10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003.

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM              TO             .

COMMISSION FILE NO. 0-21911

SYNTROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	73-1565725
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1350 South Boulder, Suite 1100

Tulsa, Oklahoma 74119-3295

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (918) 592-7900

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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.    YES  x    NO  ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

At November 5, 2003, the number of outstanding shares of the issuer’s common stock was 39,435,032.

SYNTROLEUM CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Unaudited Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	1
	Unaudited Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2003 and 2002	2
	Unaudited Consolidated Statements of Stockholders’ Equity for the nine-month period ended September 30, 2003	3
	Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2003 and 2002	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
SIGNATURES		28

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as well as historical facts. These forward-looking statements include statements relating to the Syntroleum Process and related technologies including Synfining, gas-to-liquids (GTL) plants based on the Syntroleum Process, anticipated costs to design, construct and operate these plants, the timing of commencement and completion of the design and construction of these plants, obtaining required financing for these plants and our other activities, the economic construction and operation of GTL plants, the value and markets for plant products, testing, certification, characteristics and use of plant products, the continued development of the Syntroleum Process (alone or with partners), our sub-quality gas monetization project and the economic production of gas reserves, anticipated capital expenditures, anticipated expense reductions, anticipated cash outflows, anticipated expenses, use of proceeds from our equity offerings, anticipated revenues, and any other statements regarding future growth, cash needs, capital availability, operations, business plans and financial results. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions are intended to be among the statements that identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these kinds of statements involve risks and uncertainties. Actual results may not be consistent with these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking statements include risks that the cost of designing, constructing and operating commercial-scale GTL plants will exceed current estimates, the schedule for construction of commercial-scale GTL plants will extend beyond current estimated schedules, financing for design and construction of commercial-scale GTL plants and our other activities may not be available, commercial-scale GTL plants will not achieve the same results as those demonstrated on a laboratory or pilot basis, GTL plants may experience technological and mechanical problems, improvements to the Syntroleum Process currently under development may not be successful, markets for GTL plant products may not develop, plant economics may be adversely impacted by operating conditions, including energy prices, construction risks and risks associated with investments and operations in foreign countries, our dependence on strategic relationships with manufacturing and engineering companies, volatility of natural gas prices, our ability to obtain interests in natural gas properties for our sub-quality gas monetization project, our ability to implement corporate strategies, competition, intellectual property risks, our ability to obtain necessary financing and other risks described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2002.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “our” or “us” mean Syntroleum Corporation, a Delaware corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	September 30, 2003			December 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	12,226		$	14,611
Accounts and notes receivable		1,746			4,431
Catalyst materials		6,366			—
Other current assets		273			1,384
Total current assets		20,611			20,426
REAL ESTATE HELD FOR SALE		—			2,674
INVESTMENTS		185			217
RESTRICTED CASH		21,725			18,076
PROPERTY AND EQUIPMENT, net		2,064			12,673
NOTES RECEIVABLE		2,081			2,199
OTHER ASSETS, net		803			875
	$	47,469		$	57,140
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,160		$	5,729
Accrued liabilities		1,228			1,071
Current portion of convertible debt (See Note 9)		17,861			—
Total current liabilities		23,249			6,800
LONG-TERM DEBT		1,851			1,432
OTHER NONCURRENT LIABILITIES		136			283
CONVERTIBLE DEBT (See Note 9)		—			4,466
DEFERRED CREDIT		9,829			9,829
DEFERRED REVENUE		34,935			35,875
MINORITY INTERESTS		706			2,445
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued		—			—
Common stock, $0.01 par value, 150,000 shares authorized, 41,504 and 40,435 shares issued in 2003 and 2002 respectively, including shares in treasury		415			404
Additional paid-in capital		164,656			161,546
Notes receivable from sale of common stock		(100	)		(100	)
Notes receivable from officers secured by common stock		—			(1,441	)
Accumulated deficit		(188,131	)		(164,322	)
		(23,160	)		(3,913	)
Less-treasury stock, 7,675 shares		(77	)		(77	)
Total stockholders’ equity		(23,237	)		(3,990	)
	$	47,469		$	57,140

The accompanying notes are an integral part of these unaudited consolidated balance sheets.

1

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2003			2002			2003			2002
REVENUES:
Joint development revenue	$	1,130		$	3,446		$	14,252		$	7,876
Catalyst materials sales		975			—			1,227			—
Other		38			26			408			26
Total revenues		2,143			3,472			15,887			7,902
COST AND EXPENSES:
DOE Catoosa project		3,821			4,747			18,209			7,040
Sweetwater project		—			30,855			—			30,855
Pilot plant, engineering and research and development		2,018			4,250			6,317			12,546
Cost of sales and impairment of catalyst materials		1,477			—			4,395			—
General, administrative and other		3,422			3,936			12,400			12,297
INCOME (LOSS) FROM CONTINUING OPERATIONS		(8,595	)		(40,316	)		(25,434	)		(54,836	)
INVESTMENT AND INTEREST INCOME		338			366			959			1,227
INTEREST EXPENSE		(384	)		—			(935	)		—
OTHER INCOME (EXPENSE)		1,274			(475	)		1,578			(624	)
FOREIGN EXCHANGE GAIN (LOSS)		(31	)		10			(156	)		(55	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES		(7,398	)		(40,415	)		(23,988	)		(54,288	)
MINORITY INTERESTS		(1	)		(26	)		(99	)		(48	)
INCOME TAXES		(9	)		(18	)		(49	)		(94	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(7,408	)		(40,459	)		(24,136	)		(54,430	)
INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED REAL ESTATE BUSINESS		(5	)		134			327			390
NET INCOME (LOSS)	$	(7,413	)	$	(40,325	)	$	(23,809	)	$	(54,040	)
BASIC AND DILUTED PER SHARE DATA -
Income (loss) from continuing operations	$	(0.22	)	$	(1.24	)	$	(0.72	)	$	(1.64	)
Income from operations of discontinued real estate business	$	0.00		$	0.01		$	0.01		$	0.01
Net income (loss)	$	(0.22	)	$	(1.23	)	$	(0.71	)	$	(1.63	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		33,771			32,760			33,742			33,074

The accompanying notes are an integral part of these unaudited consolidated statements.

2

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock			Additional     Paid-In Capital		Note Receivable From Sale Of Common Stock			Note Receivable From Officers Secured by Common Stock			Accumulated  Deficit			Treasury     Stock			Total Stockholders’ Equity
	Number of     Shares	Amount
BALANCE, December 31, 2002	40,435	$	404	$	161,546	$	(100	)	$	(1,441	)	$	(164,322	)	$	(77	)	$	(3,990	)
ISSUANCE OF COMMON STOCK AND WARRANTS	1,000		10		2,990		—			—			—			—			3,000
REPAYMENT OF OFFICER NOTE RECEIVABLE	—		—		—		—			1,441			—			—			1,441
STOCK OPTIONS EXERCISED	69		1		113		—			—			—			—			114
VALUATION OF CONSULTANT OPTIONS	—		—		7		—			—			—			—			7
NET INCOME (LOSS)	—		—		—		—			—			(23,809	)		—			(23,809	)
BALANCE, September 30, 2003	41,504	$	415	$	164,656	$	(100	)	$	—		$	(188,131	)	$	(77	)	$	(23,237	)

The accompanying notes are an integral part of these unaudited consolidated statements.

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SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Nine Months Ended September 30,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(23,809	)	$	(54,040	)
Adjustments to reconcile net income (loss) to net cash used in operations:
Minority interest in subsidiaries		(1,679	)		(304	)
Depreciation and amortization		477			635
Foreign currency exchange		3,759			1,009
Non-cash compensation expense		7			(53	)
Write-down of property, plant & equipment		—			30,855
Gain on sale of property and equipment		(426	)		—
Gain on sale of interest in real estate		(1,151	)		—
Equity in affiliates		—			852
Changes in real estate held for sale		776			275
Changes in assets and liabilities—
Accounts and notes receivable		2,685			(1,725	)
Catalyst materials		4,387			—
Other assets		1,251			878
Accounts payable		(1,606	)		1,762
Accrued liabilities and other		10			520
Deferred revenue		(4,393	)		—
Net cash used in operating activities		(19,712	)		(19,336	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(739	)		(316	)
Proceeds from sale of property and equipment		594			—
Proceeds from sale of interest in real estate		3,049			—
Change in restricted cash		(7	)		(30	)
Distributions from investments		32			—
Net cash provided by (used in) investing activities		2,929			(346	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and warrants		3,114			—
Proceeds from issuance of debt		13,507			—
Notes receivable from officers secured by common stock		1,441			(1,141	)
Minority interest distribution		(60	)		—
Net cash provided by (used in) financing activities		18,002			(1,141	)
FOREIGN EXCHANGE EFFECT ON CASH		(3,604	)		(954	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,385	)		(21,777	)
CASH AND CASH EQUIVALENTS, beginning of period		14,611			44,737
CASH AND CASH EQUIVALENTS, end of period	$	12,226		$	22,960
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for interest	$	—		$	—
Cash paid during the period for income taxes	$	49		$	94

The accompanying notes are an integral part of these unaudited consolidated statements.

4

SYNTROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

1. Basis of Reporting

The primary operations of Syntroleum Corporation and subsidiaries (the “Company” or “Syntroleum”) to date have consisted of the research and development of a proprietary process (the “Syntroleum Process”) designed to convert natural gas or synthesis gas into synthetic liquid hydrocarbons (gas-to-liquids or “GTL”) and activities related to commercialization of the Syntroleum Process. Synthetic liquid hydrocarbons produced by the Syntroleum Process can be further processed using the Syntroleum Synfining Process into high quality liquid fuels such as diesel, kerosene and naphtha, high quality specialty products such as synthetic lubricants, synthetic drilling fluid, waxes, liquid normal paraffins and certain chemical feedstocks.

The Company’s current focus is to commercialize the Syntroleum Process and Synfining Process through licensing and constructing commercial plants. The Company has sold license agreements to seven oil companies and the Commonwealth of Australia. In addition to operating its own pilot plant in Tulsa, Oklahoma, the Company participated in the design and operation of a demonstration plant located at ARCO’s Cherry Point refinery in Washington State. This plant has been relocated to the Tulsa Port of Catoosa and is being used as part of the U. S. Department of Energy (“DOE”) ultra-clean fuels project (“DOE Catoosa Project”). The Company also intends to pursue gas monetization prospects, which may include gas field development in concert with available gas processing technologies, and projects that may later evolve into integrated projects that would encompass GTL activities.

The consolidated financial statements included in this report have been prepared by the Company without audit, pursuant to the rules and regulation of the Securities and Exchange Commission (“SEC”). Accordingly, these statements reflect all adjustments (consisting of normal recurring entries), which are, in the opinion of management, necessary for a fair statement of the financial results for the interim periods presented. These financial statements should be read together with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC under the Securities Exchange Act of 1934.

The preparation of 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.

2. Operations and Liquidity

Construction of GTL plants in which the Company owns an interest would require significant capital expenditures by the Company. The Company may obtain funding through joint ventures, partnerships, license agreements and other strategic alliances, as well as various other financing arrangements. The Company may also seek debt or equity financing in the capital markets. The Company has an effective registration statement for the proposed offering from time to time of shares of its common stock, preferred stock, debt securities, depositary shares or warrants for a remaining aggregate initial offering price of approximately $220,000,000. On November 4, 2003, the Company completed the sale of 5,180,000 shares of common stock and warrants to purchase 1,554,000 shares of common stock under this registration statement (see note 16). In the event such capital resources are not available to the Company, its GTL plant development and other activities may be curtailed.

If adequate funds are not available, the Company may be required to reduce, delay or eliminate expenditures for these capital projects, as well as its research and development and other activities, or seek to enter into a business combination transaction with or sell assets to another company. The Company could also be forced to license to third parties the rights to commercialize additional products or technologies that it would otherwise seek to develop itself. If the Company obtains additional funds by issuing equity securities, dilution to stockholders may occur. In addition, preferred stock could be issued in the future without stockholder approval and the terms of the preferred stock could include dividend, liquidation, conversion, voting and other rights that are more favorable than the rights of the holders of the Company’s common stock. The Company can give no assurance that any of the transactions outlined above will be available to it when needed or on terms acceptable or favorable to the Company.

5

3. Research and Development

The Company incurs significant costs for materials, equipment and personnel related specifically to research, development and engineering programs. These costs have no alternative future uses and therefore are charged to expense when incurred in accordance with SFAS No. 2, “Accounting for Research and Development Costs.”

4. Earnings Per Share

Basic and diluted earnings (losses) per common share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the reporting periods. Options and warrants to purchase 5,655,108 shares of common stock at an average exercise price of $5.40 and 4,494,410 shares of common stock at an average exercise price of $8.01 were not included in the computation of diluted earnings per share for the periods ended September 30, 2003 and 2002, respectively, because inclusion of these options would be anti-dilutive. The number of shares that could be issued as a result of the convertible debt outstanding at September 30, 2003 totals 2,976,732 shares of common stock based on the minimum conversion rate of $6.00 per common share. These shares are also excluded from this computation because their inclusion would also be anti-dilutive.

