form10qeb033108.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2008
OR
o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50842

Earth Biofuels, Inc.

(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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.xYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

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

As of May 16, 2008 there were 324,576,294 shares of common stock of the registrant outstanding.

EARTH BIOFUELS, INC.

FORM 10-Q QUARTERLY REPORT

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	2
	Consolidated Balance Sheets at March 31, 2008 (unaudited), and December 31, 2007	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (unaudited)	4
	Consolidated Statement of Stockholders’ Equity for the Three Month period ended March 31, 2008 (unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item4.	Controls and Procedures	32
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Signatures		45

Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer

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Item 1.

PART I FINANCIAL INFORMATION

EARTH BIOFUELS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands except share amounts)

	March 31, 2008			December 31, 2007
Current Assets
Cash and cash equivalents	$	85		$	42
Investments in equity securities		48			73
Trade accounts receivable, net of allowances totaling $31 and $30		2,026			2,545
Inventory		147			159
Prepaid expenses and other current assets		1,526			2,417
Total Current Assets		3,832			5,236

Property, Plant and equipment, net of accumulated depreciation		24,405			25,078
Investments and advances		11,779			11,740
Deferred financing fees		906			2,036
Goodwill		35,533			35,533
Prepaid and other long term assets		479			222
Total Assets	$	76,934		$	79,845

Current Liabilities
Accounts payable	$	15,774		$	12,754
Accrued interest payable		48,151			48,151
Payables to related parties		50			253
Demand Notes		976			679
Note payable		1,376			1,508
Convertible promissory notes, net of discount		27,354			24,711
Term debt facilities		28,700			28,700
Accrued income taxes		17,462			17,233
Total Current Liabilities		139,843			133,989

Commitments and contingencies (Note 14)

Redeemable preferred stock, $.001 par value, 15,000,000 shares authorized, 100,000 and 0 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively; liquidation preference of $135,000		—			—
Redeemable preferred stock liability		135			—

Stockholders’ Equity (Deficiency)
Common stock, $.001 par value, 400,000,000 shares authorized, 311,576,294 and 308,442,294 shares issued and outstanding, and 278,389,134 issued and 276,554,134 shares outstanding as of December 31, 2007		311			278
Additional paid-in capital		155,295			154,122
Accumulated deficit		(213,952	)		(204,277	)
Notes receivable from parent		(4,472	)		(4,111	)
Treasury stock at cost (3,134,000 shares)		(226	)		(156	)
Total Stockholders’ Equity (Deficiency)		(63,044	)		(54,144	)

Total Liabilities and Stockholders’ Equity	$	76,934		$	79,845

See accompanying notes to consolidated financial statements

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EARTH BIOFUELS, INC.

Statements of Operations

(Unaudited)

(Amounts in 000’s)

	Three Months Ended March 31,
	2008			2007
				(Restated)
Sales revenue	$	7,421		$	6,645
Cost of sales (exclusive of items shown separately below)		5,984			6,292
Gross profit		1,437			353

Compensation		1,979			5,114
Other selling, general and administrative		3,245			3,356
Depreciation and amortization		677			952
Total operating expenses		5,901			9,422

Net loss from operations		(4,464	)		(9,069	)

Other income (expense)
Interest expense		(5,154	)		(16,124	)
Loss on sale of fixed assets		—			(120	)
Loss on equity investments		—			(315	)
Other income		(56	)		101
Total other income (expense)		(5,210	)		(16,458	)

Net loss		(9,674	)		(25,527	)

Other Comprehensive expense
Unrealized losses on marketable securities		—			(127	)
Total Comprehensive loss	$	(9,674	)	$	(25,654	)

Net loss per common share

Basic and diluted net loss	$	(0.042	)	$	(0.13	)

Weighted average shares		225,769			202,989

See accompanying notes to consolidated financial statements

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EARTH BIOFUELS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2008 and For The Year Ended December 31, 2007

(Unaudited)

(Amounts in 000’s)

	Common Stock Shares	Common Stock at Par	Additional Paid in Capital	Other Comprehensive Income (Loss)	Treasury Stock	Accumulated Deficit	Note Receivable from Parent	Totals

Balance December 31, 2006 (restated)	233,047	233	145,555	(570)	(463)	(79,572)	—	65,183
Cumulative adjustment for the implementation of FIN 48	—	—	—	—	—	(2,225)		(2,225)
Adjusted Balance, January 1, 2007	233,047	233	145,555	(570)	(463)	(81,797)	—	62,958
Parent and affiliate note receivable	—	—	—	—	—	—	(4,111)	(4,111)
Shares issued for cash	7,872	8	1,522	—	—	—	—	1,530
Shares issued for services	7,800	8	3,991	—	—	—	—	3,999
Shares forfeited	(6,000)	(6)	—	—	—	—	—	(6)
Shares issued for related parties	8,219	8	1,801	—	—	—	—	1,809
Shares issued for converted debt	16,922	17	102	—	—	—	—	119
Exercise of warrants	250	—	—	—	—	—	—	—
Unrealized losses on marketable securities	—	—	—	(127)	—	—	—	(127)
Reclassification adjustment for losses included in net income, net of $0 tax effect	—	—	—	697	—	—	—	697
Treasury stock, net of sales and purchases	(1,556)	—	—	—	307	—	—	307
Share issued in connection with demand notes	10,000	10	286	—	—	—	—	296
Net changes in discounts on convertible debts	—	—	865	—	—	—	—	865
Net loss	—	—	—	—	—	(122,480)	—	(122,480)
Balance December 31, 2007	276,554	$ 278	$ 154,122	$ —	$ (156)	$ (204,278)	$ (4,111)	$ (54,144)
Shares issued for services	30,578	31	1,187	—	—	—	—	1,218
Issuance of 100,000 shares of Series A convertible preferred stock including, common stock warrants and beneficial conversion feature	2,000	2	(37)	—	—	—	—	(35)
Shares issued for investments	609	1	23	—	—	—	—	24
Treasury Stock	(1,299)	(1)	—	—	(70)	—	—	(71)
Parent and affiliate note receivable							(361)	(361)
Net loss	—	—	—	—	—	(9,674)		(9,674)
Balance March 31, 2008	308,442	$ 311	$ 155,295	$ —	$ (226)	$ (213,952)	$ (4,472)	$ (63,044)

See accompanying notes to consolidated financial statements

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EARTH BIOFUELS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

(Amounts in 000’s)

	Three Months Ended March 31, 2008 2007

Cash Flows from Operating Activities:				(Restated)
Total Comprehensive loss	$	(9,674	)	$	(25,527	)
Loss on sales of fixed assets		—			121
Depreciation		677			737
Amortization of debt issuance costs		220			215
Goodwill impairment		—			315
Share-based compensation expense		1,214			3,818
Debt discount amortization		2,929			3,556
Changes in assets and liabilities:
Decrease (increase) in:
Trade accounts receivable		519			(500	)
Inventory		12			(17	)
Prepaid expenses & other current assets		1551			(586	)
Other Assets		25			(2,166	)
Increase (decrease) in:
Accounts payable and accrued expenses		3,021			(1,088	)
Accrued interest payable		—			10,885
Other liabilities		51			8
Net cash provided by (used in) operating activities		545			(10,229	)

Cash Flows From Investing Activities:
Purchases of equity securities		—			(71	)
Purchases of property, plant and equipment		—			(2,243	)
Investments in and advances to related parties		(39	)		(2,296	)
Proceeds from the sale of property, plant and equipment		—			75
Increase in notes receivable		(361	)		(5,441	)
Net cash used in investing activities		(400	)		(9,976	)

Cash Flows From Financing Activities:
Proceeds from issuance of common stock		—			1,534
Proceeds from term debt facilities and line of credit		—			29,000
Repayments of long term debt and line of credit		(132	)		(8,653	)
Proceeds (purchases) of treasury stock		(70	)		463
Proceeds from issuance of preferred stock		100			—
Cash paid for debt issuance cost		—			(509	)
Net cash provided by financing activities		(102	)		21,835

Net increase (decrease) in cash		43			1,630
Cash and cash equivalents
Beginning of period		42			291
End of period	$	85		$	1,921

Supplemental Cash Flow Disclosures:
Cash paid for income taxes	$	—		$	—
Cash paid for interest	$	1,205		$	1,574

See accompanying notes to consolidated financial statements

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EARTH BIOFUELS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — ORGANIZATION AND MANAGEMENT’S PLANS

Organization

Earth Biofuels, Inc., (“Earth” or “EBOF”) was incorporated in the state of Nevada on July 15, 2002. On September 13, 2005, Earth issued 146,100,000 shares of common stock to Apollo Resources International, Inc., a Utah corporation, (“Apollo”) in exchange for 80% of the outstanding shares of common stock of Earth Biofuels, Inc., a Mississippi corporation. With the acquisition, Apollo (“the parent”) owned approximately 88% of the issued and outstanding shares of Earth. This transaction has been accounted for as a recapitalization effected through a reverse merger, such that Earth Biofuels Operating, Inc. is the “accounting acquirer” for financial reporting purposes. On October 7, 2005, Earth Biofuels, Inc. (the Mississippi Company) changed its name to Earth Biofuels Operating, Inc. Effective November 14, 2005; the domicile of Earth was moved to Delaware by means of a merger of Earth with and into Earth Biofuels, Inc., a Delaware corporation. As of March 31, 2008, Apollo Resources International, Inc owned 20% of the outstanding shares, however, due to the company’s ability to exercise significant influence over EBOF’s operating and financial policies, and has indirect controlling financial interest, Apollo is still considered the “Parent of EBOF”.

