).

10.63(1)		Lock-Up Letter dated July 24, 2006 from Apollo Resources International, Inc.

10.64(1)		Lock-Up Letter dated July 24, 2006 from Dennis G. McLaughlin III.

10.65(1)		Warrant No. 3 to Purchase Common Stock of Earth Biofuels, Inc. dated July 24, 2006 by Cowen & Company LLC.

10.66		Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated July 24, 2006 (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).

10.67		Form of Notes dated as of July 24, 2006 issued by Earth Biofuels, Inc. (incorporated by reference to Exhibit 4.3 on the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).

10.68		Merger Agreement, dated March 31, 2006, by and between Earth Biofuels, Southern Bio Fuels, Inc., Southern Bio Fuels, LLC, and the other members and individuals party thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on April 10, 2006).

10.69(1)		Securities Purchase Agreement, dated August 19, 2005, by and among Apollo Resources International, Inc., Tommy Johnson, Bruce Blackwell, William H. Webster and Robert Glenn.

10.70(1)		Purchase and Sale Agreement dated February 25, 2005 by and between Earth Biofuels, Inc., R. Bruce Blackwell, Tommy Johnson, Robert Glenn, William Webster and Apollo Resources International, Inc.

10.71(1)		Promissory Note issued on March 2, 2006 to Southern Bio Fuels, LLC.

10.72(1)		Commercial Guaranty made on March 2, 2006 by Dennis G. McLaughlin, III in favor of Southern Biofuels, LLC.

10.73(1)		Promissory Note issued on March 31, 2006 to Southern Bio Fuels, LLC.

10.74(1)		Commercial Guaranty made on March 31, 2006 by Dennis G. McLaughlin, III in favor of Southern Bio Fuels, LLC.


Exhibit
Number		Description

10.75(1)		Commercial Guaranty made on March 31, 2006 by R. Bruce Blackwell in favor of Southern Bio Fuels, LLC.

10.76(1)		Commercial Guaranty made on March 31, 2006 by Tommy Johnson in favor of Southern Bio Fuels, LLC.

10.77(1)		Earth Biofuels, Inc. 2006 Stock Option and Award Plan effective April 15, 2006.

10.78(1)		Sublicense Agreement dated April 1, 2006 by and between Earth Biofuels, Inc. and Biodiesel Venture, L.P.

10.79(1)		Securities Purchase Agreement dated August 11, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule.

10.80(1)		Revised Schedule of buyers on Securities Purchase Agreement dated August 11, 2006.

10.81(1)		Registration Rights Agreement dated August 11, 2006 among Earth Biofuels, Inc. and the buyers listed on the schedule.

10.82(1)		Form of Notes dated as of August 11, 2006 issued by Earth Biofuels, Inc. with Whalehaven Capital Fund Ltd.

10.83(1)		Form of Notes dated as of August 11, 2006 issued by Earth Biofuels Inc. with Gundyco ITF Excalibur Ltd Partnership.

10.84(1)		Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated August 11, 2006, with Whalehaven Capital Fund Ltd.

10.85(1)		Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated August 11, 2006, with Gundyco ITF Excalibur Ltd Partnership.

10.86(1)		Form of Warrant to purchase Common Stock of Earth Biofuels, Inc. dated July 21, 2006 with Lance Bakrow, and Consulting Agreement with Lance Bakrow.

10.87(2)		Share Exchange Agreement effective as of November 17, 2006, by and between Earth Biofuels, Inc., a Delaware corporation (“Earth Biofuels”) and Apollo Resources International, Inc., a Utah corporation (“Apollo”).

10.88		Acquisition Agreement between Liquafaction Corporation, et al and Earth Ethanol (incorporated by reference to Exhibit 1.01 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on December 21, 2006).

**10.89		Pledge Agreement, Promissory Notes and Warrant Agreements with and from Two Ponds, Gilcreast and Bryant Russell Construction

11(3)		Code of Ethics

12(3)		Subsidiaries

13(3)		Forbearance and Amendment Agreement and related Security and Subsidiary Agreements

14(3)		Letter from Nexxus re offer to Capitalize Biofuels with $150 million in Exchange for Common Stock and Escrow Agreement dated January 9, 2007

15(3)		Credit Agreement dated March 23 2007 by and between Durant Biofuels, LLC and Lenders and related Amendment No. 1, Amended and Restated Collateral Agreement, and Warrant Purchase and Registration Rights Agreement

16(3)		Credit Agreement dated February 28, 2007 by and between Earth LNG, Inc. and Lenders, and related Guarantee and Collateral Agreement and Warrant Purchase and Registration Rights Agreement

17(3)		Loan and Security Agreement with Greenfield Commercial Credit LLC dated March 1, 2007, and related Revolving Credit Loan note and Guaranty

18(3)		Report of Independent Registered Public Accounting Firm to the audit committee of Earth LNG, Inc.

*31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Act of 1934.

*31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Act of 1934.


Exhibit
Number		Description

*32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith.

**		Previously filed.

+		Management contract, compensatory plan or arrangement.

(1)		Filed as an exhibit to the registrants Report on Form 10-QSB for the period ending September 30, 2006 filed with the SEC on November 21, 2006.

(2)		Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the SEC on November 22, 2006

(3)		Filed as an exhibit to the registrants Report on Form 10-KSB for the period ending December 31, 2006 filed with the SEC on May 18, 2007.


PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at June 30, 2007 and December 31, 2006 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2007 and 2006 (unaudited)	4
	Consolidated Statement of Stockholders’ Equity for the Six Month period ended June 30, 2007 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2007 and 2006 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Controls and Procedures	39

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 2.	Equity Securities and Use of Proceeds	42
Item 3.	Defaults upon Senior Securities	50
Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 5.	Other Information	50
Item 6.	Exhibits	50
Signatures		56
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906