5. Stock-Based Compensation

The Company has stock-based employee compensation plans for employees and directors. The Company applies the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure” (SFAS 148). Accordingly, no compensation cost has been recognized for the employee and director stock option plans. However, pursuant to the requirements of SFAS 123 and SFAS 148, the following disclosures are presented to reflect the Company’s pro forma net income (loss) for the three and nine months ended September 30, 2003 and 2002, as if the fair value method of accounting prescribed by SFAS 123 had been used. Had compensation cost for the Company’s stock option plans been determined consistent with the provisions of SFAS 123, the Company’s net income (loss) and income (loss) per share would have increased to the pro forma amounts indicated below:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2003			2002			2003			2002
	(in thousands, except per share data)						(in thousands, except per share data)
Net income (loss), as reported	$	(7,413	)	$	(40,325	)	$	(23,809	)	$	(54,040	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects		(806	)		(680	)		(2,282	)		(4,163	)
Pro forma net income (loss)	$	(8,219	)	$	(41,005	)	$	(26,091	)	$	(58,203	)
Earnings (loss) per share:
Basic and diluted - as reported	$	(0.22	)	$	(1.23	)	$	(0.71	)	$	(1.63	)
Basic and diluted - pro forma	$	(0.24	)	$	(1.25	)	$	(0.77	)	$	(1.76	)

The fair values of options have been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	September 30, 2003	September 30, 2002
Expected dividend yield	0%	0%
Expected volatility	109%	84%
Risk-free interest rate	2.85%	2.63%
Expected life	5 yrs.	5 yrs.

6. New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143), which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The Company adopted SFAS 143 on January 1, 2003 and the adoption did not have a material impact on its financial condition or results of operations.

6

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument within the scope of SFAS 150 as a liability (or an asset in some circumstances). SFAS 150 was effective for the Company beginning in the third quarter 2003. The Company’s adoption of SFAS 150 did not have a material impact on its financial condition or results of operations.

7. Note Receivable

In February 2000, the Company sold its parking garage in Reno, Nevada to Fitzgerald’s Reno, Inc. (“FRI”) for $3 million. FRI paid $750,000 in cash and executed a promissory note in the original principal amount of $2,250,000 and interest rate of 10% per year (based on a twenty-year amortization). The note was payable in monthly installments of principal and interest, with the entire unpaid balance due on February 1, 2010. The note was secured by a deed of trust, assignment of rents and security interest in favor of the Company on the parking garage. FRI also executed an Assumption and Assignment of Ground Lease dated February 1, 2000, under which FRI agreed to make the lease payments due under the ground lease. FRI’s obligations under the Assumption and Assignment of Ground Lease are secured by the deed of trust, assignment of rents and security interest in the parking garage and the ground lease.

In December 2000, FRI, a Nevada corporation doing business as Fitzgerald’s Hotel & Casino Reno, along with several affiliates, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, District of Nevada. Since the date of its bankruptcy petition, FRI has continued to make the monthly payments due on the note and the payment obligations due under the ground lease.

On August 28, 2003, the bankruptcy plan filed by FRI went into effect and FRI agreed to pay the Company $50,000 to be applied towards the outstanding principal balance of the promissory note. FRI then issued a new note in the amount of $2,068,000, which was the balance outstanding on the original note at that time, under the same terms and conditions as the original promissory note, except that the maturity date was accelerated to August 28, 2006 and the interest rate was reduced to 5% with principal payments prior to maturity based on a 16-year amortization schedule. The remaining unpaid balance is due August 28, 2006. No gain or loss was recorded as a result of the restructuring of the note. FRI executed an amended and restated deed of trust under the same terms and conditions as the previous deed of trust. FRI is required to continue to make the lease payments due under the ground lease under the same terms as originally agreed in the Assumption and Assignment of Ground Lease dated February 1, 2000.

The Company will continue to closely monitor the payments made by FRI under the note and the ground lease to ensure that, should a default occur, notice of default will be properly provided. Management believes that the Company will ultimately collect the balance of the note receivable, and accordingly the Company has not recorded any reserve for uncollectible amounts as of September 30, 2003.

8. Property and Equipment

Property and equipment is stated at cost. When assets are sold or retired, the cost and accumulated depreciation related to those assets are removed from the accounts and any gain or loss is credited or charged to income. Depreciation of property and equipment is computed on the straight-line method over the estimated useful lives of three to thirty-nine years. Property and equipment consists of the following (in thousands):

	September 30, 2003		December 31, 2002
	(unaudited)
Furniture and office equipment	$	4,402	$	4,270
Buildings		1,347		840
Land		31		118
Leasehold improvements		352		373
Catalyst materials		—		10,752
		6,132		16,353
Less-accumulated depreciation		4,068		3,680
	$	2,064	$	12,673

7

The Company is currently marketing catalyst materials for sale during the next year. As a result, these materials, totaling approximately $6,366,000, have been classified as current assets in the September 30, 2003 balance sheet. During the nine-month period ending September 30, 2003, the Company sold some of these materials at the current market price at the time of each sale. The Company incurred a loss on these transactions of approximately $237,000. The Company has recorded an impairment of its remaining catalyst materials as a result of a decline in the current market value of these materials. The total amount of the impairment of these materials totaled approximately $2,931,000 and is included in the accompanying statement of operations for the nine-months ended September 30, 2003. Management will continue to assess these materials for impairment in the future.

9. Marathon Participation and Loan Agreement

In May 2002, the Company signed a Participation Agreement with Marathon Oil Company (“Marathon”) in connection with the ultra-clean fuels production and demonstration project sponsored by the U.S. Department of Energy. This agreement requires Marathon to reimburse the Company for up to $5 million in project costs and to provide up to $3 million in Marathon personnel contributions. Marathon is entitled to credit these contributions against future license fees in specified circumstances. As of September 30, 2003, the Company had received reimbursement of $5 million of project costs ($1 million of which is included in deferred revenue as a fuel delivery commitment) and $3 million in personnel contributions. Marathon also agreed to provide project funding pursuant to advances under a $21.3 million secured promissory note with the Company. The promissory note bears interest at a rate of eight percent per year and matures on June 30, 2004. Since this promissory note matures within the next twelve months, the current balance of $17.9 million has been included in current liabilities in the accompanying balance sheet as of September 30, 2003. Should the Company obtain capital for the project from a third party, these capital contributions will be required to be applied towards the outstanding principal and interest of the note. Marathon’s only other form of repayment is its right to convert the promissory note into credits against future license fees or into the Company’s common stock at no less than $6.00 per share. The promissory note is secured by a mortgage on the assets of the project that would allow Marathon to complete the project in the event of a default by the Company. Events of default under the promissory note include failure by the Company to comply with the terms of the promissory note, events of bankruptcy of the Company, a material adverse effect on the Company, a change of control of the Company and the Company’s current assets minus current liabilities falling below $10 million, excluding amounts due under the promissory note and liabilities associated with prepaid license fees. The Company was in compliance with the provisions of the note as of September 30, 2003.

10. Deferred Credit

In August 2000, a wholly owned subsidiary of the Company entered into a loan agreement with the Commonwealth of Australia under which the Commonwealth would make an unsecured, non-amortizing, interest-free loan to the Company in the amount of AUD $40 million (approximately U.S. $22 million) with a 25-year maturity. Loan proceeds were to be used to support the further development and commercialization of GTL technologies in Australia. Under the terms of the loan agreement, the Company agreed to conduct a feasibility study on constructing a large-scale GTL fuels plant in Australia. Loan proceeds were made available to the Company in three advances. Pending satisfaction of certain conditions relating to the financing, construction and completion of the Sweetwater project, proceeds will be held in escrow. Should the conditions not be fully satisfied by August 2004, any loan proceeds remaining in escrow may be returned to the Commonwealth.

During 2000, the Company received the first advance in the amount of AUD $8 million (approximately U.S. $4 million) and during 2001 the Company received the second advance of loan proceeds in the amount of AUD $12 million (approximately U.S. $7 million). These funds were placed in escrow and are being held in Australian currency. These proceeds are included in the Restricted Cash balance on the Company’s consolidated balance sheets. Both the restricted funds and the long-term debt have been adjusted to reflect the exchange rates in effect as of the balance sheet date. The long-term debt amount reflects the total cash loan proceeds discounted over the remaining term of the loan using an imputed interest rate of nine percent. The difference between the cash proceeds received and the discounted long-term debt amount totaled $9,829,000. This difference was initially recorded as a reduction in the cost of the related property and equipment. As a result of the suspension of the Sweetwater project and the expensing of all capitalized costs related to this project, this amount has been reclassified from property and equipment and recorded as a deferred credit, as there is no cost of property and equipment related to this project remaining. This credit will be reduced at the time the debt is repaid by the Company. The long-term debt amount reflected for these proceeds will, excluding the effect of currency exchange rate fluctuations, increase over time as the remaining term of the loan declines.

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11. Deferred Revenue

On June 18, 2003, the Company entered into an Agreement in Principle for GTL Project Development with one of its licensees, Ivanhoe Energy, which modified certain terms included in the Master License Agreement dated April 26, 2000, and amended October 11, 2000 and June 1, 2002, between the Company and the licensee. The licensee had previously paid $10 million as license fee deposits which were recorded as deferred revenue, in accordance with the Company’s revenue recognition policy. Under this modification, the licensee will retain its rights under the Master License Agreement to use the Syntroleum Process and other technology developed by the Company. However, the licensee’s rights to receive a credit against future license fees and the related indemnifications as it relates to the $10 million deposit have been terminated. The licensee also agreed to the release of equity contributions for certain projects totaling $2 million. These items were forfeited as reimbursement to the Company for certain research and development projects completed on the licensee’s behalf. As a result of this agreement and in accordance with the Company’s revenue recognition policies, the Company has recognized $12 million previously recorded in deferred revenue and minority interests in projects as joint development revenue during 2003.

During the nine months ended September 30, 2003, the Company has recorded approximately $4,607,000 as deferred revenue related to fuel delivery commitments in connection with the DOE Catoosa Project for Congressional appropriation funds received. The fuel delivery commitment is subject to continued Congressional appropriation of the final project funds and will be recorded as joint development revenue at the time that the fuels are delivered. The Company has also recorded $1,000,000 as deferred revenue related to its agreement with Marathon as discussed in Note 8 in conjunction with the DOE Catoosa Project.

A portion of the Company’s deferred revenue relates to our license agreement with the Commonwealth of Australia. This license agreement is denominated in Australian Dollars and is subject to changes in foreign currency. During the nine months ended September 30, 2003, the Company’s deferred revenue increased by $3,453,000 as a result of an increase in the exchange rate between the United States and Australian dollars.

12. Sale of Common Stock and Warrants

On February 10, 2003, the Company sold in a private placement one million shares of its common stock and warrants to purchase additional shares of common stock for a total of $3 million. The warrants allow for the purchase an additional one million shares of the Company’s common stock at an exercise price of $6.00 per share, with expiration on December 31, 2004. The Company may call the warrants for redemption at any time after the average market value of the Company’s common stock for 20 consecutive trading days immediately preceding the call date exceeds $12.00 per share. The warrants provide for settlement upon exercise through the issuance of the Company’s common stock. These warrants had a fair market value of approximately $961,000 at the date of issuance and have been recorded as additional paid-in capital in the accompanying financial statements.

13. Notes Receivable from Officers Secured by Common Stock

During 2001, the Company loaned Kenneth Agee, the Company’s Chairman and Chief Executive Officer, $300,000 under a loan agreement that allowed up to $1,100,000 in loan advances and which matured on June 25, 2002. In May and June 2002, the Company made additional advances of $683,000 to Mr. Agee. On June 25, 2002, the promissory note was renewed for an additional year with an interest rate of 3.75%. The renewal of the promissory note increased to $1,460,000 the amount available to be borrowed. On June 26 and July 6, 2002, an additional $458,000 was loaned to Mr. Agee. At the maturity of the promissory note on June 25, 2003, Mr. Agee paid the Company for the entire outstanding balance of the loans, including accrued interest. As a result of this transaction, the Company has no additional loans outstanding with Mr. Agee.

14. Discontinued Operations

On May 29, 2003, the Company entered into a formal agreement to sell its 75% ownership interest in undeveloped land and residential lots in Houston, Texas known as the “Houston Project” for total proceeds of $3,450,000 less a purchase price adjustment for lot sales from May 1 through closing. As part of this agreement, the Company also retained the right to receive 75% of the Municipal Utility District Bond distribution that was expected to be received by the Houston Project, regardless of the time of distribution. On June 25, 2003, the Houston Project received approximately $860,000 from the Municipal Utility District Bond, of which $645,000 was paid to the Company. This distribution is reflected as a reduction in real estate held for sale in the Company’s financial statements for the period ending June 30, 2003. On July 21, 2003, the Company completed and closed on the sale of its interest in the Houston Project and received approximately $3.1 million in proceeds, net of the purchase price

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adjustment and selling costs. This sale, and the corresponding gain of approximately $1,151,000, is reflected in the Company’s third quarter financial statements. As a result of this sale, the Company no longer has any real estate inventory and will no longer have revenues from sales of real estate operations. The Company has recorded the impact of this business as income from discontinued operations in the consolidated statement of operations for the periods ended September 30, 2003 and 2002. Revenues from the Houston Project totaled $27,000 and $415,000 for the three months ended September 30, 2003 and 2002, respectively, and $1,068,000 and $1,295,000 for the nine months ended September 30, 2003 and 2002, respectively.

15. Reclassifications

Certain reclassifications have been made to the 2002 consolidated balance sheet and statements of operations to conform to the 2003 presentation. These reclassifications had no impact on net income (loss).

16. Subsequent Events

In October 2003, the Company sold 400,000 shares of its common stock to a consultant of the Company and received net proceeds of $1.8 million. In connection with this agreement, the Company also granted 600,000 stock options to this consultant. These options were granted with a strike price of $4.50 per share. These options vest upon the occurrence of certain events specified in the consulting agreement and have a two-year life from the date of vesting. Also in October, we granted 100,000 stock options to another consultant of the Company. These options were granted with a strike price of $3.00 per share. These options vest upon the occurrence of certain events specified in the consulting agreement and have a five-year life from the date of grant. All of the options granted to consultants will be accounted for under SFAS 123 with an expense recognized for any increases in the Company’s stock price greater than strike price.