The principal business of Earth is the domestic production, supply and distribution of petroleum diesel-based alternative fuels consisting of pure biodiesel fuel (B100) for sale directly to wholesalers, and to be used as a blend stock to make B20. Earth’s primary bio-diesel operations are located in Oklahoma and Texas. Earth also produces and distributes liquefied natural gas, or LNG, which is natural gas in its liquid form. The primary LNG operations are in Arizona and California.

Going Concern

Earth has incurred significant losses from operations through March 31, 2008 and has limited financial resources. The Company also has an accumulated deficit of $213,952, negative current ratios and negative tangible net worth at March 31, 2008. These factors raise substantial doubt about our ability to continue as a going concern. . In addition, investors holding $52.5 million in senior unsecured notes filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation against EBOF during the second quarter of 2007. However, on November 14, 2007, EBOF negotiated and executed a settlement agreement (the “Agreement”) with the above note holders. The Agreement required the creditors to dismiss their petition of bankruptcy.

Under the terms of the Agreement, EBOF and subsidiaries granted certain security interests to the creditors and will execute a restructuring plan within 180 days. In addition, one of the accredited investors of the original eight accredited investors purchased four of the original investors interest, whereby reducing the number of credit holders to three. The Company is currently in negotiations with the remaining investors to settle the outstanding debts. The Company intends to sell certain operating assets and liabilities of the LNG business through a reverse merger and public offering of the LNG Business, and raise $35 million in the newly formed public company. Management expects that the LNG Business will be released as a guarantor of the EBOF notes totaling $52.5 by providing the note holders with a security interest in the newly formed public company (the “Restructuring”). The Restructuring will allow the Company to build new fueling stations, expand geographically and improve the Company’s sales and marketing efforts.

Management believes its LNG Business has substantial market value that is not necessarily reflected by the accompanying financial statements. The LNG company acquisitions have produced revenues over the past two years in excess of $50 million, and this market has been the focus of Earth LNG’s underlying company efforts for over ten years.

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Earth believes the LNG business will be a major part of establishing future financial stability of the Company. The Company also believes the above measures will significantly enhance the liquidity position, profitability and allow for repayment to the $52.5M notes holders. Earth’s management is attempting to seek strategic alternatives, including the pursuit of additional financing for strategic acquisitions or a merger with other businesses. Management intends to raise capital through other 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.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements and the supporting and supplemental material are the responsibility of the management of Earth Biofuels, Inc.

Principles of Consolidation — Earth’s consolidated financial statements include the accounts of Earth and it’s wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents — Earth considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

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Accounts Receivable — Earth uses the allowance method of accounting for doubtful accounts. The balance is based on historical collections and management’s review of the current status of existing receivables and estimate as to their collectibility.

Accounts Receivable — Tax Credits — Earth files federal excise tax returns each quarter, claiming refundable biodiesel mixture tax credits. These credits are accounted for on a gross basis and included as part of sales revenues when earned.

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 December 31, 2007 the market value of investments in equity securities was approximately $73,000. 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 $1,071,000 are included in earnings as of December 31, 2007. Realized losses totaling approximately $25,000 were recorded as of the three months ended March 31, 2008.

Inventory — Inventories of fuel purchased and processed are stated at the lower of cost (on a first-in, first-out, moving-average basis) or market.

Notes Receivable from Parent and Affiliates — Notes receivable from Parent and Affiliates consist of advances made to Apollo Resources pursuant to inter-company credit agreements. The notes are due upon demand and consist of market interest rates ranging from 6% to 15%. Amounts advanced to related parties were used to fund operations and investments. . The amounts due from the parent totaling approximately $4.5 million was reflected as a reduction in equity in conformity with the EITF 85-1 and SAB Topic 4-G, which requires that notes or other receivables from a parent or another affiliate be treated as a deduction from stockholders’ equity in the balance sheet. In addition during the three months ended March 31, 2008, LNG executed a purchase agreement with it’s parent Apollo, whereby the parent is responsible for purchasing natural gas at daily natural gas spot prices. Net receivables due from Apollo Resources increased by approximately $361,000 at March 31, 2008.

Property, Plant and Equipment — Property, plant and equipment are carried at cost. Depreciation of property, plant and equipment is provided using the straight line method at rates based on the following estimated useful lives:

Asset	Life

Buildings and improvements	8 - 39 years
Fixtures and equipment	4 - 20 years

The cost of asset additions and improvements that extend the useful lives of property and equipment are capitalized. Routine maintenance and repairs items are charged to current operations. The original cost and accumulated depreciation of asset dispositions are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition.

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.

Goodwill and Other Intangible Assets — Earth accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets are periodically tested for impairment. Earth assesses goodwill for impairment by periodically comparing the fair value of its reporting units to their carrying amounts to determine if there is potential impairment. Fair values for reporting units are

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determined based on discounted cash flows, market multiples or appraised values as appropriate. The fair value of definite lived intangible assets is determined by using a “relief from royalty” approach.

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

In accordance with SFAS 133 and EITF 00-19, during the year ended December 31, 2006 we determined that several of the outstanding warrants to purchase our common stock and the embedded conversion feature, and certain features of our other financial instruments should be separately accounted for as derivative liabilities. These financial instruments were subsequently repaid or converted such that there was no derivative liability as of year end December 31, 2006. Our financial statements for the year ended December 31, 2006 reflect the realized changes in the fair value of these derivatives in our consolidated statements of operations as “Gain (loss) on derivative liability”.

Revenue — Sales are recorded at net realizable value, net of allowances for returns, upon shipment of products to customers. Earth records revenue from federal incentive programs related to the production of biodiesel when Earth has produced and sold the biodiesel and completed all the requirements of the applicable incentive program. Revenues also consist of liquefied natural gas which is sold to end users, and is recognized based on actual volumes of lng sold. Revenue is recognized in accordance with SEC Staff Accounting Bulletin (SAB) No. 104 “Revenue Recognition” (“SAB 104”), when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, delivery of a product has occurred and title and risk of loss has transferred or services have been rendered. Revenues include shipping and handling costs billed to the customers.

Cost of Product Sales — Cost of sales consists primarily of raw materials costs incurred to produce or process our product. Shipping and handling costs are included as a component of costs of product sales in our consolidated statements of operations because we include in revenue the related costs that we bill our customers.

Accounting for Share-Based Compensation — Earth measures all share-based payments, including grants of employee stock options, using a fair-value based method in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payments.” The cost of services received in exchange for awards of equity instruments is recognized in the statement of operations based on the grant date fair value of those awards amortized over the requisite service period. Earth utilizes a standard option pricing model, the Black-Scholes model, to measure the fair value of stock options granted.

Earth determines the measurement date for share-based transactions with non-employees according to the terms of EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. Earth measures fair value of equity instruments using the stock price and other measurement assumptions as of the earlier of either of the date at which a commitment for performance by the counterparty to earn the equity instruments is, or the date at which the counterparty’s performance is complete.

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Income Taxes — Earth and its subsidiaries file a consolidated federal tax return. Income taxes are provided based upon the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities, and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.

Net Loss Per Common Share — 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 options and warrants until their exercise would be anti-dilutive. Share and per-share data presented throughout the financial statements and notes reflect a 6-for-1 forward split that Earth declared in November, 2005. Basic net income per share is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding during the year (denominator). Diluted net income per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the year. Outstanding options and warrants were not included in the computation of diluted loss per share for the three months ended March 31, 2008 and 2007 because their inclusion would be anti-dilutive.

Treasury Stock — The Company accounts for treasury stock using the cost method. Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account. The stock was acquired for reasons other than its retirement, however, its ultimate disposition has not yet been decided.

Registration Payments— In December 2006, The FASB issued No. EITF 00-19-2 “Accounting for Registration Payment Arrangements”. The Company adopted EITF 00-19-2 for the year ended December 31, 2006. In connection with the 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 March 31, 2008 and December 31, 2007 these penalties total $13.4 million and are being classified as accrued interest with a related charge to interest expense.

Significant Concentrations — Financial instruments that potentially subject us to a concentration of credit risk consist principally of trade accounts receivable. We perform ongoing credit evaluations of our customers and generally do not require collateral on accounts receivable, as the majority of our customers are government entities. We maintain reserves for potential credit losses, but historically have not experienced any significant losses related to any particular geographic area.

Municipal customers represent approximately 46% of the consolidated revenues of the Company. Total sales to these customers for the three months ended March 31, 2008 was approximately $3,413, and for the twelve months ended December 31, 2007 was approximately $11.9 million.

NOTE 3 — INVENTORIES

At March 31, 2008 and year ended December 31, 2007, respectively, inventories consisted of the following:

	March 31, 2008		December 31, 2007
Description	($ in 000’s)		($ in 000’s)

Biodiesel inventory, finished goods	$	110	$	127
Liquid Natural Gas, finished goods		37		32

Total	$	147	$	159

NOTE 4 — PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the following at March 31, 2008 and year ended December 31, 2007:

	March 31, 2008			December 31, 2007
Description	($ in 000’s)			($ in 000’s)

Deposits on business related assets and office spaces		808			1,193
Escrowed interest related to term debt facilities	$	26		$	1,205
Current portion only deferred financing fees		1,057			—
Other prepaid assets		114			241
Total		2,005			2,639

Less current portion		(1,526	)		(2,417	)

Long term prepaid expenses and other assets	$	479		$	222

NOTE 5 — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of March 31, 2008 and year ended December 31, 2007 consist of the following:

	March 31, 2008			December 31, 2007
Property, Plant and Equipment	($ in 000’s)			($ in 000’s)

Land	$	681		$	681
Buildings and improvements		24,880			24,882
Fixtures and equipment		10,854			10,494

Total cost		36,415			36,057
Accumulated Depreciation		(12,010	)		(10,979	)

Net property, plant and equipment	$	24,405		$	25,078

Depreciation expense for the three months ended March 31, 2008 was $ 677,459.

NOTE 6 — INVESTMENTS, ADVANCES AND NOTES RECEIVABLE FROM RELATED PARTIES

Amounts representing the Corporation’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 no significant operations during 2007 or for the three months ended March 31, 2008, and as such Earth’s share of the net losses of these companies is $0 in the consolidated

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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 another 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 and impairment amounts consist of the following entities and amounts as of and for the three months ended March 31, 2008 and year ended December 31, 2007:

March 31, 2008			Total
Description	Method	% Ownership	Investments and Advance (Amounts in 000’s)	Impairment Amount (Amounts in 000’s)

Truckers Corner, Hillsboro, Texas	Equity	49%	$ 6,484	$ —
American Earth	Equity	100%	—	—
Systems Management, San Antonio, Texas	Cost	Advances on letter of intent	—	—
Vertex Processing, LP, Houston, Texas	Cost	Advances on letter of intent	—	—
Biodiesel Investment Group, Danville, Illinois	Cost	10%	4,976	—

Miscellaneous investments-Cellulonsic	Cost	Advances on letters of Intent	289	—
Earth Ethanol -Liquification, Moses Lake	Cost	Advances- on letter of intent	—	—

HPS Development, L.L.C., Louisiana	Cost	Impairment related to exchange of investment for Note receivable	—	—

DFI-Albemarle Bio-Refinery, Inc., North Carolina	Cost	Notes receivable related to letter of intent	—	—

Blue Wireless	Cost	Investment in related party 5%	30	—
Total			$11,779	—

December 31, 2007			Total
Description	Method	% Ownership	Investments and Advance (Amounts in 000’s)	Impairment Amount (Amounts in 000’s)

Truckers Corner, Hillsboro, Texas	Equity	49%	$ 6,445	$ —
American Earth	Equity	100%	—	(77)
Systems Management, San Antonio, Texas	Cost	Advances on letter of intent	—	(832)
Vertex Processing, LP, Houston, Texas	Cost	Advances on letter of intent	—	(2,542)
Biodiesel Investment Group, Danville, Illinois	Cost	10%	4,976	—

Miscellaneous investments-Cellulonsic	Cost	Advances on letters of Intent	289	—
Earth Ethanol -Liquification, Moses Lake	Cost	Advances- on letter of intent	—	(750)

HPS Development, L.L.C., Louisiana	Cost	Impairment related to exchange of investment for Note receivable	—	(17,823)

DFI-Albemarle Bio-Refinery, Inc., North Carolina	Cost	Notes receivable related to letter of intent	—	(Amount included below in bad debt expense for $5,525)

Blue Wireless	Cost	Investment in related party 5%	30	—
Total			$ 11,740	$ (22,024)

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Investments —

Trucker’s Corner — On April 20, 2006, Earth acquired a 25% limited partnership interest in Trucker’s Corner, L.P. in exchange for a capital contribution of $1.1 million in cash, 125,000 shares of Earth’s common stock valued at $1,120,000, and 250,000 shares of Apollo Resources (Earth’s parent) common stock. During 2007 Earth increased it’s investment to 50% upon the additional advances of monies for construction of the related facility.. In February 2008 the company completed the financing needed to finish the construction of “Willie’s Place at Carl’s Corner” truck stop located 70 miles south of Dallas on Interstate 35E. the construction on the remaining final phase of the project has already begun and management expects the truck stop to open this summer, 2008. This new roadside destination will feature 13 Ultra-High Flow Master/Satellite dispensers for fueling twelve trucks at a time including a wide load island. There will also be 4 standard-sized fueling stations with 8 pumps. All fuel sold at “Willie’s Place” will have some percentage of biofuels, including “BioWillie®” Premium Biodiesel and ethanol, enabling more drivers to participate in the green movement in the United States. In addition to the truck stop fueling facilities, “Willie's Place at Carl’s Corner” will feature two restaurants, a convenience store, saloon, gift shop featuring official Willie Nelson merchandise and memorabilia, and the 750 seat performance hall which still remains from the original “Carl’s Corner” truck stop. Additionally, this destination for travelers will feature wireless internet access, clean restrooms, hot showers, laundry facilities, plenty of parking, and a video game and TV entertainment area. XM radio will also broadcast during live performances from their studio located within the theater.

American Earth Fuels Company — Earth had planned to begin acquiring and operating retail service stations through its majority-owned subsidiary, American Earth Fuels Company (AEFC). Upon further analysis it was determined not to be profitable business venture and the company was dissolved in 2007.

Biodiesel Investment Group — On September 21, 2006, Earth invested approximately $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. On March 14, 2008, The Company sold its investment for approximately $5 million dollars with no gain or loss recorded. Per the agreement, The Company will receive cash and stock payments over the next two years.

Earth Ethanol/Liquefaction Corporation — In 2006, Earth Ethanol, Inc. a 100% owned subsidiary of Earth entered into an agreement with Liquefaction Corporation to construct and operate an ethanol production facility located near Moses Lake, Washington. Due to lack of contributions contemplated under the agreement the business venture was cancelled by Liquefaction.

Earth Biofuels Technologies — During 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 America, and together in 2006, a new entity was formed.. Accordingly, the purpose of the 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

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contracts obtained. There were no properties under construction as of the three months ended March 31, 2008. The operations of this entity are consolidated with Earth.

Advances on Letters of Intent —

During 2006, Earth signed a letter of intent to acquire a biodiesel production facility from Systems Management Solutions, Inc. This agreement was terminated in 2007.

In 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 its common stock to Vertex Energy. These shares were issued in October, 2006 and had a fair market value of $4,320,000. Advances totaling $658,000 had also been made towards this investment. 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 2006, and $2,542,000 during 2007, resulting in total estimated impairments of $4,978,000. Should Vertex prevail in the above proceedings Earth would receive the facility in question.

On August 31, 2006, Earth entered into letters of intent with HPS Development, L.L.C. ("HPS") which contemplated a joint venture in which a newly created limited liability company (the "LLC") would own and operate a fuel ethanol distillery located on the Mississippi River in Plaquemines Parish, Louisiana (the "Agreement"). As contemplated by the Agreement, HPS was to contribute real property and improvements in an ethanol distillery for a 50% interest in LLC. Earth was to contribute cash totaling $50 million and issue 5,829,005 shares of common stock to HPS as well as the assumption of $40.0 million in 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.

Through June 2007, Earth had invested $27 million in the joint venture without a security interest. The Agreement between the parties was disputed and in June 2007 a settlement agreement was reached whereby HPS would return $4 million in cash and provide an $18 million note to Earth. In addition, HPS signed an agreement not to compete valued at $5 million. At of December 31, 2007, the $18 million note was considered to be impaired and accordingly, Earth has provided a reserve against this note. As a result, Earth recorded a $23 million loss on the LLC investment for the year ended December 31, 2007, and $0 for the three months ended March 31, 2008.

The Company’s investment in an Ethanol production facility located in Albemarle, North Carolina was converted to promissory notes and subsequently deemed impaired due to lack of activity. The investment totaling $5,525,000 was written off during 2007 and is included in bad debt expense.

Notes receivable from related parties —

Notes receivable from related parties consists of advances made to the parent Apollo, and other related parties pursuant to intercompany credit agreements and notes related to investments bearing market rates and terms. Total notes receivable as of March 31, 2008 and year ended December 31, 2007 are as follows:

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	March 31, 2008		December 31, 2007
Description	($ in 000’s)		($ in 000’s)

DFI	$	—	$	5,525
AIRO		—		930
Other related parties		—		370

Total		—		6,825

Less amounts written off to bad debt expense		—		(6,825	)
Long term notes receivable from related parties	$	—	$	0

Investment — related party —

This consists of an equity investment with less than 5% ownership interest in Blue Wireless, a publicly traded company. The Chief Executive Officer of Earth is also the Chairman of the Board for the related investment. Earth will account for this investment using the cost method.

NOTE 7 — 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 March 31, 2008, Earth had recorded approximately $35,533,000 in goodwill related to its acquisition of its LNG businesses.

Earth 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 totaling $3,981,280 and the $2 million license for the brand name of biodiesel products have been impaired totaling approximately $6 million. As such the carrying amounts of these assets have been written down to zero and charged against earnings. In addition, a non-compete agreement had been obtained as a result of the settlement with the HPS investment above. This intangible was also deemed to be impaired and $5,000,000 was charged against earnings. Total impairments as of March 31, 2008, and December 31, 2007 were $0 and approximately $11million, respectively.

NOTE 8 — DEMAND NOTES —

On December 13, 2007, Earth entered into a loan agreement to which Earth issued 10,000,000 shares of common stock in connection with proceeds received of $550,000. The note and interest of 10% is due at maturity on March 15, 2008.The value of the shares totaling approximately $286,000 was allocated as a discount on the note. The amount of the note net of discounts as of March 31, 2008 was approximately $550,000. The maturity date was extended to June 15, 2008. Amortization totaled $286,000 for the three months ended March 31, 2008.

Earth has several other demand notes net of discounts totaling $426,403 as of March 31, 2008. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.

NOTE 9 — LINE OF CREDIT

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On February 28, 2007, our LNG subsidiary obtained a term note totaling $15 million, and line of credit facility totaling $5 million. The line of credit was used to repay a former line of credit due in 2006. The balance on the new line of credit as of March 31, 2008 and December 31, 2007was approximately $1.4 million, and $1.5 million respectively. The revolving credit facility is advanced at the rate of 85% of accounts receivable. Interest of prime plus 2% is payable monthly.

In addition, on March 23, 2007, Earth obtained a $9 million term loan facility, and a $2.5 million letter of credit secured by the Durant, Oklahoma biodiesel plant. The line of credit balance as of March 31, 2008, and December 31, 2007 was $0.