On November 4, 2003, the Company completed the sale of 5,180,000 shares of common stock and warrants to purchase 1,554,000 shares of common stock pursuant to a public offering at a price to the public of $3.95 per share and 30% of a warrant. Each warrant is exercisable at a price of $5.00 per share of common stock beginning on the date of issuance and expiring November 4, 2007. The warrants were deemed to have a fair market value of approximately $2.6 million for financial accounting purposes at the date of issuance and will be recorded as additional paid-in capital in the fourth quarter of 2003. The Company received net proceeds of approximately $18.7 million after the underwriting discount and estimated offering expenses. Total estimated expenses related to this offering were approximately $0.5 million.

The Company intends to use the net proceeds from the offering to fund a potion of the costs associated with its domestic monetization of sub-quality gas. The Company intends to use any remaining net proceeds to fund costs associated with its GTL Barge project and larger scale GTL projects it is pursuing, if necessary, pilot plant facilities, research and development activities, the acquisition of complementary technologies, working capital needs and other general corporate purposes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following information together with the information presented elsewhere in this Quarterly Report on Form 10-Q and with the information presented in our Annual Report on Form 10-K for the year ended December 31, 2002 (including our audited financial statements and the accompanying notes).

Overview

We are seeking to develop projects that will allow us to use and license our proprietary process for converting natural gas or synthesis gas from coal to synthetic liquid hydrocarbons, a process generally known as gas-to-liquids (GTL) technology utilizing Fischer-Tropsch synthesis. We seek to form joint ventures and acquire equity interests in oil and gas development projects where GTL is critical to a project’s success by monetizing remote and/or stranded natural gas. We also license our technology, which we refer to as the “the Syntroleum Process,” to others for the production of fuels. We anticipate that the Syntroleum Process will be an attractive solution in many instances where there are natural gas reserves, including flared gas, that are not economic to produce using traditional technology or have no current market. We also intend to pursue gas monetization prospects in order to generate short-term cash flow. These projects may include projects that involve only gas field development in concert with available gas processing technologies and projects that may later evolve into integrated projects that would encompass GTL activities. One of the gas monetization projects we are currently pursuing involves monetizing sub-quality gas reserves through the use of a third-party separation technology. These activities are intended to allow us to bridge our short-term cash flow needs as we pursue long lead-time GTL projects.

We are focusing our short-term efforts on projects that we believe will generate cash flow in the near future. We also continue to pursue opportunities for developing meaningful revenue streams in the future. Our efforts have focused on the following:

1. We are currently placing an emphasis on near-term cash-flow projects and projects we believe have the best chance of going forward in the relatively near future with the greatest return on investment potential;

2. We believe that we are making progress in our defined strategies to reduce costs and monetize non-core assets, although our longer-term survival, particularly after 2004, will depend on our ability to obtain additional revenues or financing;

3. We believe we have a competitive advantage in our technology by our use of air in the conversion process compared to other technologies that use pure oxygen, thereby reducing the capital costs of plants and avoiding the safety risks associated with pure oxygen; and

4. We have a large, diverse inventory of projects at varying stages and in various areas including Australia, Bolivia, Cameroon, the Middle East, the Russian Federation, the Commonwealth of Independent States, the United States and other areas of the world.

The Syntroleum Process produces synthetic liquid hydrocarbons that are substantially free of contaminants normally found in conventional products made from crude oil. These synthetic liquid hydrocarbons can be further processed into higher margin products through conventional refining processes, including a proprietary process we developed called the Synfining Process. These products include:

• Ultra-clean liquid fuels for use in internal combustion engines, jet/turbine engines and fuel cells; and

• Specialty products, such as synthetic lubricants, process oils, high melting point waxes, liquid normal paraffins, drilling fluids, and chemical feedstocks.

We believe the key advantages of our technology over traditional technologies are (1) the use of air in the conversion process, which is inherently safer than the requirement for pure oxygen in other GTL technologies and (2) the use of our proprietary catalysts, which enhance the conversion efficiency of the catalytic reaction. We believe these advantages will reduce capital and operating costs of GTL plants based on the Syntroleum Process and permit smaller plant sizes, including mobile plants that could be mounted on barges and ocean-going vessels. Based on demonstrated research, we believe the Syntroleum Process can be economically applied in GTL plants with throughput levels from less than 10,000 to over 100,000 barrels per day (b/d). We believe the advantages afforded by the Syntroleum Process together with the large worldwide resource base of stranded natural gas and underutilized

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coal reserves provide significant market opportunities for the use of this technology by us and our licensees in the development of commercial GTL plants. While we have not yet built a commercial-scale GTL plant based on the Syntroleum Process, we have successfully demonstrated numerous elements and variations of the Syntroleum Process in demonstration plant operations and laboratory tests.

We currently have a number of licensing agreements with oil companies plus the Commonwealth of Australia and have active projects under development with current licensees Ivanhoe Energy, Inc. (Ivanhoe), Marathon Oil Company (Marathon) and Repsol-YPF, S.A. Additionally, we have strategic relationships with various companies in support of the Syntroleum Process, including AMEC Process and Energy Ltd. as a preferred engineering provider.

We are pursuing gas monetization projects with prospects for short-term cash flow. These gas monetization projects are intended to allow us to bridge our short-term cash flow needs as we pursue long lead-time GTL projects. One of the gas monetization projects we are currently pursuing involves gas reserves located in the United States that do not currently meet pipeline specifications because of impurities in the produced gas. When these sub-quality gas reserves are located at smaller fields, they are typically not produced because they do not meet pipeline requirements and the use of typical gas separation technology has been considered uneconomic. We believe that these reserves can be economically produced through the use of a third-party separation technology. We are identifying fields with proven reserves of sub-quality gas and seeking to acquire interests in these fields with minimal capital expenditures and develop gas processing plants to upgrade the quality of the gas, as well as related production and gathering facilities. We expect to acquire the gas processing plants from a third-party supplier and are working with that party in connection with our development efforts, although we do not currently have a supply agreement. Depending upon the demand for sub-quality gas plants, we may seek debt or equity financing in the capital markets to enable us to pursue these opportunities.

We are incurring costs with respect to developing and commercializing the Syntroleum Process and the Synfining Process and do not anticipate recognizing any significant revenues from licensing our technology or from production from either a GTL fuel or specialty plant in the near future. As a result, we expect to continue to operate at a loss unless and until sufficient revenues are recognized from licensing activities, gas-to-liquids plants or non-GTL projects we are developing.

Operating Revenues

During the periods discussed below, our revenues were primarily generated from reimbursement for research and development activities associated with the Syntroleum Process. In the future, we expect to receive revenue relating to the Syntroleum Process from sales of products or fees for the use of GTL plants in which we will own an equity interest, catalyst sales, licensing, revenues from research and development activities carried out with industry partners, and non-GTL projects we are developing.

Until the commencement of commercial operation of GTL plants in which we own an interest or a non-GTL project we are developing, we expect that cash flow relating to the Syntroleum Process will consist primarily of license fee deposits, site license fees and revenues associated with joint development activities. We will not receive any cash flow from GTL plants in which we own an equity interest until the first of these plants is constructed, and will not receive any cash flow from non-GTL projects we are developing until the first of these projects is completed. Our future operating revenues will depend on the successful commercial construction and operation of GTL plants based on the Syntroleum Process, the success of competing GTL technologies, the success of our non-GTL projects, and other competing uses for natural gas. We expect our results of operations and cash flows to be affected by changing crude oil, natural gas, fuel and specialty product prices. If the price of these products increases (decreases), there could be a corresponding increase (decrease) in operating revenues.

GTL Plant Revenues. We intend to develop GTL plants and to retain equity interests in these plants. These plants will enable us to gain experience with the commercial operation of the Syntroleum Process and, if successful, are expected to provide ongoing revenues. The anticipated products of these plants (i.e., synthetic fuels, lube base oils, process oils, waxes, drilling fluid and liquid normal paraffins) have historically been sold at premium prices and are expected to result in relatively high sales margins. We anticipate forming joint ventures with energy industry and financial partners in order to finance and operate these plants. We anticipate that our GTL plants will include partners who have low-cost gas reserves in strategic locations and/or have distribution networks in place for the synthetic products to be made in each plant.

Catalyst Revenues. We expect to earn revenue from the sale of our proprietary catalysts to our licensees.

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Our license agreements currently require our catalyst to be used in the initial fill for the licensee to receive a process guarantee. After the initial fill, the licensee may use other catalyst vendors if appropriate catalysts are available. The price for catalysts purchased from us pursuant to license agreements is equal to our cost plus a specified margin. We will receive revenue from catalyst sales if and when our licensees purchase catalysts. We expect that catalysts will need to be replaced every three to five years. We are currently marketing a certain amount of the catalyst materials we have on-hand and have classified these materials as current other assets in the September 30, 2003 balance sheet at the current market price for these materials. Any revenues and costs of sales related to the sale of these materials will be recorded in the statement of operations in the period in which the materials are sold.

License Revenues. The revenue earned from licensing the Syntroleum Process is expected to be generated through four types of contracts: master license agreements, volume license agreements, regional license agreements and site license agreements. Master, volume and regional license agreements provide the licensee with the right to enter into site license agreements for individual GTL plants. A master license agreement grants broad geographic and volume rights, while volume license agreements limit the total production capacity of all GTL plants constructed under the agreement to specified amounts, and regional license agreements limit the geographical rights of the licensee. Master, volume and regional license agreements signed in the past have required an up-front cash deposit that may offset or partially offset license fees for future plants payable under site licenses. In the past, we have acquired technologies or commitments of funds for joint development activities, services or other consideration in lieu of the initial cash deposit in cases where we believed the technologies or commitments had a greater value.

Our site license agreements currently require fees to be paid in increments when milestones during the plant design and construction process are achieved. The amount of the license fee under our existing master and volume license agreements is currently determined pursuant to a formula based on the present value of the product of: (1) the yearly maximum design capacity of the plant, (2) an assumed life of the plant and (3) our per barrel rate, which currently is approximately $.50 per barrel of daily capacity. Our licensee fees may change from time to time based on the size of the plant, improvements that reduce plant capital cost and competitive market conditions. Our existing master and volume license agreements allow for the adjustment of fees for new site licenses under certain circumstances. Our accounting policy is to defer all up-front deposits under master, volume and regional license agreements and license fees under site license agreements and recognize 50% of the deposits and fees as revenue in the period in which the engineering process design package (PDP) for a plant licensed under the agreement is delivered and recognize the other 50% of the deposits and fees when the plant has passed applicable performance tests. The amount of license revenue we earn will be dependent on the construction of plants by licensees, as well as the number of licenses we sell in the future. To date we have received $39.5 million in cash as initial deposits and option fees under our existing license agreements. Except for $2 million recorded as revenue in connection with option expirations and $10 million recorded as revenue as a result of the release of license credits and indemnifications, these amounts have been recorded in deferred revenue. Our obligations under these license agreements, are to allow the use of the technology, provide access to engineering services to generate a PDP package at an additional cost, and to refund 50% of the advances should the licensee build a plant that does not pass all mechanical completion testing. These licenses generally begin expiring in 2011 and the initial deposits will be recognized as licensing revenue as the licenses expire should a licensee not purchase a site license and begin construction of a plant prior to expiration of the license.

Joint Development Revenues. We continually conduct research and development activities in order to reduce the capital and operating costs of GTL plants based on the Syntroleum Process. We conduct our research and development activities primarily through two initiatives: (1) independent development utilizing our own resources and (2) formal joint development arrangements with our licensees and others. Through these joint development agreements, we may receive revenue as reimbursement for specified portions of our research and development or engineering expenses. Under some of these agreements, the joint development partner may receive credits against future license fees for monies expended on joint research and development.

Non-GTL Project Revenues. We intend to pursue gas monetization projects that involve only gas field development in concert with available gas processing technologies and projects that may later evolve into integrated projects that would encompass GTL activities. One of the projects that we are currently pursuing involves monetizing sub-quality gas reserves through the use of a third-party separation technology. We expect these projects will be pursued by us and with partners through various arrangements. We anticipate receiving revenues from these projects, including sales of oil and gas from properties owned by us or jointly with another party, as well as processing and gathering fees from facilities in which we own an interest.

Real Estate Sales Revenues. On May 29, 2003, we entered into an agreement to sell our 75% ownership interest in undeveloped land and residential lots in Houston, Texas known as the “Houston Project” for total proceeds of $3,450,000 less a purchase price adjustment for lot sales from May 1 through closing. As part of this

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agreement, we also retained the right to receive 75% of the Municipal Utility District Bond distribution that was expected to be received by the Houston Project, regardless of the time of distribution. On June 25, 2003, the Houston Project received approximately $860,000 from the Municipal Utility District Bond, of which $645,000 was paid to us. This distribution is reflected in our financial statements for the period ended June 30, 2003. On July 21, 2003, we completed and closed on the sale of our interest in the Houston Project and received approximately $3.1 million in proceeds. This sale is reflected in our third quarter financial statements. As a result of this sale, we no longer have any real estate inventory and will no longer have revenues from sales of real estate.

Operating Expenses

Our operating expenses historically have consisted primarily of pilot plant, engineering, including third party engineering, research and development expenses and general and administrative expenses, which include costs associated with general corporate overhead, compensation expense, legal and accounting expense and expenses associated with other related administrative functions.

Our policy is to expense pilot plant, engineering and research and development costs as incurred. All of these research and development expenses are associated with our development of the Syntroleum Process. Research and development expenses include costs to operate both our laboratory and technology center, salaries and wages associated with these operations, research and development services performed by universities, consultants and third parties and additional supplies and equipment for these facilities. Our policy is to expense costs associated with the development of GTL plants until financial close unless they have future economic value for future projects. Engineering costs are capitalized once an engineering contract has been signed.