NOTE 10 — CONVERTIBLE DEBT

Convertible debt consists of the following as of March 31, 2008 and year ended December 31, 2007:

Description	March 31, 2008			December 31, 2007
	($ in 000’s)			($ in 000’s)
8% convertible promissory notes, due August 31, 2011	$	52,500		$	52,500
Discount on convertible promissory notes		(25,146	)		(27,789	)

Current portion of convertible promissory notes	$	27,354		$	24,711

On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that were due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In connection with the issuance of the notes, 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.

At the date of original issuance the warrants had a relative fair value of $18,808,359, and intrinsic value of the beneficial conversion feature of $24,098,240, to arrive at a total debt discount of $42,906,599. Included in interest expense is $10,770,000 of discount amortization in 2007 related to this debt.

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 have accrued at the default rate of 15% interest, plus 1.5% for the amount outstanding for registration penalties, and an 18% late charge. Additionally there is a redemption penalty of 20% due upon settlement of the notes.

Subsequent to the second quarter of 2007, certain of the note holders above, filed with the bankruptcy courts a Chapter 7 - Involuntary Liquidation against the company. On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year. The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days. A confession of judgment was signed

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by the company noting the entire amount of debt and penalties due under the original notes was $100,651,173. Total accrued interest and penalties were approximately $48,151,000 as of December 31, 2007 and March 31, 2008.

On November 29, 2007, certain of there note holders converted the $1.1 million in aggregate senior notes to common stock of Earth. The notes, interest and penalties were settled through the issuance of 16,818,155 shares valued at approximately $1,210,000. A gain on the conversion was recorded totaling approximately $454,000 was recorded for the year ended December 31, 2007.

Accrued unpaid penalties and interest related to the above judgment for March 31, 2008 and year ended December 31, 2007 is as follows:

Accrued interest payable on convertible debts	2008

Interest	$	9,148
Late charges		15,120
Redemption fee		10,500
Registration penalties		13,383

Total interest expense	$	48,151

In connection with the 8% senior convertible notes issued on July 24, 2006, Earth incurred loan costs in the amount of $3,452,000, of which the unamortized balance as of December 31, 2007 totaling $2,620,000 was charged against earnings due to the above proceedings.

NOTE 11 — TERM DEBT FACILITIES

On February 28, 2007, our LNG subsidiary obtained a term note 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 $3,674,702.

In addition, on March 23, 2007, Earth obtained a $9 million term loan facility secured by the Durant, Oklahoma biodiesel plant. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. 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 $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $1,654,643.

In June 2007, the lender on the above term loan facilities totaling $15 million and $9 million, respectively, exchanged their rights to purchase the warrants in lieu of additional financing fees totaling $5.4 million. These financing fees are payable at maturity of the debt and are being accrued monthly. Accrued financing fees of approximately $1,414,000 are included in accounts payable at March 31, 2008.

The Company has not met underlying debt covenants related to fixed charge ratios and advances to subsidiaries. The debtor has noted these defaults and has not relinquished their rights per the underlying debt agreements. As a result, the notes are included in current liabilities.

Subsequent to default, the Company received additional funding in the fourth quarter of 2007 from the lender in the amount of $4.7 million. Notes payable for both term notes totaled $28,700,000 at December 31, 2007, and March 31, 2008. In connection with the above term notes interest reserves were escrowed totaling $1,205,000 for interest payments due the next twelve months. These facilities are also cross-collaterized. In addition, Earth incurred loan costs

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in the amount of $2,854,443 which will be amortized over the term of the notes.

NOTE 12 — CONVERTIBLE PREFERRED SHARES

Preferred Stock issuances

On March 28, 2008, we entered into a private financing transaction (“financing transaction”) pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement we issued to the investors (i) 100,000 shares of our newly authorized Series A Convertible Preferred Stock, $.001 par value (the “convertible preferred stock”), (ii) Stock Purchase Warrants to purchase an additional 2,000,000 shares of common stock at an initial exercise price of $.0375 per share, and (iii) we issued 2,000,000 shares of common stock. We received $100,000 in gross proceeds in the initial closing. Holders of the Series A Preferred Stock shall be entitled to receive dividends or other distributions with the holders of the Corporation’s common stock, par value $.001 (the “Common Stock”) on an as converted basis when, as, and if declared by the Directors of the Corporation.

In connection with the sale of the securities to the investors, we entered into a Registration Rights Agreement with the investors dated as of March 28, 2008 (the “Registration Rights Agreement”), which requires us to use our best efforts to register under the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock issued and issuable upon conversion of the convertible preferred stock. The Registration Rights Agreement also provides the investors with demand and piggyback registration rights under the Securities Act for shares of common stock issuable upon conversion of the convertible preferred stock.

Due to certain rights granted to its holders, the convertible redeemable preferred stock is classified as non-permanent equity in the Consolidated Balance Sheets, pursuant to Rule 5-02.28 of the Securities and Exchange Commission’s Regulation S-X and as further clarified by the Emerging Issues Task Force Issue No. D-98, Classification and Measurement of Redeemable Securities. Pursuant to FASB Staff Position FAS 150-5, Issuer’s Accounting Under FAS 150 for Freestanding Warrants and Other Similar Instruments That Are Redeemable, the redeemable preferred shares are classified as liabilities also due to certain rights granted to its holders. The shares are redeemable at any time after April 27, 2008 at 1.35 times the original amount or $135,000.

The 100,000 shares of convertible preferred stock currently outstanding are convertible into an aggregate of 5,000,000 shares of our common stock at a conversion price of $.02 per share. In accordance with EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios the value of the beneficial conversion feature was recorded.

NOTE 13 — STOCKHOLDERS’ EQUITY

Warrants —

Warrants granted by the Company consisted of the following for the three months ended March 31, 2008.

Description	Remaining Life	Exercise Price	2007 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	$ 0.25	4,000,000
July 24, 2006 convertible debt, warrants issued to investors	9-10 years	$ 2.90	9,051,725
January 19, 2007 notes payable, warrants issued to noteholders	10 years	$ .01	375,000
February , 2008 warrants issued to investor	10 years	$ .10	1,000,000
March 28, 2008 Preferred share issuance	5 years	$ .0375	2,000,000

A summary of the Company’s stock warrant activity and related information at March 31, 2008 and December 31, 2007 is as follows:

	Number of Shares Under Warrant	Exercise Price	Weighted Average Exercise Price

Warrants outstanding at December 31, 2006	17,990,940	$.25 - 3.84	$ 2.27
Issued	20,699,724	$.01 - .36	$ 25
Exercised	(439,655)	$.01	$ 1.26)
Repurchased	(20,324,724)	$.30-.3 6	$ (.25)
Expired	—	—	—

Warrants outstanding and exercisable at December 31, 2007	17,926,285	$.01 - $3.84	$ 2.25
Issued	3,000,000	$.0375-.10	$ .06
Warrants outstanding and exercisable at March 31, 2008	20,926,285	$.01 - $3.84	$ 1.93

The weighted average exercise price for all warrants outstanding as of December 31, 2007 was $2.25 per share. During the year ended December 31, 2007, 20,324,724 shares were repurchased, and 439,635 shares were exercised. The weighted average exercise price for all warrants outstanding as of March 31, 2008 was $1.93 per share.

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.

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 —

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and 16,728,000 common shares, valued at approximately $661,627, of Earth’s common stock for consulting services, of which 12,475,320 were not restricted.

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.

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. There have been no stock options granted as of March 31, 2008.

NOTE 14 — RELATED PARTY TRANSACTIONS

As of March 31, 2008, Earth had payables to the following related party totaling $50,419 as follows: This affiliate was the prior owner of the LNG Business and is currently an investor in EBOF and Apollo Resources. This affiliate provides shipping services of LNG to various customers. Total shipping costs incurred during the three months ended March 31, 2008 using this affiliates was approximately $1,184,000. As of March 31, 2008, the Company had a deposit with this affiliate totaling $450,000 which is included in prepaid and other long-term assets, accounts payable due this affiliate vendor totaling $594,000 and advances payable to this affiliate totaling $50,419.

NOTE 15 — COMMITMENTS AND CONTINGENCIES

Settlements —

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On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year. The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 180 days.

Royalties —

As part of the “BioWillie” license agreement, Earth pays $25,000 in monthly advances on biodiesel royalty amounts payable equal to two cents per gallon of fuel sold under the BioWillie trademark. The contract is renewable every 2 years. For the three months ended March 31, 2008, royalty payments totaled $0.

Leases —

At December 31, 2005, Earth held non cancelable operating leases covering properties with minimum lease commitments as indicated below.

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.

Minimum lease payments for the next five years are approximately $120,000.

Total rent expense for the three months ended March 31, 2008 was approximately $55,623.

Litigation —

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 its common stock to Vertex Energy. In Harris County District Court, Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract on January 26, 2007, 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. Vertex Energy filed its First Amended Petition on February 8, 2008, enjoining Jason Gehrig to the case. Earth is currently in the discovery motion stage with Vertex Energy regarding disclosures, interrogatories, and requests for production. The investment in this company and related plant was deemed impaired due to lack of operations and was charged to earnings totaling $$2,435,000 during 2006, and $2,543,000 during 2007, resulting in total estimated impairments of $4,978,000. Should Vertex prevail in the above proceedings Earth would receive the facility in question.

In April 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., Case No. 2007-160, 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. On February 1, 2008, Earth entered into a settlement agreement with JM Allen for $410,000. This amount has been included in accounts payable and accrued expenses.

On May 22, 2007, Pacific Biodiesel Texas, LP filed a Demand for Arbitration with the American Arbitration Association claiming $513,309 is due them do to a breach of their Sales and Purchase Agreement with Earth to purchase all Claimant’s biodiesel output for a 12 month period. Pacific Biodiesel Texas, LP filed their First Amended Demand for Arbitration on January 24, 2008 increasing their claim to $1,225,765. Both parties executed an award agreement

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dated April 1, 2008, whereby Earth will pay $552,800 to Pacific Biodiesel in full settlement of their claim. Accordingly, $552,800 has been included in accounts payable and accrued expenses.