We have also recognized depreciation and amortization expense primarily related to office and computer equipment and patents. Our general and administrative expenses have increased substantially over the last several years as we have expanded our research and development, engineering and commercial activities, including staffing levels. As a result of the completion of our new corporate office facility, we have eliminated approximately $500,000 annually of costs associated with our previously rented space.

As a result of the completion of a substantial portion of the engineering and process/product testing associated with the current generation design of the Syntroleum Process and the suspension of our Sweetwater project, and in an effort to conserve working capital, we plan to decrease our operating expenses for 2003 compared to 2002 while continuing to fund only our most critical research and development and project development activities. As a result of workforce reductions, project completions and reduced operating costs related to lower staffing levels, we currently expect our net cash outflows for 2003 to be approximately half of our net cash outflows for 2002. We expect to continue to work on the demonstration plant located at the Tulsa Port of Catoosa used as part of the U.S. Department of Energy (DOE) ultra-clean fuels project (DOE Catoosa Project) in 2003, which will cause our operating cash outflows to increase compared to 2002 amounts. However, we expect these operating cash outflows to be largely offset by outside funding by the DOE and Marathon included in our financing cash flows. Our expectation for cash outflows for 2003 could change if we accelerate our development of a commercial project. During the first nine months of 2003, we recorded $979,000 of severance expense related to our workforce reductions. All severance payments related to our staff reduction during the first quarter of 2003 have been fully paid. Severance payments related to our staff reduction during the second quarter of 2003 and the fourth quarter of 2002 will be fully paid by April 2005.

If we are successful in developing a GTL plant in which we own an interest, we expect to incur significant expenses in connection with our share of the engineering design, construction and start-up of the plant. Upon the commencement of commercial operations of a plant, we will incur our share of cost of sales expenses relating primarily to the cost of natural gas feedstocks for this plant and operating expenses relating to this plant, including labor, supplies and maintenance, and product marketing costs. Due to the substantial capital expenditures associated with the construction of GTL plants, we expect to incur significant depreciation and amortization expense in the future. We also expect to incur expenses related to other gas monetization projects, which could include lease operating costs, gathering and processing fees and other typical costs associated with traditional oil and gas exploration, production and processing.

Results Of Operations

Our primary research and development projects during the first nine months of 2003 related to the GTL technology for use in licensee GTL plants, including confirmation of catalyst performance and reactor designs. We expensed $18.2 million during the first nine months of 2003 for our DOE Catoosa Project. Since this project is not currently for commercial operations, these costs have been expensed in accordance with SFAS No. 2, “Accounting

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for Research and Development Costs.” Marathon provides funding for these expenditures through a $21.3 million promissory note, advances on which are recorded as convertible debt on our consolidated balance sheet. Additionally, the DOE funds a portion of these expenditures.

Of the $6.3 million in expenses for pilot plant, engineering and research and development during the first nine months of 2003, approximately $1.7 million directly related to the operation of our existing pilot plant facilities in Tulsa, Oklahoma with a new pilot-scale reactor based on our advanced moving bed technology. This unit began operating during the fourth quarter of 2002 and our testing was completed in mid-August 2003. The results of our testing will enable us to provide quality control for commercial catalyst manufacturing and project-specific engineering support. The new reactor operated according to expectations. In addition, an aggregate of $4.6 million of expenses incurred during the first nine months of 2003 related to salaries and wages, outside contract services, lab equipment and improvements and laboratory operating expenses, which primarily supported work on technology we plan to use in fuels plants. During the past six years, we have continually expanded our research and development and pilot plant facilities. Because these expenditures have been accounted for as research and development expenses, they are not recorded on our balance sheet. However, they provide valuable data to both our licensees and us.

Our research and development and pilot plant facilities include the following locations and equipment:

• Syntroleum Laboratory - This laboratory houses nine fixed bed reactors, four fluid bed reactors and seven continuous stir reactors as well as 12 catalyst characterization units and seven catalyst preparation units.

• Syntroleum Technology Center - This facility houses much of our research and development equipment including our Synfining Refining Upgrading Unit. This unit manufactures finished fuels and specialty products to specifications for testing by our customers and us, which have included the Department of Defense (DoD) and a consortium of Japanese automobile manufacturers. This facility is also home to our isomerization laboratory, our products laboratory, our distillation laboratory and our gas chromatography laboratory.

• Syntroleum Pilot Plant - The plant includes our Advanced Fischer-Tropsch Slurry Reactor Unit, which is utilized in demonstrating process performance and conducting parametric studies requested by clients and engineering contractors involved in developing commercial GTL plants. We also have a Fischer-Tropsch laboratory located at this facility that includes four fixed bed reactors and two continuous stir reactors.

• Syntroleum DOE Catoosa Project - This facility is currently under construction and will house a 70 b/d plant that will initially produce products for the DOE. This facility is anticipated to be online in the fourth quarter of 2003. Subsequent to the completion of the DOE Catoosa Project, we expect to utilize this facility for research and development, as well as demonstrations for licensees or other customers.

During the third quarter of 2001, the DOE concluded an agreement with Integrated Concepts and Research Corporation (ICRC) to provide funding to a team of companies for the GTL Ultra-Clean Fuels Production and Demonstration Project for which we announced preliminary approval in October 2000. In May 2002, we signed a Participation Agreement with Marathon in connection with this project. The agreement provides for an executive committee comprised of a majority of Syntroleum representatives to govern the project. We and Marathon are providing additional facilities at this site outside the scope of the DOE Catoosa project. Under the program, our Cherry Point GTL facility has been disassembled and relocated from ARCO’s Cherry Point Refinery in Washington State to a site located at the Port of Catoosa near Tulsa, Oklahoma. This facility is the basis for construction of a new GTL facility expected to produce up to approximately 70 b/d of synthetic product. Procurement and construction for the project was underway throughout the nine months ended September 30, 2003. The plant was mechanically completed and dedicated on October 3, 2003, and startup and fuel deliveries are expected to commence in the fourth quarter of 2003. Funding received from the DOE during 2003 will be recorded in deferred revenue until the shipment of the finished fuels products. The fuels from this facility are expected to be tested by other project participants in advanced power train and emission control technologies and are also expected to be tested in bus fleets by the Washington Metropolitan Area Transit Authority and the U.S. National Park Service at Denali National Park in Alaska. The project has a budget of $59 million, funded by $11.5 million from the DOE, labor contributions of $17 million by Marathon and us, the contribution of the Cherry Point GTL equipment of $6.3 million by us, a $5 million cash contribution by Marathon and a $21.3 million loan agreement between Marathon and us. The excess funding will apply to any contingencies on the project. Completion of the project is subject to continued congressional appropriation of project funds. The government has approved the appropriations for budget period three of the project in the amount of $4.6 million. As of September 30, 2003, three out of the four budget periods have been approved and funded for a total of $10.8 million. The final budget period will be December 15, 2003

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through December 31, 2005 and will include expected funding of approximately $782,000. Once this project is complete, we expect to utilize the plant for further research and development and demonstrations for licensees or other customers. The completion and start-up of this project will be subject to the risks of delay inherent in any large construction project.

In October 2003, Marathon announced that they and four other companies entered into a memorandum of understanding to further explore the possibility of developing a GTL project in a portion of the North field offshore Qatar using Syntroleum technology. Such a project would be expected to include infrastructure for the development and production of North field reserves, gas processing facilities and a GTL plant. Marathon will lead the consortium, and the companies will work with Qatar Petroleum to pursue technical and commercial discussions that could lead to a GTL project capable of converting natural gas into ultra-clean diesel and other liquid hydrocarbon products for export to world markets.

In January 2002, we announced that Congress had appropriated $3.5 million for a proposed Flexible JP-8 (single battlefield fuel) Pilot Plant program under the Department of Defense Appropriation Bill, 2002. In September 2002 we signed a $2.2 million contract with the Department of Defense (DoD) to participate in the program, in which we will provide for the design of a marine-based fuel-production plant, as well as testing of synthetically-made (gas-to-liquids) JP-8 fuel in military diesel and turbine engine applications. The program is now nearing completion of Phase I and all the work done to date has validated our beliefs in the performance of the single battlefield fuel product (S5 X-02-001) and in the design of the barge-mounted unit to produce the fuel. We have recorded joint development revenues totaling $2.2 million over the life of this contract, $1.7 million during the first nine months of 2003. On October 21, 2003, we announced that Congress had appropriated $2.0 million for Phase II development of our proposed Flexible JP-8 single-battlefield fuel Pilot Plant Program under fiscal year 2004 DoD appropriations legislation. Phase II will include expanded engineering and design work for single-battlefield fuel production systems and further single-battlefield fuel characterization and demonstration work. We expect this work will begin during the first quarter of 2004.

On August 21, 2003, we announced our plan to commercialize a small barge-mounted GTL plant (GTL Barge). The GTL Barge is designed to develop offshore and near-shore coastal natural gas fields in the one to three trillion cubic feet range where there is currently no infrastructure to produce and transport the stranded reserves. These fields are generally considered to be too small to support an LNG facility. The GTL Barge builds on the strengths and safety advantages of the Syntroleum Process, which utilizes air instead of oxygen. We believe the GTL Barge is also suited to process associated rich gas that might otherwise be flared or re-injected. We expect that a single GTL Barge would be designed to produce approximately 20,000 b/d of GTL products, of which 8,000 b/d would be zero sulfur diesel fuel. The balance would be a mix of naptha and natural gas liquids.

On June 18, 2003, we entered into an Agreement in Principle for GTL Project Development with one of our licensees, Ivanhoe, which modified certain terms included in the Master License Agreement (MLA) dated April 26, 2000, and amended October 11, 2000 and June 1, 2002, between Ivanhoe and us. Ivanhoe had previously paid $10 million as license fee deposits which were recorded as deferred revenue, in accordance with our revenue recognition policy. Under this modification, Ivanhoe will retain its rights under the MLA to use the Syntroleum Process and other technology developed by us. However, Ivanhoe’s rights to receive a credit against future license fees and the related indemnifications as it relates to the $10 million deposit have been terminated. The licensee also agreed to the release of equity contributions for certain projects totaling $2 million. These items were forfeited as reimbursement to us for certain research and development projects completed on Ivanhoe’s behalf. As a result of this agreement and in accordance with our revenue recognition policies, we have recognized $12 million previously recorded in deferred revenue and minority interests in projects as joint development revenue during the nine months ended September 30, 2003. We also agreed to jointly pursue certain integrated GTL projects that both Ivanhoe and us had developed independently. In return for Ivanhoe bringing certain financial resources, as well as certain knowledge and experience from previous GTL projects, we agreed to remove certain territorial restrictions from the MLA.

During February 2003 after discussions with Chevron-Texaco, we mutually agreed to end our license agreement that was originally signed by Texaco in 1996 and that had been inactive for several years. All of the obligations by Chevron-Texaco for confidentiality and protection of our intellectual property remain in effect. This transaction had no impact on our financial condition or results of operations.

We acquired exploration and production rights to Block Z-1, a Peruvian offshore oil and gas block, in late 2001 with a 5% partner, BPZ & Associates, Inc. (BPZ). Activities related to the development of Block Z-1 have included expenses to complete inspections of the four existing offshore platforms on the block and review of existing geologic data under the requirements of our Block Z-1 license agreement. Our most current assessment of Block Z-1 indicates that previously existing gas reserves are too small to support a GTL investment, but our analysis did

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identify two large exploration prospects in the southern portion of the block. We have decided not to perform further exploration or assessments on Block Z-1, and we have entered into a contract with a third party that would transfer our entire interest in Block Z-1 to them, including fulfillment of our obligations under the Block Z-1 license agreement with the government of Peru. This transfer of our interest is contingent on the approval of the contract by the government of Peru and we can give no assurances that the contract will be approved. The Block Z-1 license agreement allows for us to terminate the agreement with notice and to remain liable for only the approved work program for the period of withdrawal. Currently we are in period one of the exploration work program, which requires a commitment of at least $300,000. While we have substantially completed the work commitments for exploration period one, we are maintaining a letter of credit secured by restricted cash of $308,000 until either the completion of exploration program one or the transfer of obligations to the third party. Under the current agreement to transfer our interest, the third party has agreed to perform the remaining requirements under exploration program one until final approval is received from the Peruvian authorities. If the agreement to transfer our interest in Block Z-1 is not approved, we have until January 2004 to decide whether or not to enter exploration work program two, which requires a minimum commitment of $1,300,000. The exploration period expires on December 30, 2008. Upon declaration of commerciality at any time during the exploration phase, the license contract is automatically extended to a total period of 40 years.

In November 2002, we announced the signing of two memoranda of understanding with Repsol-YPF to jointly conduct pre-engineering assessment studies on developing two GTL projects in the Republic of Bolivia using the Syntroleum Process and Synfining Process for converting natural gas to synthetic fuels. The first assessment study, completed in June, evaluated a 13,500 b/d plant in central Bolivia that would produce clean diesel for the local market. A go-forward decision on the development of this project will await the completion of the commercialization study for a larger 90,000 b/d plant, which would likely be located in southern Bolivia near the large gas reserves in the Tarija region. This plant would produce ultra-clean fuels and other products primarily for export. The memorandum of understanding for this project originally expired in October 2003, however, under a recent agreement, Ivanhoe has joined Repsol-YPF and us in this large-plant commercialization study, and the parties continue to pursue this project. If either or both of the Bolivia projects go forward upon completion of the studies, Syntroleum, Repsol-YPF and Ivanhoe will negotiate our individual equity participation and would have the right to sell down our respective equity interests or transfer interests between ourselves, as may be mutually agreed. There can be no assurance that either of these projects will go forward.

In March 2003, we also entered into four separate agreements for development in the Russian Federation. These encompass a feasibility study for Yakutgazprom in connection with constructing a GTL plant in the Republic of Sakha, a joint-venture enterprise with the Evenk Autonomous District in Evenkiya region, an investment analysis study for OAO Gazprom and VNIIGAZ for constructing multiple GTL facilities in Russian Federation gas fields, and an economic assessment for Lukoil Overseas for developing associated gas processing and power production projects in the Verkhnekam and Pechora oil fields. During the three months ended September 30, 2003, we initiated a study for VNIIGAZ and recorded revenues totaling $192,000. The remaining feasibility studies are progressing according to schedule, and a portion of the studies are expected to be completed in the early 2004.

We are also participating in other project development activities, including the $3 billion Victorian Power and Liquids Project being developed by Australian Power and Energy Limited in Australia and the negotiations with the Cameroon government for a license to develop the offshore MLHP-4 block in Cameroon, West Africa with EurOil.

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Joint Development Revenue. Revenues from our joint research and development and pilot plant operations were $1,130,000 in the third quarter of 2003, down $2,316,000 from the third quarter of 2002 when they were $3,446,000. The decrease was due to higher levels of funding from the DOE for the DOE Catoosa plant received during the third quarter of 2002 than the third quarter of 2003. The majority of our joint development revenue during the three months ended September 30, 2003 relates to our DoD project.

Catalyst Materials Sales. Revenues from catalyst materials sales of $975,000 are related to the sale of a portion of certain catalyst materials. We sold these materials for a net loss of $104,000 during the three months ended September 30, 2003. No catalyst materials were sold during the three months ended September 30, 2002.

DOE Catoosa Project. Expenses related to the DOE Catoosa Project totaled $3,821,000 during the third quarter of 2003, a decrease of $926,000 compared to the $4,747,000 of expenses incurred during the third quarter of 2002. The decrease in these expenses is a result of the completion of installation of major equipment modules during the second quarter of 2003. These expenses do not negatively impact our current cash because they are funded by Marathon through a $21.3 million promissory note, advances on which are recorded as convertible debt on our balance sheet, and the DOE.

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Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant, engineering and research and development activities were $2,018,000 in the third quarter of 2003, down $2,232,000 from the third quarter of 2002 when these expenses were $4,250,000. The decrease was primarily the result of our workforce reduction and the completion of construction of our Advanced Fischer-Tropsch Slurry Reactor Unit, which began operating during the fourth quarter of 2002.

Cost of Sales and Impairment of Catalyst Materials. Cost of sales and impairment of materials is related to the sale and impairment of certain catalyst materials. We incurred costs of approximately $1,079,000 related to sale of these materials and an impairment of $398,000 during the three months ended September 30, 2003. The impairment was a result of a decrease in the market value of these materials remaining on-hand at September 30, 2003. We will continue to assess these materials for impairment. No catalyst materials were sold during the three months ended September 30, 2002.

General and Administrative Expense. General and administrative expenses were $3,422,000 in the third quarter of 2003, down $514,000 from the third quarter of 2002 when these expenses were $3,936,000. The decrease is attributable to our current emphasis on controlling costs over prior years and our workforce reduction.

Investment and Interest Income. Investment and interest income was $338,000 in the third quarter of 2003, down $28,000 from the third quarter of 2002 when this income was $366,000. The decrease was primarily attributable to decreased interest income from lower cash balances.

Interest Expense. Interest expense was $384,000 during the second quarter of 2003. This interest expense is primarily related to the Marathon convertible debt. The only form of repayment for this interest is through capital contributions from a third party, credits against future license fees or conversion into our common stock at no less than $6.00 per share. We had no convertible debt outstanding during the three months ended September 30, 2002.

Other Income (Expense), Foreign Exchange and Minority Interests. Other income (expenses), including foreign exchange loss and minority interest, was income of $1,242,000 in the third quarter of 2003, compared to expense of ($491,000) during the third quarter of 2002. This increase of $1,733,000 is the result of a gain recorded on the sale of our interest in the Houston Project and the sale of certain property and equipment.

Provision for Income Taxes. Income tax expense was $9,000 and $18,000 in the third quarter of 2003 and 2002, respectively. Tax expense during both periods represents the Australian withholding tax imposed on interest we earned on funds held in Australian bank accounts and on the second advance of loan proceeds under our loan agreement with the Commonwealth of Australia. We expect to incur similar withholding tax expense with respect to any future interest payments to us from these Australian bank accounts and any future advances of loan proceeds. We incurred losses in the third quarter of 2003 and 2002 and did not recognize any income tax benefits for these losses.

Income from Operations of Discontinued Real Estate Business. Revenues from the sale of real estate were $27,000 in the third quarter of 2003, down $388,000, from the third quarter of 2002 when they were $415,000. The cost of real estate sold was $32,000 in the third quarter of 2003, down $249,000 from $281,000 in the third quarter of 2002. These decreases resulted from the sale of our interest in the Houston Project. Real estate revenues, cost of real estate sold, and operating expenses have been netted and included in Income from Discontinued Operations. We no longer have any real estate inventory and will no longer receive real estate sales revenue.

Net Income (Loss). In the third quarter of 2003, we experienced a net loss of $7,413,000. This loss was $32,912,000 lower than in the third quarter of 2002 when we experienced a loss of $40,325,000. The decrease in the net loss is primarily a result of the write down in 2002 of $30,855,000 of costs related to our suspended Sweetwater Project and other factors described above.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Joint Development Revenue. Revenues from our joint research and development and pilot plant operations were $14,252,000 in the first nine months of 2003, up $6,376,000 from the first nine months of 2002 when they were $7,876,000. The increase was primarily due to the release of license credits and related indemnifications, as well as project equity contributions, by one of our licensees totaling $12,000,000. These amounts were previously recorded as deferred revenue of $10 million and minority interest of $2 million and were used for reimbursement of research

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and development costs incurred on the licensee’s behalf. Also included in joint development revenues for the nine months ended September 30, 2003 is $2,252,000 for feasibility studies and work on the Department of Defense project.

Catalyst Materials Sales. Revenues from catalyst materials sales of $1,227,000 are related to the sale of a portion of certain catalyst materials. We sold these materials for a net loss of $237,000 during the nine months ended September 30, 2003. No catalyst materials were sold during the nine months ended September 30, 2002.

DOE Catoosa Project. Expenses related to the DOE Catoosa Project totaled $18,209,000 during the first nine months of 2003, an increase of $11,169,000 compared to the $7,040,000 of expenses incurred during the first nine months of 2002. The increase in these expenses is a result of the installation of major equipment modules and mechanical completion of the plant. These expenses do not negatively impact our current cash because they are funded by Marathon through a $21.3 million promissory note, advances on which are recorded as convertible debt on our balance sheet, and by the DOE.

Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant, engineering and research and development activities were $6,317,000 in the first nine months of 2003, down $6,229,000 from the first nine months of 2002 when these expenses were $12,546,000. The decrease was primarily the result of our workforce reductions and the completion of construction of our Advanced Fischer-Tropsch Slurry Reactor Unit, which began operating during the fourth quarter of 2002.

Cost of Sales and Impairment of Catalyst Materials. Cost of sales and impairment of materials is related to the sale and impairment of certain catalyst materials. We incurred costs of approximately $1,464,000 related to sale of these materials and an impairment of $2,931,000 during the nine months ended September 30, 2003. The impairment was a result of a decrease in the market value of the materials remaining on-hand. We will continue to assess these materials for impairment. No catalyst materials were sold during the nine months ended September 30, 2002.

General and Administrative Expense. General and administrative expenses were $12,400,000 in the first nine months of 2003, up $103,000 from the first nine months of 2002 when these expenses were $12,297,000. The increase is attributable primarily to the recording of $979,000 of severance costs for workforce reductions occurring in February and April 2003 and increased insurance costs of approximately $590,000.

Investment and Interest Income. Investment and interest income was $959,000 in the first nine months of 2003, down $268,000 from the first nine months of 2002 when this income was $1,227,000. The decrease was primarily attributable to decreased interest income from lower cash balances and lower interest rates.

Interest Expense. Interest expense was $935,000 during the first nine months of 2003. This interest expense is primarily related to the Marathon convertible debt. The only form of repayment for this interest is through capital contributions from a third party, credits against future license fees or conversion into our common stock at no less than $6.00 per share. We had no convertible debt outstanding during the nine months ended September 30, 2002.

Other Income (Expense), Foreign Exchange and Minority Interests. Other income (expenses), including foreign exchange loss and minority interest, was income of $1,323,000 in the first nine months of 2003, compared to a loss of ($727,000) during the first nine months of 2002. This increase of $2,050,000 is the result of gains recorded on the sale of our interest in the Houston Project and sales of certain property and equipment.

Provision for Income Taxes. Income tax expense was $49,000 and $94,000 in the first nine months of 2003 and 2002, respectively. Tax expense during both periods represents the Australian withholding tax imposed on interest we earned on funds held in Australian bank accounts and on the second advance of loan proceeds under our loan agreement with the Commonwealth of Australia. We expect to incur similar withholding tax expense with respect to any future interest payments to us from these Australian bank accounts and any future advances of loan proceeds. We incurred a loss in both the first nine months of 2003 and the first nine months of 2002 and did not recognize an income tax benefit for these losses.

Income from Operations of Discontinued Real Estate Business. Revenues from the sale of real estate were $1,068,000 in the first nine months of 2003, down $227,000, from the first nine months of 2002 when they were $1,295,000. The cost of real estate sold was $741,000 in the first nine months of 2003, down $164,000 from $905,000 in the first nine months of 2002. These decreases resulted from the sale of our interest in the Houston Project. Real estate revenues, cost of real estate sold, and operating expenses have been netted and included in Income from Discontinued Operations as a result of this sale. We no longer have any real estate inventory and will no longer receive real estate sales revenue.

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Net Income (Loss). In the first nine months of 2003, we experienced a loss of $23,809,000. The loss was $30,231,000 lower than in the first nine months of 2002 when we experienced a loss of $54,040,000. The decrease in the net loss is primarily a result of the write down in 2002 of $30,855,000 of costs related to our suspended Sweetwater Project and other factors described above.

Liquidity and Capital Resources

General

As of September 30, 2003, we had $12,226,000 in cash and short-term investments, including $1,680,000 of advances for the DOE Catoosa Project. Our current liabilities totaled $23,249,000, including approximately $17,861,000 of convertible debt with Marathon which matures at June 30, 2004, $1,997,000 of reimbursable costs related to the DOE Catoosa Project and $655,000 related to severance payments to be made over the next year. Our long-term debt as of September 30, 2003 was $1,851,000, and this debt matures in 2025. The long-term debt amount reflects cash loan proceeds received under our loan agreement with the Commonwealth of Australia, which are held in escrow (AUD $20 million, which is approximately U.S. $11 million) and which are discounted over the remaining term of the loan using an imputed interest rate of nine percent. The difference between the cash received of $11,019,000 and the originally discounted long-term debt amount of $1,190,000 has been recorded as a deferred credit on the balance sheet. The long-term debt amount reflected for these proceeds, excluding the effect of currency exchange rate fluctuations, will increase over time as the remaining term of the loan declines. Should the conditions under the loan agreement relating to the financing, construction and completion of the Sweetwater Plant not be fully satisfied by August 2004, any loan proceeds remaining in escrow may be returned to the Commonwealth. We are currently in discussions with the Commonwealth regarding the suspension of the Sweetwater project and the related project funding. These funds are currently held in escrow, and we have the rights to the interest earned on these funds. If we are unable to reach a favorable agreement with the Commonwealth of Australia, the funds will be returned in August 2004.

During 2001, we loaned Kenneth Agee, our Chairman and Chief Executive Officer, $300,000 under a loan agreement that allowed up to $1,100,000 in loan advances and which matured on June 25, 2002. In May and June 2002, we made additional advances of $683,000 to Mr. Agee. On June 25, 2002, the promissory note was renewed for an additional year with an interest rate of 3.75%. The renewal of the promissory note increased to $1,460,000 the amount available to be borrowed. On June 26 and July 6, 2002, we loaned an additional $458,000 to Mr. Agee. At the maturity of the promissory note on June 25, 2003, Mr. Agee paid us for the entire outstanding balance of the loans, including accrued interest. As a result of this transaction, we have no additional loans outstanding with Mr. Agee.

In February 1999, we loaned Paul F. Schubert, previously our Vice President of Research and Development, $29,335. In September 1999, we loaned Mr. Schubert an additional $30,000. These notes were unsecured and bore interest rates of 5.18% and 5.98%, respectively. The initial note matured on February 25, 2003, on which date Mr. Schubert settled the note by paying $35,221 in principal and interest. On April 11, 2003, Mr. Schubert left the Company and in connection with his separation from the Company, the second note was forgiven.

At September 30, 2003, we had $17,861,000 in convertible debt relating to our loan agreement with Marathon. Under this agreement, we can borrow up to $21.3 million for costs relating to the DOE Catoosa Project. The note bears interest at a rate of eight percent per year. If we obtain capital for the project from a third party, these capital contributions will be required to be applied towards the outstanding principal and interest of the note. The promissory note matures on June 30, 2004. Under this agreement, Marathon’s only other form of repayment is its right to convert the promissory note into credits against future license fees or into our stock at no less than $6.00 per share. The promissory note is secured by a mortgage on the assets of the project, to allow Marathon to complete the project in the event of a default by us. Events of default under the promissory note include failure by us to comply with the terms of the promissory note, events of our bankruptcy, a material adverse effect on us, a change of control of us and our current assets minus current liabilities falling below $10 million (excluding amounts due under the promissory note and liabilities associated with prepaid license fees). Upon an event of default, Marathon may exercise its rights under the mortgage securing the promissory note and appoint a majority of the executive committee that governs the project. At September 30, 2003, we were in compliance with the note agreement. With this note agreement, the approved budget for the project is fully funded, excluding contingencies. The entire project represents a commitment of approximately $59 million, funded $11.5 million from the DOE, labor contributions of $17 million by Marathon and us, the contribution of the previously expensed Cherry Point GTL equipment of $6.3 million by us, a $5 million cash contribution by Marathon and the $21.3 million promissory note between Marathon and us. The excess funding will apply to any contingencies on the project.