On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that were due in 2011 to eight institutional investors. 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. Subsequent to the second quarter of 2007, certain of the note holders, filed with the bankruptcy courts a Chapter 7 - Involuntary Liquidation against the company. On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”). The Agreement required the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 160 days. A confession of judgment was signed by the company noting the entire amount of debt and penalties due under the original notes of $100,651,173. Total accrued penalties were approximately $48,151,000 as of March 31, 2008.

YA Global Investments, LP, formerly Cornell Capital Partners, LP, filed their Complaint against Earth Biofuels on February 1, 2008 in the Supreme Court of the State of New York in the County of New York. The Plaintiff alleges claims of 3 counts of breach of contract against the Defendant; wherein, the parties are currently in the pleading stage. This investor was one of the original accredited investors in the Securities Purchase Agreement dated July 24, 2006, holding notes totaling $3 million.

Earth has become subject to various claims and other legal matters in the course of conducting its business. No material individual claims are currently pending; however, the company has recorded approximately $1,000,000 in regards to claims deemed likely in accounts payable and accrued expenses as of March 31, 2008.

We may become party to various legal actions that arise in the ordinary course of our business. During the course of our operations, we are also subject to audit by tax authorities for varying periods in various federal, state, local, and foreign tax jurisdictions. Disputes may arise during the course of such audits as to facts and matters of law. It is impossible at this time to determine the ultimate liabilities that we may incur resulting from any lawsuits, claims and proceedings, audits, commitments, contingencies and related matters or the timing of these liabilities, if any. If these matters were to be ultimately resolved unfavorably, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon our consolidated financial position or results of operations. However, we believe that the ultimate resolution of such actions will not have a material adverse affect on our consolidated financial position, results of operations, or liquidity.

NOTE 16 — INCOME TAXES

In 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). As such, the Company has determined that certain tax liabilities relating to a supply contract relating to the Apollo Resources purchase of the LNG Business in December 2005 should be recorded in the accompanying financial statements totaling $17,233,000 of which $11,550,000 was recorded as an addition to goodwill, $1,641,000 represents interest, and $2,225,000 represents prior periods estimated penalties and interest. The outcome of this tax estimate is uncertain at this time. The Company recorded an adjustment to retained earning of $2,225,000 as a part of the transitional accounting promulgated by FIN 48 at December 31, 2007. In addition, additional interest has been accrued totaling approximately $229,000 as of March 31, 2008. The Company will adjust the accrual for this tax contingency in the period that the facts and circumstances warrant or the liability is settled with taxing authorities. The Company's tax years for 2005 through 2006 are subject to examination by various tax authorities. A number of years may elapse before an uncertain tax position is finally resolved. It is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, but the Company believes that its reserves for income taxes reflect the most probable outcomes. The Company adjusts the reserve, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash and result in the reduction of the related reserve. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. As of March 31, 2008, it is possible that the Company's liability for uncertain tax positions will be reduced by as much as $17.2 million during the year ended December 31, 2012 as a result of the settlement of tax positions with various

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tax authorities.

In addition to the above FIN 48 income tax liabilities, the Company has net deferred tax assets calculated at an expected rate of 35% of approximately $48.4 million and $46.6 million as of March 31, 2008 and December 31, 2007, respectively. As the ultimate realization of this net tax asset is uncertain, the Company has provided a valuation allowance for the entire amount at March 31, 2008 and December 31, 2007, respectively.

The net deferred tax assets generated by loss carry-forwards has been fully reserved. The cumulative net operating loss carry-forward is approximately $123.9 million as of March 31, 2008, and will expire in the years 2024 through 2027. The valuation allowance for deferred tax assets was increased by approximately $2.2 million and $27.3 million for the three months ended March 31, 2008 and for the year ended December 31, 2007, respectivley.

Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax effect of temporary differences that give rise to deferred tax assets and liabilities as of March 31, 2008 and year ended December 31, 2007 are as follows:

	March 31, 2008			December 31, 2007
Deferred tax assets:	(in 000’s)			(in 000’s)
Impairment of investments and intangibles	$	4,870		$	4,870
Net operating loss carryforwards		46,953			43,618
Deferred tax assets		51,823			48,488
Less valuation allowance		(51,783	)		(48,448	)
Total deferred tax assets		40			39
Deferred tax liabilities:
Depreciation and amortization		(40	)		(39	)
Total deferred tax liabilities		(40	)		(39	)

Net deferred tax assets (liabilities)	$	—		$	—

NOTE 17 — SEGMENT INFORMATION

Earth maintains one operating segment whose business is conducted through a separate legal entity that is wholly owned by Earth. This segment is Earth LNG, Inc. LNG is managed separately, as this business has distinct customer base and requires different strategic and marketing efforts. The accounting policies of the segment are the same as those described in the summary of significant accounting policies. The segment company contains liquefied natural gas production, distribution and marketing operations. The subsidiary revenues are in excess of 10% of consolidated revenues. 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)

Three months ended March 31, 2008
Revenue	$	7,421		$	—		$	7,421
Income (Loss) from operations	$	172		$	(4,636	)	$	4,464
Interest Expense	$	1,649		$	3,505		$	5,154
Net Loss for the three months ended March 31, 2008	$	(1,468	)	$	(8,206	)	$	(9,674	)
Property, plant and equipment, net	$	8,663		$	15,742		$	24,405
Total Assets	$	48,707		$	28,227		$	76,934
Current Liabilities	$	43,071		$	96,773		$	139,844
Year Ended December 31, 2007
Revenue	$	26,068		$	1,018		$	27,086
Income (Loss) from operations	$	102		$	(32,215	)	$	(32,113	)
Interest Expense	$	(2,671	)	$	(56,215	)	$	(58,886	)
Net Loss for the twelve months ended December 30, 2007	$	(5,296	)	$	(117,184	)	$	(122,480	)
Property, plant and equipment, net	$	9,033		$	16,045		$	25,078
Total Assets	$	50,846		$	28,999		$	7 9,845
Current Liabilities	$	40,750		$	93,239		$	133,989

Municipal customers represent approximately 46% of the consolidated revenues related to LNG. The total sales to this customer for the year ended 2006 was approximately $3.4 million.

NOTE 18 — SUBSEQUENT EVENTS

On March 28, 2008, and subsequently amended on April 9, 2008, the board of directors approved a Certificate of Amendment to Series A Preferred Stock of Earth. The Company is authorized to issue 15,000,000 shares of $0.001 par value preferred stock (“Preferred Stock”). The Board of Directors of the Company has designated 935,000 shares of the Preferred Stock as Series A Preferred Stock, the number of shares designated and rights of each class are briefly described as follows:

Series A Convertible Preferred Stock

On April 10, 2008, the Company designated 935,000 shares of Preferred Stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock is convertible into shares of Common Stock at an initial conversion price of $.02. Holders of Series A Preferred Stock are entitled to one vote for each share of Series A Convertible Preferred Shares held, are entitled to elect up to two members to the Company’s Board of Directors, and, absent such election, are provided certain voting and veto rights to any vote by the Board of Directors. As of April 10, 2008, there were 935,000 shares of Series A Preferred Stock designated and as of March 28, 2008 100,000 shares of Series A Preferred Stock were issued and outstanding.

ITEM 2. Management’s Discussion and Analysis

Forward Looking Statements

This Annual Report on Form 10-KSB and all other reports filed by Earth Biofuels, Inc , a Delaware corporation (“EARTH”), from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, the management of EARTH as well as estimates and assumptions made by EARTH management. When used in the filings the words “may”, “will”, “should”, “estimates”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to EARTH or its management, identify forward looking statements. Such statements reflect the current view of EARTH and with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to EARTH, its ability to raise capital, its ability to market to biodegradable diesel fuel and other risk factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although EARTH believes that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, management does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with EARTH’s consolidated financial statements and the related notes filed herewith.

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 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 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 produces and distributes liquefied natural gas, or LNG, which is natural gas in its

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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 years ended 2007 and 2006 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. For our LNG products the production facility is located in Topock, AZ, which is just one mile east of the Arizona-California border. The plant has a maximum capacity of 95,000 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.

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 in 2005, 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 and the level and success of production, development and distribution activities and financial resources to meet cash flow needs. In addition, investors holding $52.5 million in senior unsecured notes filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation against EBOF during the second quarter of 2007. However, on November 14, 2007, EBOF negotiated and executed a settlement agreement (the “Agreement”) with the above note holders. The Agreement required the creditors to dismiss their petition of bankruptcy.

Management believes that the LNG Business has substantial market value that is not necessarily reflected by the accompanying financial statements. The LNG company acquisitions have produced revenues over the past two years in excess of $50 million, and this market has been the focus of Earth LNG’s underlying company efforts for over ten years. While cash flows from operations were flat year over the first of the 2007 year, the second half of 2007 demonstrated positive trends due to renewed and new customer contracts, significant cost restructurings and management improvements. 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 87,000 gallons per day, with a maximum capacity of 95,000 gallons per day.

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The supply of LNG in the United States and Canada is limited. We believe that increasing our LNG supply will enable us to increase sales to existing customers and to secure new customers. We use our LNG supply relationships and strategically located LNG production capacity to give us an advantage. We also are in the process of building an LNG liquefaction plant in California that will enhance our ability to serve California, Arizona and other western U.S. markets and will help us to optimize the allocation of LNG supply we sell to our customers. In the future, we may also acquire natural gas reserves or rights to natural gas production to supply our LNG plants.