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On February 10, 2003, we sold in a private placement one million shares of our common stock and warrants to purchase additional shares of common stock for a total of $3 million. The warrants allow for the purchase an additional one million shares of our common stock at an exercise price of $6.00 per share, with expiration on December 31, 2004. We may call the warrants for redemption at any time after the average market value of our common stock for 20 consecutive trading days immediately preceding the call date exceeds $12.00 per share. The warrants provide for settlement upon exercise through the issuance of our common stock. These warrants had a fair market value of approximately $961,000 at the date of issuance and have been recorded as additional paid-in capital in the accompanying financial statements. We expect to use the net proceeds from the offering for working capital and general corporate purposes.

During October 2003, we consummated (i) the private issuance and sale of 400,000 shares of our common stock for an aggregate purchase price of $1,800,000 and the grant of options to purchase 600,000 shares of common stock to a consultant and (ii) the grant of options to purchase 100,000 shares of common stock to another consultant. The options are exercisable during the period beginning on the date the options vest in accordance with the applicable option agreement and ending on the second anniversary of the vesting date with respect to the options to purchase 600,000 shares and October 6, 2008 with respect to the options to purchase 100,000 shares. The exercise price of the options to purchase 600,000 shares is $4.50 per share, and the exercise price of the options to purchase 100,000 shares is $3.00 per share. We expect to use the net proceeds from these transactions for working capital and general corporate purposes.

On November 4, 2003, we closed a public offering of 5,180,000 shares of common stock and warrants to purchase 1,554,000 shares of common stock, priced at $3.95 per share, including 30% of a common warrant. Each warrant is exercisable at a price of $5.00 per share of common stock beginning on the date of issuance and expiring November 4, 2007. The warrants were deemed to have a fair market value of approximately $2.6 million for financial accounting purposes at the date of issuance and will be recorded as additional paid-in capital in the fourth quarter of 2003. Net proceeds to us were approximately $18.7 million. We intend to use the net proceeds from the offering to fund a portion of the costs associated with our projects related to the monetization of sub-quality gas, including the costs of the gas processing plants we plan to use in connection with these projects. We intend to use any remaining net proceeds to fund a portion of the costs associated with our GTL Barge project and larger scale GTL projects we are pursuing, if necessary, pilot plant facilities, research and development activities, the acquisition of complementary technologies, working capital needs and other general corporate purposes.

At September 30, 2003, we had $1,746,000 in accounts receivable outstanding relating primarily to our DoD project. We also had $21,725,000 in restricted investments as of September 30, 2003 of which $21,417,000 are held in escrow representing funds received from the Commonwealth of Australia under our loan and license agreements with the Commonwealth. These restricted assets are held in escrow pending satisfaction of conditions in the loan agreement. The funds will be returned in 2004 if these conditions are not satisfied. We do not have rights to the use of these funds except for the interest earned while in escrow. We also have $308,000 pledged as security for a $300,000 letter of credit issued in connection with the guaranteed work program under our license contract for Block Z-1 in Peru. The work program for period one ends on January 30, 2004 and we have no other spending commitments for this project other than the funds in restricted investments, which would be forfeited if we do not comply with the requirements of the work program for period one.

Cash flows used in operations were $19,712,000 in the first nine months of 2003 compared to $19,336,000 during the first nine months of 2002. This increase in cash flows used in operations was primarily the result of the construction of the DOE Catoosa Project and the operation of our advanced reactor at our pilot plant facility, offset by the streamlining of our research and development activities during 2003. As of September 30, 2003, we had recorded as deferred revenue, approximately $5,607,000 related to license credits and fuel delivery commitments in connection with the DOE Catoosa Project.

Cash flows provided by investment activities were $2,929,000 in the first nine months of 2003 compared to cash used in investment activities of $346,000 in the first nine months of 2002. The increase resulted primarily from the proceeds received from the sale of our interest in the Houston Project and other property and equipment.

Cash flows provided by financing activities were $18,002,000 in the first nine months of 2003 compared to cash flows used in financing activities of $1,141,000 in the first nine months of 2002. The difference is primarily due to proceeds from the issuance of common stock and warrants and the exercise of options of $3,114,000, proceeds from the settlement of a promissory note for $1,441,000 and proceeds from the issuance of convertible debt of $13,395,000 related to the DOE Catoosa Project.

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The following table sets forth our contractual obligations as of September 30, 2003:

	Payments Due by Period (in thousands)
Contractual Obligations	Total		1 year or less		1-3 years		4-5 years		After 5 years
Long Term Debt	$	1,851	$	—	$	—	$	—	$	1,851
Convertible Debt		17,861		17,861		—		—		—
Operating Leases		8,116		848		1,285		851		5,132
Total Contractual Cash Obligations	$	27,828

The following table sets forth our other commercial commitments as of September 30, 2003:

	Amount of Commitment Expiration Per Period (in thousands)
Other Commercial Commitments	Total Amounts Committed		1 year or less		1-3 years	4-5 years	After 5 years
Standby Letters of Credit	$	300	$	300	—	—	—

Our contractual obligations include long-term debt amounts associated with our loan agreement with the Commonwealth of Australia. Under this agreement, the Commonwealth made an unsecured, non-amortizing, interest-free loan to us in the amount of AUD $40 million (approximately U.S. $25 million) with a 25-year maturity. Loan proceeds are to be used to support the further development and commercialization of GTL technologies in Australia. Under the terms of the loan agreement, we agreed to conduct a feasibility study on constructing a large-scale GTL fuels plant in Australia. Loan proceeds are to be made available to us in three advances. Pending satisfaction of certain conditions, proceeds will be held in escrow. If the conditions are not fully satisfied by August 2004, any loan proceeds remaining in escrow may be returned to the Commonwealth. To date we have received the first and second advances of loan proceeds in the amount of AUD $8 million (approximately U.S. $4 million) and AUD $12 million (approximately U.S. $7 million), respectively. These funds were placed in escrow and are being held in Australian currency. Both the restricted funds and the long-term debt have been adjusted to reflect the exchange rates in effect as of the balance sheet date. The long-term amount reflects cash loan proceeds received in escrow from both the 2001 and 2000 distributions, discounted over the remaining term of the loan using an imputed interest rate of nine percent. The difference between the cash proceeds received and the discounted long-term debt has been recorded as a deferred credit on our balance sheet. The long-term debt amount reflected for these proceeds will, excluding the effect of currency exchange rate fluctuations, increase over time as the remaining term of the loan declines.

Convertible debt represents our loan agreement with Marathon related to our DOE Catoosa Project. This agreement provides project funding pursuant to advances under a $21.3 million secured promissory note between Marathon and us. The promissory note bears interest at a rate of eight percent per year. The only form of repayment under this loan is through capital contributions to the DOE Catoosa Project from a third party, credits against future license fees, or conversion into our common stock at no less than $6.00 per share. At September 30, 2003, we had received $17.9 million under the loan.

Our operating leases include leases for corporate equipment such as copiers, printers and vehicles. We also have leases on our corporate office, which expires in November 2003 and will not be renewed as a result of our relocation, our laboratory and our Houston and Peruvian offices. As a result of the ground lessor not removing us from the lease, we also remain the lessee of a parking garage in Reno, Nevada that we sold to Fitzgerald’s Casino in 2001. This lease is currently paid by Fitzgerald’s Casino and is part of the sale agreement executed in 2001, however it is included in our schedule of contractual obligations above.

Our commercial commitments with our 5% partner, BPZ, include a letter of credit relating to our Block Z-1 contract in Peru. This agreement requires four periods of work schedules. Period one runs from January 30, 2002 until January 30, 2004. We currently have the required work schedule guarantee in restricted cash, and we have completed part one of the three-part schedule for period one. We have entered into an agreement to transfer our

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interest in Block Z-1 to a third party. Under this agreement, the third party has agreed to complete the remaining portion of period one until the government of Peru approves the transfer. Should the contract not be approved, we have until January 30, 2004 to complete parts two and three. If we are unable to complete these parts by January 30, 2004, we will forfeit our $300,000 work guarantee and our rights to the block. Period two runs from January 31, 2004 until January 30, 2006 and requires a work guarantee of $1,300,000. Period three runs from January 31, 2006 until June 29, 2007 and requires a work guarantee of $1,000,000. Period four runs from June 30, 2007 until December 30, 2008 and requires a work guarantee of $1,000,000. We may withdraw from this agreement and the contract by giving notice to all other parties stating our decision to withdraw. A withdrawing party will, following its notification of withdrawal, remain liable only for its share of the work program and budget or AFE prior to such party’s notification of withdrawal, regardless of when the costs are actually incurred; any minimum work obligations for the current period or phase of the contract, and for any subsequent periods of the project which have been previously approved.

We are also in discussions with various parties regarding joint venture projects. If these discussions progress, we could enter into additional commercial commitments. These discussions currently revolve around projects to be located in Bolivia, Cameroon and the Russian Federation.

We have expended and will continue to expend a substantial amount of funds to continue the research and development of our GTL technologies, to market the Syntroleum Process, to design and construct GTL plants, and to develop our other commercial projects. We intend to obtain additional funds through collaborative or other arrangements with strategic partners and others and debt (including debt which is convertible into our common or preferred stock) and equity financing. We also intend to obtain additional funding through joint ventures, partnerships, license agreements and other strategic alliances, as well as various other financing arrangements. We have an effective registration statement for the proposed offering from time to time of shares of our common stock, preferred stock, debt securities, depositary shares or warrants for an aggregate initial offering price of approximately $220 million. If adequate funds are not available, we may be required to delay or to eliminate expenditures for our capital projects, as well as our research and development and other activities or seek to enter into a business combination transaction with or sell assets to another company. We could also be forced to license to third parties the rights to commercialize additional products or technologies that we would otherwise seek to develop ourselves. If we obtain additional funds by issuing equity securities, dilution to stockholders may occur. In addition, preferred stock could be issued in the future without stockholder approval, and the terms of our preferred stock could include dividend, liquidation, conversion, voting and other rights that are more favorable than the rights of the holders of our common stock. We can give no assurance that any of the transactions outlined above will be available to us when needed or on terms acceptable or favorable to us.

Assuming the commercial success of the plants based on the Syntroleum Process, we expect that license fees, catalyst sales and sales of products from GTL plants in which we own an interest will be a source of revenues. In addition, we could receive revenues from other commercial projects we are pursuing. However, we may not receive any of these revenues, and these revenues may not be sufficient for capital expenditures or operations and may not be received within the expected time frame. If we are unable to generate funds from operations, our need to obtain funds through financing activities will be increased.

We have sought and intend to continue to temporarily invest our assets, pending their use, so as to avoid becoming subject to the registration requirements of the Investment Company Act of 1940. These investments are likely to result in lower yields on the funds invested than might be available in the securities market generally. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation that could materially adversely affect us.

Real Estate and Other Assets

On May 29, 2003 we entered into an agreement to sell our 75% ownership interest in the Houston Project for total proceeds of $3,450,000 less a purchase price adjustment for lot sales from May 1 through closing. As part of this agreement, we also retained the right to receive 75% of the Municipal Utility District Bond distribution that was expected to be received by the Houston Project, regardless of the time of distribution. On June 25, 2003, the Houston Project received approximately $860,000 from the Municipal Utility District Bond, of which $645,000 was paid to us. This distribution is reflected in the second quarter of 2003. On July 21, 2003, we completed and closed on the sale of our interest in the Houston Project and received approximately $3.1 million in proceeds. This sale is reflected in our third quarter of 2003 financial statements. As a result of this sale, we no longer have any real estate inventory and will no longer have revenues from sales of real estate.

Our other non-current assets at September 30, 2003 included an investment in a privately held venture capital limited partnership, which had a carrying value of $135,000, and an equity investment in a recently renovated hotel in Tulsa, Oklahoma.

23

New Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143), which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Our adoption of SFAS 143 on January 1, 2003 did not have a material impact on our financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument within the scope of SFAS 150 as a liability (or an asset in some circumstances). SFAS 150 is effective for us beginning in the third quarter 2003. Our adoption of SFAS 150 did not have a material impact on our financial condition or results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We had approximately $12,226,000 in cash and cash equivalents and short-term investments in the form of money market instruments as of September 30, 2003. We also hold restricted funds in Australian escrow accounts in the form of money market funds denominated in Australian dollars. These accounts can have fluctuating balances relating to the foreign currency exchange rate between the United States dollar and the Australian dollar.

We expect to conduct a portion of our business in currencies other than the United States dollar. We may attempt to minimize our currency exchange risk by seeking international contracts payable in local currency or we may choose to convert our currency position into United States dollars. In the future, we may also have significant investments in countries other than the United States. The functional currency of these foreign operations may be the local currency; accordingly, financial statement assets and liabilities may be translated at prevailing exchange rates and may result in gains or losses in current income. Currently, all of our subsidiaries use the United States dollar for their functional currency. Monetary assets and liabilities are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Transaction gains and losses that arise from exchange rate fluctuations applicable to transactions denominated in a currency other than the United States dollar are included in the results of operations as incurred.

Foreign exchange risk currently relates to our two escrow accounts held in Australian dollars in the amount of U.S. $21,417,000 at September 30, 2003, and to long-term debt held in Australian dollars in the amount of U.S. $1,851,000 at September 30, 2003. This long-term debt matures in 2025 and has been discounted using an imputed interest rate of nine percent. We also have deferred revenue, a portion of which is denominated in Australian dollars. The portion of deferred revenue denominated in Australian currency was U.S. $20,328,000 at September 30, 2003. These restricted funds, long-term debt and associated discount and deferred revenue are converted to U. S. dollars for financial reporting purposes at the end of every reporting period. To the extent that conversion results in gains or losses, such gains or losses will be reflected in our statements of operations.

We do not have any purchased futures contracts or any derivative financial instruments, other than the warrants issued in connection with the private placement on February 10, 2003.

Item 4. Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

24

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In February 2000, we sold our parking garage in Reno, Nevada to Fitzgerald’s Reno, Inc. (“FRI”) for $3 million. FRI paid $750,000 in cash and executed a promissory note in the original principal amount of $2,250,000 and interest rate of 10% per year (based on a twenty-year amortization). The note was payable in monthly installments of principal and interest, with the entire unpaid balance due on February 1, 2010. The note was secured by a deed of trust, assignment of rents and security interest in favor of us on the parking garage. FRI also executed an Assumption and Assignment of Ground Lease dated February 1, 2000, under which FRI agreed to make the lease payments due under the ground lease. FRI’s obligations under the Assumption and Assignment of Ground Lease are secured by the deed of trust, assignment of rents and security interest in the parking garage and the ground lease.

In December 2000, FRI, a Nevada corporation doing business as Fitzgerald’s Hotel & Casino Reno, along with several affiliates, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, District of Nevada. Since the date of its bankruptcy petition, FRI has continued to make the monthly payments due on the note and the payment obligations due under the ground lease.

On August 28, 2003, the bankruptcy plan filed by FRI went into effect and FRI agreed to pay us $50,000 to be applied towards the outstanding principal balance of the promissory note. FRI then issued a new note in the amount of $2,068,000, which was the balance outstanding on the original note at that time, under the same terms and conditions as the original promissory note, except that the maturity date was accelerated to August 28, 2006 and the interest rate was reduced to 5% with a 16-year amortization. FRI executed an amended and restated deed of trust under the same terms and conditions as the previous deed of trust. FRI is required to continue to make the lease payments due under the ground lease under the same terms as originally agreed in the Assumption and Assignment of Ground Lease dated February 1, 2000.

We will continue to closely monitor the payments made by FRI under the note and the ground lease to ensure that, should a default occur, notice of default will be properly provided. We believe that we will ultimately collect the balance of the note receivable, and accordingly we have not recorded any reserve for uncollectible amounts as of September 30, 2003.

We and our subsidiaries are involved in other lawsuits that have arisen in the ordinary course of our business. We do not believe that ultimate liability, if any, resulting from any such other pending litigation will have a material adverse effect on our business or consolidated financial position.

We cannot predict with certainty the outcome or effect of the litigation matter specifically described above or of any such other pending litigation. There can be no assurance that our belief or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.

Item 2. Changes in Securities and Use of Proceeds.

On October 15, 2003, we consummated the private issuance and sale of 400,000 shares of our common stock for an aggregate purchase price of $1,800,000 and the grant of options to purchase 600,000 shares of common stock to Ziad Ghandour, a consultant to us. On October 6, 2003, we granted options to purchase 100,000 shares of common stock to Wayne Berman, another consultant to us. The consideration received by us in connection with these transactions was the amount of cash referred to above and consulting services. The options are exercisable during the period beginning on the date the options vest in accordance with the applicable option agreement and ending on the second anniversary of the vesting date with respect to the options to purchase 600,000 shares and October 6, 2008 with respect to the options to purchase 100,000 shares. The exercise price of the options to purchase 600,000 shares is $4.50 per share, and the exercise price of the options to purchase 100,000 shares is $3.00 per share. We expect to use the net proceeds from these transactions for working capital and general corporate purposes. Such transactions were exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as a transaction not involving any public offering.

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On October 31, 2003, we entered into a First Amendment to our Amended and Restated Rights Agreement. This amendment provides that neither Robert A. Day nor members of his immediate family, nor any of their affiliates or associates, individually or collectively, will be deemed an acquiring person under our Rights Agreement unless Mr. Day or any member of his immediate family, together with all affiliates and associates of such person, is the beneficial owner of 35% or more of the then outstanding shares of common stock.

In early 2000 we filed a Registration Statement on Form S-3 (Registration No. 333-32968) (as amended, the Registration Statement), in connection with the registration of shares of our common stock with an aggregate offering price of up to $120,000,000. The Securities and Exchange Commission declared the Registration Statement effective on April 25, 2000. As described in a prospectus supplement dated June 29, 2000, an offering commenced on June 29, 2000 pursuant to the Registration Statement, and resulted in (i) the sale by us of 5,250,000 shares of common stock on July 6, 2000 and (ii) the sale by us of 400,000 shares of common stock on July 19, 2000 pursuant to the exercise of the underwriters’ over-allotment option.

The net proceeds to us from the offering were approximately $92 million. We have used approximately $81.7 million in such net proceeds in connection with the development of our Sweetwater project and general corporate purposes. The remaining net proceeds from the offering are currently invested in short-term cash and cash equivalents. None of such payments were direct or indirect payments to our directors or officers or their associates, to persons owning ten percent or more of any class of our equity securities or to our affiliates.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5. Other Information.

On September 2, 2003, we announced that Richard L. Edmonson joined the Company as Vice President, General Counsel and Corporate Secretary.

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

Reports on Form 8-K

On July 29, 2003, we filed a Current Report on Form 8-K dated July 29, 2003 to furnish information under Item 12 of that form regarding our second quarter 2003 earnings release.

Exhibits

4.1	Warrant Agreement dated as of November 4, 2003 between the Company and American Stock Transfer & Trust Company.
4.2	Form of Warrant (contained in Exhibit 4.1)
*4.3	First Amendment to the Amended and Restated Rights Agreement between the Company and American Stock Transfer & Trust Company dated as of October 31, 2003 (incorporated by reference to Exhibit 4.6 to Amendment No. 1 to the Company’s Current Report on Form 8-K filed October 31, 2003).
+10.1	Employment Agreement dated as of July 30, 2003 between the Company and Richard L. Edmonson.
+10.2	Indemnification Agreement dated as of April 11, 2003 between the Company and Richard L. Edmonson.

26

31.1 Section 302 Certification of Kenneth L. Agee

31.2 Section 302 Certification of Larry J. Weick

32.1 Section 906 Certification of Kenneth L. Agee.

32.2 Section 906 Certification of Larry J. Weick.

* Incorporated by reference as indicated

+ Compensatory plan or arrangement

27

SIGNATURES

Pursuant to 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.

	SYNTROLEUM CORPORATION, a Delaware corporation (Registrant)
Date: November 13, 2003	By:	/s/ Kenneth L. Agee
		Kenneth L. Agee
		Chairman and Chief Executive Officer
Date: November 13, 2003	By:	/s/ Larry J. Weick
		Larry J. Weick
		Senior Vice President, Chief Financial Officer (Principal Financial Officer)

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INDEX TO EXHIBITS

No.	Description of Exhibit
4.1	Warrant Agreement dated as of November 4, 2003 between the Company and American Stock Transfer & Trust Company.
4.2	Form of Warrant (contained in Exhibit 4.1)
*4.3	First Amendment to the Amended and Restated Rights Agreement between the Company and American Stock Transfer & Trust Company dated as of October 31, 2003 (incorporated by reference to Exhibit 4.6 to Amendment No. 1 to the Company’s Current Report on Form 8-K filed October 31, 2003).
+10.1	Employment Agreement dated as of July 30, 2003 between the Company and Richard L. Edmonson.
+10.2	Indemnification Agreement dated as of April 11, 2003 between the Company and Richard L. Edmonson.
31.1	Section 302 Certification of Kenneth L. Agee
31.2	Section 302 Certification of Larry J. Weick
32.1	Section 906 Certification of Kenneth L. Agee.
32.2	Section 906 Certification of Larry J. Weick.

* Incorporated by reference as indicated

+ Compensatory plan or arrangement

29

EX-4.1

Exhibit 4.1

WARRANT AGREEMENT

Dated as of November 4, 2003

Between

SYNTROLEUM CORPORATION

and

AMERICAN STOCK TRANSFER AND TRUST COMPANY

as Warrant Agent

TABLE OF CONTENTS

		Page
	ARTICLE I ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES
Section 1.01	Issuance of Warrants	1
Section 1.02	Form of Warrant Certificates	1
Section 1.03	Execution of Warrant Certificates	2
Section 1.04	Authentication and Delivery	2
Section 1.05	Temporary Warrant Certificates	3
Section 1.06	Separation of Warrants and Shares	3
Section 1.07	Registration	3
Section 1.08	Registration of Transfers and Exchanges	4
Section 1.09	Lost, Stolen, Destroyed, Defaced or Mutilated Warrant Certificates	6
Section 1.10	Offices for Exercise, etc	7
	ARTICLE II DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE
Section 2.01	Duration of Warrants	7
Section 2.02	Exercise, Exercise Price, Settlement and Delivery.	8
Section 2.03	Cancellation of Warrant Certificates.	9
	ARTICLE III OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS
Section 3.01	Enforcement of Rights.	9
	ARTICLE IV CERTAIN COVENANTS OF THE COMPANY
Section 4.01	Payment of Taxes.	10
Section 4.02	Reservation of Shares.	10
Section 4.03	Registration of Securities.	10
	ARTICLE V ADJUSTMENTS
Section 5.01	Adjustment of Exercise Price and Number of Shares Issuable	11
Section 5.02	Fractional Interest.	17
Section 5.03	When Adjustment Not Required.	17
Section 5.04	Challenge to Good Faith Determination.	17
Section 5.05	Treasury Stock.	18

Section 5.06	Notices to Warrant Holders.	18
Section 5.07	Par Value of Shares of Common Stock	18
	ARTICLE VI CONCERNING THE WARRANT AGENT
Section 6.01	Warrant Agent.	19
Section 6.02	Conditions of Warrant Agent’s Obligations.	19
Section 6.03	Resignation and Appointment of Successor.	22
	ARTICLE VII MISCELLANEOUS
Section 7.01	Amendment.	24
Section 7.02	Notices and Demands to the Company and Warrant Agent.	24
Section 7.03	Addresses for Notices to Parties and for Transmission of Documents.	24
Section 7.04	Notices to Holders	25
Section 7.05	Applicable Law.	25
Section 7.06	Obtaining of Governmental Approvals.	25
Section 7.07	Persons Having Rights Under Agreement.	25
Section 7.08	Headings.	25
Section 7.09	Counterparts.	25
Section 7.10	Inspection of Agreement.	25
Section 7.11	Successors.	26
EXHIBIT A -	Form of Warrant Certificate
EXHIBIT B -	Certificate To Be Delivered upon Exchange or Registration of Transfer of Warrants

ii

INDEX OF DEFINED TERMS

Defined Term	Section
Act	Recitals
Additional Shares of Common Stock	5.01(f)
Agreement	Recitals
Business Day	2.01
Common Stock	Recitals
Company	Recitals
Convertible Securities	5.01(e)
Current Market Value	5.01(c)
Definitive Warrants	1.02
Distribution	5.01(f)
Effective Date	Recitals
Election to Exercise	2.02(b)
Excluded Shares	5.01(e)
Exercisability Date	2.02(a)
Exercise Date	2.02(d)
Exercise Price	2.02(a)
Expiration Date	2.01
Fully Diluted Basis	5.01(g)
Global Warrants	1.02
Issuance Date	5.01(e)
Majority Holders	5.04
Market Value	5.01(c)
Nasdaq	5.01(c)
Officers’ Certificate	1.08(f)(ii)
Options	5.01(e)
Registrar	1.07
Related Parties	6.02(e)
SEC	4.03
Shares	1.01
Shelf Registration Statement	4.03
Underwriter	Recitals
Warrant Agent	Recitals
Warrant Agent Office	1.10
Warrant Certificates	Recitals
Warrant Exercise Office	2.02(b)
Warrant Register	1.07
Warrants	Recitals

iii

WARRANT AGREEMENT

WARRANT AGREEMENT (“Agreement”), dated as of November 4, 2003 (the “Effective Date”) by Syntroleum Corporation, a Delaware corporation (together with any successor thereto, the “Company”), and American Stock Transfer and Trust Company, a New York corporation, as warrant agent (with any successor Warrant Agent, the “Warrant Agent”).

WHEREAS, the Company has entered into an underwriting agreement dated October 30, 2003 with Jefferies & Company, Inc. (the “Underwriter”) in which the Company has agreed, among other things, to sell to the Underwriter in an initial public offering under the Securities Act of 1933, as amended (the “Act”), units consisting in the aggregate of (i) 5,180,000 shares of common stock, par value $.01 per share, of the Company (“Common Stock”) and (ii) 1,554,000 Warrants to purchase an aggregate of 1,554,000 shares of Common Stock of the Company (the “Warrants”), and the certificates evidencing the Warrants being hereinafter referred to as “Warrant Certificates”), in each case subject to adjustment in accordance with the terms hereof; and

WHEREAS, the Warrants and the shares of Common Stock comprising part of the units shall be separately transferable immediately; and

WHEREAS, the Company desires the Warrant Agent to assist the Company as warrant agent in connection with the issuance, exchange, cancellation, replacement and exercise of the Warrants, and in this Agreement wishes to set forth, among other things, the terms and conditions on which the Warrants may be issued, exchanged, canceled, replaced and exercised;

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I

ISSUANCE, FORM, EXECUTION, DELIVERY AND

REGISTRATION OF WARRANT CERTIFICATES

Section 1.01 Issuance of Warrants. Each Warrant Certificate shall evidence the number of Warrants specified therein, each Warrant evidenced thereby shall represent the right, subject to the provisions contained herein and therein, to purchase from the Company (and the Company shall issue and sell to such holder of the Warrant) one fully paid and non-assessable share of the Company’s Common Stock (the shares of Common Stock purchasable upon exercise of a Warrant, as adjusted from time to time, being hereinafter referred to as the “Shares” and, where appropriate, such term shall also mean the other securities or property purchasable and deliverable upon exercise of a Warrant as provided in Article V) at the price specified herein and therein, in each case subject to adjustment as provided herein and therein.