During the first two quarters of 2007 the company obtained approximately $31 million in credit facilities. The credit facilities consisted of two term loans totaling $24 million, due in 3 years and are secured by the LNG plant facility in Topock, Arizona, and the biodiesel plant located in Durant Oklahoma. There is also $7 million in revolving credit facilities which are advanced at the rate of 85% of accounts receivable. The term loan credit facilities were amended during the fourth quarter of 2007, and the facility was increased by $4.7 million.

The Company is also in the process of refinancing the term debt related to the Durant, Oklahoma biodiesel plant, and retrofitting the plant to allow for usage of other types of raw materials besides soybean oil. Due to the significant increase in feedstock prices during the year this plant was idle for most of 2007, resulting in reduced profit margins. Management is currently focusing on retrofitting the plant to be able to process yellow grease. Yellow grease is basically cooking grease, is easily accessible, and represents a significant reduction in cost from the existing market prices for soybean oil and other feedstock’s. In addition, the Company is actively seeking acquisition of companies which handle this material, and to provide turnkey solutions for distributions throughout Texas and other markets of the Bio-Willie diesel brand fuel.

Earth believes the LNG business will be a major part of establishing future financial stability of the Company. The Company also believes the above measures will significantly enhance the liquidity position, profitability and allow for repayment to the $52.5 notes holders. Earth’s 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 March 31, 2008, 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 other 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.

Results of Operations

Comparison of Three Months Ended March 31, 2008 to the Three Months Ended March 31, 2007

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.

	Three Months Ended
	March 31,
	2008			2007
Revenues:
Sales revenue		100	%		99	%
Energy production credits		—	%		1	%
Total revenues		100	%		100	%
Cost of sales		81	%		95	%
Gross profit		19	%		5	%
Compensation		27	%		77	%
Other selling, general and administrative		44	%		51	%
Depreciation and amortization		9	%		1	%
Write-off of intangibles		—	%		—	%
Net loss from operations		(60	)%		(125	)%
Impairment of investment		—	%		—	%
Bad debt expense		—	%		—	%
Interest expense		69	%		242	%
Net (loss)		(130	)%		(384	)%

Revenue. Total revenue for the three months ended March 31, 2008 increased $0.8 million, or 12%, to approximately $7.4 million from approximately $6.6 million in the three months ended March 31, 2007. The increase in total revenue is primarily the result of increased sales of LNG, due to new contracts obtained during 2007.

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 biodiesel, petro fees, chemicals, and related costs of production. Our cost of sales excludes depreciation, amortization and compensation related to the production of alternative fuels. Cost of sales for the three months ended March 31, 2008 decreased $0.3 million, or 5%, to approximately $6 million from approximately $6.3 million for 2007. Our cost of goods sold is mainly affected by the cost of biodiesel, vegetable oil, natural gas and other raw materials. The decrease in cost of sales is primarily the result of decreased sales of biodiesel, and resulting decrease in purchases of feedstock. Biodiesel cost of sales were $0 in 2008 from approximately $.7 million in 2007. LNG costs of sales were approximately $5.9 million in 2008, down from approximately $5.6 million in 2007.

Compensation. Compensation for the three months ended March 31, 2008 decreased approximately $3.1million, or 61%,related primarily to reduction in work force and reduction in EBOF shares issued to employees in 2008. 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 include office expenses, insurance, professional services and shares issued to consultants for consulting services, travel expenses and other miscellaneous expenses. Other selling, general and administrative expenses for the three months ended March 31, 2008 decreased approximately $0.1 million from approximately $3.4 million for the same period in 2007. The 2008 costs decrease consists of reductions in consulting, marketing, professional, administrative, and travel expenses. The shares issued as share based compensation were valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2008 decreased to approximately $0.3 million from $1.0 million for the same period in 2007. The decrease in depreciation and amortization is related primarily to purchases of plant and equipment.

Interest Expense. Interest expense consisted primarily of interest fees, late charges, redemption premiums and registration penalties related to defaults on agreements for the three months ended March 31, 2007. Interest expense also consists of the amortization of debt discounts associated with beneficial conversion features and various bank fees for new loans. Interest expense related primarily to term debt facilities for the three months ended March 31, 2008 was approximately $5.2 million.

Comparison of Three Months Ended March 31, 2007 To Three Months Ended March 31, 2006


	Three Months Ended
	March 31, 2007
	2007			2006

Revenues:
Sales revenue		99	%		96	%
Energy production credits		1	%		4

Total revenues		100	%		100	%
Cost of sales		95	%		109	%

Gross profit		5	%		(9	)%
Compensation		77	%		54
Other selling, general and administrative		51	%		30	%
Depreciation and amortization		1	%		4	%

Net loss from operations		(125	)%		(97	)%
Net (loss)		(384	)%		(123	)%

Revenue. Total revenue for the three months ended March 31, 2007 decreased $2 million, or 23%, to approximately $6.6 million from approximately $8.6 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 $3 million, or 33%, to approximately $6.3 million from approximately $9.4 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 three months ended March 31, 2007 increased approximately $.5 million and related primarily to shares issued to consultants for employees and consulting services. 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 increased approximately $762,000 million from approximately $2.6 million for the same period in 2006. The 2007 costs increase consist of expenses related to travel, marketing and professional fees.

Depreciation and Amortization. Depreciation and amortization for three months ended March 31, 2007 increased to approximately $952,000 million from $374,000 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 $16 million from $75,000 for the same period in 2006. Interest expense consisted primarily of interest fees and the amortization of debt discounts.

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

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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. For the three month period ending March 31, 2008 our cash and cash equivalents increased by approximately $43,000 from December 31, 2007. Net cash provided by operating activities was $545,000 in 2008 compared to net cash used by operating activities of $10.2 million for the three month period ending March 31, 2007. The increase in net cash provided by operating activities relates primarily to increased sales of lng products during the second half of 2007, and for the three months ended March 31, 2008.

Net cash used in investing activities was $10 million for the three months ended March 31, 2007, compared to net cash used in investing activities of $400,000 for the same period in 2008. The decrease in net cash used in investing activities relates to the completion of the Durant facility in 2007, and thus reduced purchases of fixed assets in the amount of approximately $2.2 million from 2008. In addition, notes receivable and advances and investments in 2007 totaling approximately $7.7 million, as opposed to increases for the same of $361,000 for the same period in 2008.

Net cash provided by financing activities was $21.8 million for the three months ended March 31, 2007, compared to net cash used by financing activities of $102,000 for the same period in 2008. Cash flows provided by financing activities during 2007 relate primarily to the issuance of term debt facilities and lines of credit totaling $29 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 in 2007.

We incurred net losses and positive cash flows from operations of approximately $(9.7) million and $545,000 respectively, for the three months ended 2008. Of the net losses approximately $1.2 million relates to shares issued to employees and non employees for services rendered, $2.9 million relates to the amortization of debt discounts. We had approximately $85,000 in cash and cash equivalents at March 31, 2008. Our working capital deficit at March 31, 2008 was approximately $136 million.

Current and Future Financing Needs —

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 unleaded 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.

During 2007, EBOF defaulted under its $52.5 million senior unsecured notes indenture. Subsequent to the quarter ended June 30, 2007, these note holders filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation against EBOF. On November 14, 2007, EBOF negotiated and executed a settlement agreement (the “Agreement”) with the above note holders. The Agreement required the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, EBOF and subsidiaries granted certain security interests to the creditors and will execute a restructuring plan within 180 days.

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In addition, one of the accredited investors of the original eight accredited investors purchased four of the original investors interest, whereby reducing the number of credit holders to three. The Company is currently in negotiations with the remaining investors to settle the outstanding debts. The Company intends to sell certain operating assets and liabilities of the LNG business through a reverse merger and public offering of the LNG Business, and raise $35 million in the newly formed public company. Management expects that the LNG Business will be released as a guarantor of the EBOF notes totaling $52.5 by providing the note holders with a security interest in the newly formed public company (the “Restructuring”). The Restructuring will allow the Company to build new fueling stations, expand geographically and improve the Company’s sales and marketing efforts.

Management believes that the LNG Business has substantial market value that is not necessarily reflected by the accompanying financial statements. The LNG company acquisitions have produced revenues over the past two years in excess of $50 million. While cash flows from operations were flat year over the current year, the second half of 2007 demonstrated positive trends due to renewed and new customer contracts, significant cost restructurings and management improvements. 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 87,000 gallons per day, with a maximum capacity of 95,000 gallons per day.

During the first two quarters of 2007 the company obtained approximately $31 million in credit facilities. The credit facilities consisted of two term loans totaling $24 million, due in 3 years and are secured by the LNG plant facility in Topock,, Arizona, and the biodiesel plant located in Durant Oklahoma. There is also $7 million in revolving credit facilities which are advanced at the rate of 85% of accounts receivable. The term loan credit facilities were amended during the fourth quarter of 2007, and the facility was increased by $4.7 million.

The Company is also in the process of refinancing the term debt related to the Durant, Oklahoma biodiesel plant, and retrofitting the plant to allow for usage of other types of raw materials besides soybean oil. Due to the significant increase in feedstock prices during the year this plant was idle for the first quarter of 2008, resulting in reduced profit margins. Management is currently focusing on retrofitting the plant to be able to process yellow grease. Yellow grease is basically cooking grease, is easily accessible, and represents a significant reduction in cost from the existing market prices for soybean oil and other feedstock’s.

In addition, the Company is actively seeking acquisition of companies which handle this material, and to provide turnkey solutions for distributions throughout Texas and other markets of the Bio-Willie diesel brand fuel.

We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy. Based on our current 2008 business plan, which includes cash flows from operations and net proceeds from new equity investors, we expect to continue as a going concern.

Critical Accounting Policies and Estimates

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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. The Company enters into contracts with various customers, primarily municipalities, to sell LNG at index-plus basis market prices (primarily the prevailing index price of natural gas at that time plus basis). The contracts generally range from two to five years. The most significant cost component of LNG is the price of natural gas.

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.

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

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As the notes which included derivatives were paid or converted during the quarter, there is no derivative liability at December 31, 2006.

Net Loss Per Share Data — Basic and diluted net loss per common share are presented in conformity with the SFAS No. 128, “Earnings Per Share”. Diluted net loss per share is the same as basic net loss per share as the inclusion of outstanding warrants until their exercise would be anti-dilutive. Share and per-share data presented throughout the financial statements and notes reflect a 6-for-1 forward split that Earth declared in November, 2005.

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

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

Recent Accounting Pronouncements

On February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Financial Accounting Standards Board (FASB) issued interpretation no. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes (SFAS 109). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this new standard had a material impact on its financial position and results of operations, which are more accurately described under Item 7-Financial Statements and footnotes related to income taxes and intangible assets, such as goodwill.

Off-Balance Sheet Arrangements

As of March 31, 2008, Earth had no obligations that would qualify to be disclosed as off-balance sheet arrangements.

Contractual obligations

Current Debt Obligations —

On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that were due in 2011 to eight institutional investors. The notes carried an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In connection with the issuance of the notes, 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. 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 agreements. Subsequent to year end, Earth brought all coupon rate interest current totaling $1,574,222, plus the second interest payments due.

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However, subsequent interest and principal payments due under the notes were not made and as such, penalties and interest totaling approximately $48 million 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 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 against the company. On November 14, 2007, Earth Biofuels, Inc .negotiated and executed a settlement agreement with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year. The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 160 days. A confession of judgment was signed by the company noting the entire amount of debt and penalties due under the original notes was $100,651,173. Total accrued penalties were approximately $48,151,000 as of December 31, 2007and at March 31, 2008.

On February 28, 2007, our LNG subsidiary obtained a term note totaling $15 million, and line of credit facility totaling $5 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 $3,674,702. Amortization on the related debt discount totaled $202,560 for the year ended December 31, 2007. The line of credit was used to repay a former line of credit due in 2006. The balance on the new line of credit as of December 31, 2007 was approximately $1.5 million.

In addition, on March 23, 2007, Earth obtained a $9 million term loan facility, and a $2 million letter of credit secured by the Durant, Oklahoma biodiesel plant. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. 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 $.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 year ended December 31, 2007. The line of credit balance as of December 31, 2007 was approximately $0.

In June 2007, the lender on the above term loan facilities totaling $15 million and $9 million respectively, exchanged their rights to purchase the warrants in lieu of additional financing fees totaling $5.4 million. These financing fees are payable at maturity of the debt and are being accrued monthly. In addition the Company has not met underlying debt covenants related to fixed charge ratios and advances to subsidiaries. The debtor has noted these defaults and has not relinquished their rights per the underlying debt agreements. However, subsequent to default, the Company received additional funding in the fourth quarter of 2007 from the debtor in the amount of $4.7 million, which increased the above amount of the existing term loan facilities.

In connection with the above facilities interest reserves were escrowed as of December 31, 2007 totaling $1,205,000 for interest payments due the next twelve months. These facilities are also cross-collaterized. In addition, Earth incurred loan costs in the amount of $2,854,443 which will be amortized over the term of the notes.

On December 13, 2007, Earth entered into a loan agreement to which Earth issued 10,000,000 shares of common stock in connection with proceeds received of $550,000. The note and interest of 10% is due at maturity on March 15, 2008. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act. The value of the shares totaling approximately $286,000 was allocated as a discount on the note.

Earth has several other demand notes totaling $415,000 as of December 31, 2007. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.

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at an initial exercise price of $.0375 per share, and (iii) we issued 2,000,000 shares of common stock. We received $100,000 in gross proceeds in the initial closing. Holders of the Series A Preferred Stock shall be entitled to receive dividends or other distributions with the holders of the Corporation’s common stock, par value $.001 (the “Common Stock”) on an as converted basis when, as, and if declared by the Directors of the Corporation.

At the initial conversion price, the 100,000 shares of convertible preferred stock currently outstanding are convertible into an aggregate of 5,000,000 shares of our common stock. The convertible preferred stock is convertible into shares of our common stock at an initial conversion price of $.02 per share.

Leases —

On October 17, 2005, Earth 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.

Minimum lease payments for the next five years are approximately $120,000.

Total rent expense for the three months ended March 31, 2008 was approximately $55,623.

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 Quarterly Report on Form 10-Q 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:

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·	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. Quantitative and Qualitative Disclosures About Market Risk

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable, but not absolute, assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and ExchangeCommission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive

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Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.

The Company did not maintain a sufficient complement of personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with the Company’s complex financial accounting and reporting requirements and low materiality thresholds. This was evidenced by a significant number of out-of period adjustments noted during the year-end closing process related to deferred income taxes, impairment on notes receivable and accruals of contingent liabilities. This material weakness also contributed to the restatement of the financial statements for the three month periods ended March 31, 2007 and June 30, 2007, respectively, related to contingent liabilities, interest accruals and impairments of receivables.

A material weakness in the period-end financial reporting process could result in the Company not being able to meet its regulatory filing deadlines and, if not remediated, has the potential to cause a material misstatement or to miss a filing deadline in the future. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance.

The Company has developed and implemented remediation plans to address our material weaknesses. Management took the following actions during the last quarter of 2006 and the first two quarters of 2007 to improve the internal controls over financial reporting.

1. Reorganize and restructure the Accounting department by (a) revising the reporting structure and establishing clear roles, responsibilities, and accountability, (b) hiring additional technical accounting personnel to address Earth’s complex accounting and financial reporting requirements, and (c) assessing the technical accounting capabilities in the operating units to ensure the right complement of knowledge, skills, and training.

2. Improve period-end closing procedures by (a) requiring all significant non-routine transactions to be reviewed by Corporate Accounting, (b) ensuring that account reconciliations and analyses for significant financial statement accounts are reviewed for completeness and accuracy by qualified accounting personnel, (c) implementing a process that ensures the timely review and approval of complex accounting estimates by qualified accounting personnel and subject matter experts, where appropriate, and (d) developing better monitoring controls.

In light of this, management has augmented the resources in Accounting by utilizing external resources in technical accounting areas and implemented additional closing procedures for the year ended December 31, 2007, and for the three months ended March 31, 2008. As a result, management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements for the

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three months ended March 31, 2008 fairly present in all material respects the financial condition and results of operations for the Company in conformity with accounting principles generally accepted in the United States of America.

There were no changes in our internal controls (except as noted above) 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

On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that were due in 2011 to eight institutional investors. 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. Subsequent to the second quarter of 2007, certain of the note holders, filed with the bankruptcy courts a Chapter 7 - Involuntary Liquidation against the company. On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”). The Agreement required the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 180 days. A confession of judgment was signed by the company noting the entire amount of debt and penalties due under the original notes of

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$100,651,173. Total accrued penalties were approximately $48,151,000 as of December 31, 2007.

Earth has become subject to various claims and other legal matters in the course of conducting its business. No material individual claims are currently pending; however, the company has recorded approximately $585,000 in regards to claims deemed probable to occur in accounts payable and accrued expenses as of March 31, 2008.

Item 1A. Risk Factors

Feed stocks, 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 feed stocks, 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.

Our business is highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and on the availability of raw materials supplies, so our results of operations, financial condition and business outlook may fluctuate substantially. Our results of operations depend substantially on the prices of various commodities, particularly the prices for biodiesel, feedstock, such as soybean, corn, natural gas and unleaded gasoline. The prices of these commodities are volatile and beyond our control. As a result of the volatility of the prices for these items, our results may fluctuate substantially. We may experience periods during which the prices of our products decline and the costs of our raw materials increase, which in turn may result in operating losses and adversely affect our financial condition. We may attempt to offset a portion of the effects of such fluctuations by entering into forward contracts to supply biodiesel, corn, feedstock, such as soybean, natural gas or other items or by engaging in transactions involving exchange-traded futures contracts, but these activities involve substantial costs, substantial risks and may be ineffective to mitigate these fluctuations. If a substantial imbalance occurs, our results of operations, financial conditions and business outlook could be negatively impacted. Our ability to operate at a profit is largely dependent on market prices for biodiesel, and the value of your investment in us may be directly affected by these market prices.

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.

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Factors that could cause quarterly fluctuations include:

·	The ability to quickly bring new production capacity on stream;

·	the fluctuating prices of feed stocks 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:

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

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

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

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

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

o	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.

Changes in production technology could require us to commit resources to updating our biodiesel plants or could otherwise hinder our ability to compete in the biodiesel industry or to operate at a profit. Advances and changes in the technology of biodiesel production are expected to occur. Such advances and changes may make our biodiesel production technology less desirable or obsolete.

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.

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.

Excess production capacity in the ethanol industry resulting from new plants under construction or decreases in the demand for ethanol could adversely affect our business. According to the RFA, domestic ethanol production capacity has increased from 1.8 billion gallons per year at December 31, 2001 to an estimated 4.5 billion gallons per year in April 2006. The RFA estimates that, as of May 2006, approximately 2.0 billion gallons per year of additional

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production capacity, an increase of 50% over current production levels, is under construction at 41 new and existing facilities. This estimate does not include our plans to build a production capacity. Excess capacity in the ethanol industry would have an adverse effect on our results of operations, cash flows and financial condition. In a manufacturing industry with excess capacity, producers have an incentive to manufacture additional products for so long as the price exceeds the marginal cost of production (i.e., the cost of producing only the next unit, without regard to interest, overhead or fixed costs). This incentive can result in the reduction of the market price of ethanol to a level that is inadequate to generate sufficient cash flow to cover costs. Excess ethanol production capacity also may result from decreases in the demand for ethanol, which could result from a number of factors, including regulatory developments and reduced gasoline consumption in the United States. Reduced gasoline consumption could occur as a result of increased prices for gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage or as a result of technological advances, such as the commercialization of hydrogen fuel-cells, which could supplant gasoline-powered engines.

Our gross margins will be principally dependent on the spread between ethanol and corn prices. The current spread between ethanol and corn prices is currently at a historically high level, driven in large part by high oil prices. We do not expect the spread between ethanol and corn prices to continue at the current level. Any reduction in the spread between ethanol and corn prices, whether as a result of an increase in corn prices or a reduction in ethanol prices, would adversely affect our financial performance.

Our profit margins may be adversely affected by fluctuations in the selling price and production cost of gasoline. Ethanol is marketed both as a fuel additive to reduce vehicle emissions from gasoline and as an octane enhancer to improve the octane rating of the gasoline with which it is blended. As a result, ethanol prices are influenced by the supply of and demand for gasoline. Our results of operations may be materially adversely affected if the demand for or the price of gasoline decreases. Conversely, a prolonged increase in the price of or demand for gasoline could lead the U.S. government to relax import restrictions on foreign ethanol that currently benefit us.

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. Our future success depends, to a significant extent, on the continued services of our key personnel, including plant managers. 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 will be highly dependent upon an engineering and construction firm or firms to design and build the plants and train our personnel to operate the plants, but we currently have no binding agreement with any such firm. Various firms have indicated an interest in negotiating a design-build contract which would provide for the firm to serve as our general contractor and would provide or engage another firm to supply essential design and engineering services and would set forth the terms on which the firm would design and build our plant. However, the leading ethanol plant contracting firms are engaged in many other projects and we may have difficulty obtaining these services on a satisfactory timeline. Thus, there is no assurance that we will be able to identify a satisfactory contractor or to negotiate and execute a satisfactory design-build contract. If we are unable to execute a design-build contact or if the contractor terminates its relationship with us, we could be forced to abandon our project. Any delay in the construction of our plant or commencement of our operations would delay our ability to generate revenue, service our debt, compete effectively and make distributions to our shareholders.

Earth’s business consists of the production, marketing, distribution and sale of biodiesel fuel through Earth’s network of wholesale and retail outlets and, accordingly, its success depends upon the efforts, abilities, business

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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.

Significant increases in the cost of the project may require us to obtain additional debt or equity capital which may be difficult and expensive to obtain, or may not be available at all, and which could delay and diminish our profitability and decrease the value of your shares.

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.

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.

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.

As a result of being a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. We have incurred and will continue to incur costs associated with our public company reporting requirements and costs associated with related corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC. In addition, complying with these rules, regulations and requirements will occupy a significant amount of the time of our board of directors and management. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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

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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.

There is a limited market for our common stock. If a substantial and sustained market for our common stock does not develop, our stockholders’ ability to sell their shares may be materially and adversely affected.

Any disruption in our operations could result in a reduction of sales volume and could cause us to incur substantial losses.

We are subject to various stringent federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns. We cannot assure you that we will be at all times in complete compliance with these laws, regulations or permits. In addition, we expect to make significant capital expenditures on an ongoing basis to comply with these stringent environmental laws, regulations and permits.

In addition, the hazards and risks associated with producing and transporting our products (such as fires, natural disasters, explosions, abnormal pressures and spills) may result in personal injury claims or damage to property, natural resources and third parties. As protection against operating hazards, we will maintain insurance coverage against some, but not all, potential losses. The occurrence of events which result in significant personal injury or damage to our property, natural resources or third parties that is not fully covered by insurance could have a material adverse impact on our results of operations and financial condition.

When construction of a proposed plant nears completion, we will need to hire a significant number of employees to operate the plant. Our success depends in part on our ability to attract and retain competent personnel. We must hire qualified managers, engineers and accounting, human resources, operations and other personnel. Competition for employees in the ethanol industry is intense. If we are unable to hire, train and retain qualified and productive personnel, we may not be able to operate the plant efficiently and the amount of ethanol we produce and market may decrease.

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.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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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 8, 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. 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.

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 International, Inc. (Earth’s parent). 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.

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.

During the quarters ended June 30, and September 30, 2006, respectively 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

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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.

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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 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 its $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 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. On November 29, 2007 these notes were converted pursuant to the original conversion terms and pursuant to a Settlement Agreement with the Company, whereby conversion shares and make whole shares were issued totaling 16,818,155 shares to extinguish the debt.

·	In connection with the 8% senior convertible notes issued in July 2006, Earth incurred loan costs in the amount of $3,452,000, of which the unamortized balance was written off during 2007 due to the above legal proceedings and involuntary bankruptcy filings.

On January 18, 2007, we issued warrants for 375,000 shares of our common stock to three investors in connection with a loan agreement totaling $750,000. The loan was repaid at maturity during the second quarter of 2007. As of December 31, 2007, 250,000 shares of common stock were issued in connection with the exercise of above warrants. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.

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·	value of $1,654,643. Amortization on the related debt discount totaled $95,888 for the year ended December 31, 2007.

On December 13, 2007, Earth entered into a loan agreement to which Earth issued 10,000,000 shares of common stock in connection with proceeds received of $550,000. The note and interest of 10% is due at maturity on March 15, 2008. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.

The Company has guaranteed secured notes issued to the parent Apollo Resources International, Inc. (“ARI”) (the parent). The secured notes were issued in the total amount of $3,550,000 to ARI and guaranteed by the Company on February 12, 2007. As of December 31, 2007 the notes have been repaid through the sale of underlying collateral, and from the issuance of 7,218,750 additional shares of the Company’s stock, resulting in a net contingent liability of approximately $1.4 million still owed to the third party, and recorded in accounts payable on the Consolidated Balance Sheets of Earth. The fair market value of the additional shares issued and the remaining contingent liability was recorded as a reduction of amounts due to the parent from prior advances, resulting in no charges to earnings for Earth.

During the three months ended March 31, 2008, Earth issued 13,850,000 common shares, valued at approximately $554,000 million of Earth’s common stock to employees for services rendered, of which all shares were restricted, and 16,728,000 common shares, valued at approximately $661,627, of Earth’s common stock for consulting services, of which 12,475,320 were not restricted.

On March 28, 2008, the Company entered into a private financing transaction (“financing transaction”) pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement we issued to the investors (i) 100,000 shares of our newly authorized Series A Convertible Preferred Stock, $.001 par value (the “convertible preferred stock”), (ii) Stock Purchase Warrants to purchase an additional 2,000,000 shares of common stock at an initial exercise price of $.0375 per share, and (iii) we issued 2,000,000 shares of common stock. We received $100,000 in gross proceeds in the initial closing. Holders of the Series A Preferred Stock shall be entitled to receive dividends or other distributions with the holders of the Corporation’s common stock, par value $.001 (the “Common Stock”) on an as converted basis when, as, and if declared by the Directors of the Corporation.

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Item 3.	Defaults upon Senior Securities

See footnote 2 in “Going Concern” under Item 1.


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

Series A Convertible Preferred Stock

In November 2007, our board of directors approved and recommended to our stockholders an amendment to our stock option plans.


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 – 10.87 (1)
10.88(4)	Acquisition Agreement between Liquefaction 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 (4)	Pledge Agreement, Promissory Notes and Warrant Agreements with and from Two Ponds, Gilcreast and Bryant Russell Construction
10.90(3)	Letter from Nexxus re offer to Capitalize Biofuels with $150 million in Exchange for Common Stock and Escrow Agreement dated January 9, 2007 (Exhibit previously labeled 14.)
10.91(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 (Exhibit previously labeled 15.)
10.92(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 (Exhibit previously labeled 16.)
10.93(3)	Loan and Security Agreement with Greenfield Commercial Credit LLC dated March 1, 2007, and related Revolving Credit Loan note and Guaranty (Exhibit previously labeled 17.)
10.94(7)	Settlement Agreement with Pacific Biodiesel
10.95(7)	Amended Medley Agreement
10.96(7)	Interim Restructuring Agreement; dismissals; Order Granting Joint Motion of Debtor and Petitioning Creditors Holding 94% of Notes to Approve Interim Settlement Agreement and Dismiss Involuntary Bankruptcy Petition Pursuant to 11 U.S.C. §§ 105(a) and 3039j)(2) and Federal Rule of Bankruptcy Procedure 9019,
10.97(7)	Amended and Restated 2006 Stock Option and Award Plan
10.98(7)	Harborview Note Payable and Award Plan
10.99	Master Swap Agreement between Apollo Resources International and Arizona LNG.
10.99 A	Asset Purchase Agreement among Biodiesal Investment Group, Blackhawk Biofuels, LLC, etal
10.99 B(6)	Series A Preferred Stock First Amended and Restated Securities Purchase Agreement and Warrant Purchase Agreement, and Certificate of Amendment to Series A Preferred Stock of Earth.
12.1(3)	Report of Independent Registered Public Accounting Firm to the audit committee of Earth LNG, Inc. (Exhibit previously labeled 18.)
14	Code of Ethics – (Exhibit previously labeled 11.)
20.1(5)	Series of 7 Secured Notes (incorporated by reference to Exhibit 7.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on November 19, 2007).
21	Subsidiaries
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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.
(4)	Filed as an exhibit to the registrants Report on Form 10-QSB for the period ending June 30, 2007 filed with the SEC on August 13, 2007.
(5)	Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the SEC on November 19, 2007.
(6)	Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2008.
(7)	Filed as an exhibit to the registrants Report on Form 10-KSB for the period ending December 31, 2007 filed with the SEC on March 28, 2008.

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SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EARTH BIOFUELS, INC.


/s/ Dennis G. McLaughlin, III

Dennis G. McLaughlin, III

Chief Executive Officer

(Principal Executive Officer)

Date: May 20, 2008

/s/ Darren L. Miles

Darren L. Miles

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: May 20, 2008

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