Section 1.02 Form of Warrant Certificates. Warrant Certificates shall be issued initially in the form of one or more permanent Global Warrants (the “Global Warrants”), substantially in the form of Exhibit A hereto (including footnote 1 thereto). The Warrant Certificates evidencing the Global Warrants to be delivered pursuant to this Agreement shall be substantially in the form set forth in Exhibit A attached hereto. Such Global Warrants shall represent such of the outstanding Warrants as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the

aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent and Depositary (as identified below) in accordance with instructions given by the holder thereof. The Depository Trust Company shall act as the Depositary with respect to the Global Warrants until a successor shall be appointed by the Company. Upon written request, a Warrant holder may receive from the Warrant Agent definitive warrants (“Definitive Warrants”) as set forth in Section 1.08 hereof. Definitive Warrants shall be substantially in the form set forth in Exhibit A attached hereto.

Section 1.03 Execution of Warrant Certificates. The Warrant Certificates shall be executed on behalf of the Company by its chief executive officer, its president or any vice president and attested by its secretary or an assistant secretary. Such signatures may be the manual or facsimile signatures of the present or any future such officers. Typographical and other minor errors or defects in any such reproduction of the signature shall not affect the validity or enforceability of any Warrant Certificate that has been duly countersigned and delivered by the Warrant Agent.

In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificate so signed shall be countersigned and delivered by the Warrant Agent or disposed of by the Company, such Warrant Certificate nevertheless may be countersigned and delivered or disposed of as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Warrant Certificate, shall be the proper officers of the Company, although at the date of the execution and delivery of this Agreement any such person was not such an officer.

Section 1.04 Authentication and Delivery. Subject to the immediately following paragraph, Warrant Certificates shall be authenticated by manual or facsimile signature and dated the date of authentication by the Warrant Agent and shall not be valid for any purpose unless so authenticated and dated. The Warrant Certificates shall be numbered and shall be registered in the Warrant Register (as defined in Section 1.07 hereof).

Upon the receipt by the Warrant Agent of a written order of the Company, which order shall be signed by its chief executive officer, its president or any vice president and attested by its secretary or an assistant secretary, and shall specify the amount of Warrants to be authenticated, whether the Warrants are to be Global Warrants or Definitive Warrants, the date of such Warrants and such other information as the Warrant Agent may reasonably request, without any further action by the Company, the Warrant Agent is authorized, upon receipt from the Company at any time and from time to time of the Warrant Certificates, duly executed as provided in Section 1.03 hereof, to authenticate the Warrant Certificates and deliver them. Such authentication shall be by a duly authorized signatory of the Warrant Agent (although it shall not be necessary for the same signatory to sign all Warrant Certificates).

In case any authorized signatory of the Warrant Agent who shall have authenticated any of the Warrant Certificates shall cease to be such authorized signatory before the Warrant Certificate shall be disposed of by the Company, such Warrant Certificate nevertheless may be

2

delivered or disposed of as though the person who authenticated such Warrant Certificate had not ceased to be such authorized signatory of the Warrant Agent; and any Warrant Certificate may be authenticated on behalf of the Warrant Agent by such persons as, at the actual time of authentication of such Warrant Certificates, shall be the duly authorized signatories of the Warrant Agent, although at the time of the execution and delivery of this Agreement any such person is not such an authorized signatory.

The Warrant Agent’s authentication on all Warrant Certificates shall be in substantially the form set forth in Exhibit A hereto.

Section 1.05 Temporary Warrant Certificates. Pending the preparation of definitive Warrant Certificates, the Company may execute, and, upon receipt of an authentication order in accordance with Section 1.04 hereof, the Warrant Agent shall authenticate and deliver, temporary Warrant Certificates, which are printed, lithographed, typewritten or otherwise produced, substantially of the tenor of the definitive Warrant Certificates in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Warrant Certificates may determine, as evidenced by their execution of such Warrant Certificates.

If temporary Warrant Certificates are issued, the Company will cause definitive Warrant Certificates to be prepared without unreasonable delay. After the preparation of definitive Warrant Certificates, the temporary Warrant Certificates shall be exchangeable for definitive Warrant Certificates upon surrender of the temporary Warrant Certificates at any office or agency maintained by the Company for that purpose pursuant to Section 1.10 hereof. Subject to the provisions of Section 4.01 hereof, such exchange shall be without charge to the holder. Upon surrender for cancellation of any one or more temporary Warrant Certificates, the Company shall execute, and, upon receipt of an authentication order in accordance with Section 1.04 hereof, the Warrant Agent shall authenticate and deliver in exchange therefor, one or more definitive Warrant Certificates representing in the aggregate a like number of Warrants. Until so exchanged, the holder of a temporary Warrant Certificate shall in all respects be entitled to the same benefits under this Agreement as a holder of a definitive Warrant Certificate.

Section 1.06 Separation of Warrants and Shares. The Shares and Warrants will be separately transferable immediately.

Section 1.07 Registration. The Company will keep, at the office or agency maintained by the Company for such purpose, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of, and registration of transfer and exchange of, Warrants as provided in this Article. Each person designated by the Company from time to time as a person authorized to register the transfer and exchange of the Warrants is hereinafter called, individually and collectively, the “Registrar”. The Company hereby initially appoints the Warrant Agent as Registrar. Upon written notice to the Warrant Agent and any acting Registrar, the Company, in its sole discretion, may appoint a successor Registrar for such purposes.

3

Section 1.08 Registration of Transfers and Exchanges.

(a) Transfer and Exchange of Definitive Warrants. When Definitive Warrants are presented to the Warrant Agent with a request:

(i) to register the transfer of the Definitive Warrants; or

(ii) to exchange such Definitive Warrants for an equal number of Definitive Warrants,

the Warrant Agent shall register the transfer or make the exchange as requested if the requirements under this Warrant Agreement as set forth in this Section 1.08 hereof for such transactions are met; provided, however, that the Definitive Warrants presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Company and the Warrant Agent, duly executed by the holder thereof or by his attorney, duly authorized in writing.

(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial Interest in a Global Warrant. A Definitive Warrant may not be transferred for a beneficial interest in a Global Warrant except upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with written instructions directing the Warrant Agent to make, or to direct the Depositary to make, an endorsement on the Global Warrant to reflect an increase in the aggregate amount of the Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the number of Warrants represented by the Global Warrant to be increased accordingly. If no Global Warrant is then outstanding, the Company shall issue and the Warrant Agent shall authenticate a new Global Warrant in the appropriate amount.

(c) Transfer and Exchange of Global Warrants. The transfer and exchange of Global Warrants or beneficial interests therein shall be effected through the Depositary, in accordance with this Section 1.08 and the procedures of the Depositary therefor.

(d) Transfer of a Beneficial Interest in a Global Warrant for a Definitive Warrant.

(i) Any person having a beneficial interest in a Global Warrant may upon request transfer such beneficial interest for a Definitive Warrant. Upon receipt by the Warrant Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Warrant and upon receipt by the Warrant Agent of a written order or such other form of instructions as is customary for the Depositary or the person designated by the Depositary as having such a beneficial interest containing registration instructions then the Warrant Agent will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the aggregate amount of the Global Warrant to be reduced and, following such reduction, the Company will execute and, upon receipt of an

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authentication order in the form of an Officers’ Certificate (as defined), the Warrant Agent will authenticate and deliver to the transferee a Definitive Warrant. If such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification from such person to that effect (in substantially the form of Exhibit B hereto) may be required.

(ii) Definitive Warrants issued in exchange for a beneficial interest in a Global Warrant pursuant to this Section 1.08(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Warrant Agent in writing. The Warrant Agent shall deliver such Definitive Warrants to the persons in whose names such Warrants are so registered.

(e) Restrictions on Transfer and Exchange of Global Warrants. Notwithstanding any other provisions of this Warrant Agreement (other than the provisions set forth in subsection (h) of this Section 1.08), a Global Warrant may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary.

(f) Authentication of Definitive Warrants in Absence of Depositary. If at any time:

(i) the Depositary for the Warrants notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Warrant and a successor Depositary for the Global Warrant is not appointed by the Company within 90 days after delivery of such notice; or

(ii) the Company, at its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Definitive Warrants under this Warrant Agreement,

then the Company will execute, and the Warrant Agent, upon receipt of an officers’ certificate signed by two officers of the Company (one of whom must be the principal executive officer, principal financial officer or principal accounting officer) (an “Officers’ Certificate”) requesting the authentication and delivery of Definitive Warrants, will authenticate and deliver Definitive Warrants, in an aggregate number equal to the aggregate number of warrants represented by the Global Warrant, in exchange for such Global Warrant.

(g) Cancellation and/or Adjustment of a Global Warrant. At such time as all beneficial interests in a Global Warrant have either been exchanged for Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant shall be returned to or retained and cancelled by the Warrant Agent. At any time prior to such cancellation, if any beneficial interest in a Global Warrant is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the number of Warrants represented by such Global Warrant shall be reduced and an endorsement shall be made on such Global Warrant, by the Warrant Agent to reflect such reduction.

(h) Obligations with Respect to Transfers and Exchanges of Definitive Warrants.

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(i) To permit registrations of transfers and exchanges, the Company shall execute, at the Warrant Agent’s request, Definitive Warrants and Global Warrants. Furthermore, the Warrant Agent shall, upon receipt of an authentication order in accordance with Section 1.04 hereof, authenticate Definitive Warrants and Global Warrants.

(ii) All Definitive Warrants and Global Warrants issued upon any registration, transfer or exchange of Definitive Warrants or Global Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Warrant Agreement as the Definitive Warrants or Global Warrants surrendered upon the registration of transfer or exchange.

(iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary.

(i) Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of the Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for the Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

Section 1.09 Lost, Stolen, Destroyed, Defaced or Mutilated Warrant Certificates. Upon receipt by the Company and the Warrant Agent (or any agent of the Company or the Warrant Agent, if requested by the Company) of evidence satisfactory to them of the loss, theft, destruction, defacement, or mutilation of any Warrant Certificate and of indemnity reasonably satisfactory to them and, in the case of mutilation or defacement, upon surrender thereof to the Warrant Agent for cancellation, then, in the absence of notice to the Company or the Warrant Agent that such Warrant Certificate has been acquired by a bona fide purchaser or holder in due course, the Company shall execute, and, upon receipt of an authentication order in accordance with Section 1.04 hereof, an authorized signatory of the Warrant Agent shall manually authenticate and deliver, in exchange for or in lieu of the lost, stolen, destroyed, defaced or mutilated Warrant Certificate, a new Warrant Certificate representing a like number of Warrants, bearing a number or other distinguishing symbol not contemporaneously outstanding. Upon the issuance of any new Warrant Certificate under this Section, the Company may require the payment from the holder of such Warrant Certificate of a sum sufficient to cover any tax, stamp tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Warrant Agent and the Registrar) in connection therewith. Every substitute Warrant Certificate executed and delivered pursuant to this Section in lieu of any lost, stolen or destroyed Warrant Certificate shall constitute an additional contractual obligation of the Company, whether or not the lost, stolen or destroyed Warrant Certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of (but shall be subject to all the limitations of rights set forth in) this Agreement equally and proportionately with any

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and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Section 1.09 are exclusive with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates and shall preclude (to the extent lawful) any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates.

The Warrant Agent is hereby authorized to authenticate in accordance with the provisions of this Agreement, and deliver the new Warrant Certificates required pursuant to the provisions of this Section.

Section 1.10 Offices for Exercise, etc. So long as any of the Warrants remain outstanding, the Company will designate and maintain in New York City, New York: (a) an office or agency where the Warrant Certificates may be presented for exercise, (b) an office or agency where the Warrant Certificates may be presented for registration of transfer and for exchange (including the exchange of temporary Warrant Certificates for definitive Warrant Certificates pursuant to Section 1.05 hereof), and (c) an office or agency where notices and demands to or upon the Company in respect of the Warrants or of this Agreement may be served. The Company may from time to time change or rescind such designation, as it may deem desirable or expedient; provided, however, that an office or agency shall at all times be maintained in New York City, New York, as provided in the first sentence of this Section. In addition to such office or offices or agency or agencies, the Company may from time to time designate and maintain one or more additional offices or agencies within or outside of New York, where Warrant Certificates may be presented for exercise or for registration of transfer or for exchange, and the Company may from time to time change or rescind such designation, as it may deem desirable or expedient. The Company will give to the Warrant Agent written notice of the location of any such office or agency and of any change of location thereof. The Company hereby designates the Warrant Agent’s office at 59 Maiden Lane in the Borough of Manhattan, City of New York (the “Warrant Agent Office”), as the initial agency maintained for each such purpose.

ARTICLE II

DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE

Section 2.01 Duration of Warrants. Subject to the terms and conditions established herein, the Warrants shall expire at 5:00 p.m., New York City, New York time, on November 4, 2007 (the “Expiration Date”). Each Warrant may be exercised on any Business Day (as defined below) on or after the Exercisability Date (as defined below) and on or prior to the Expiration Date.

Any Warrant not exercised on or prior to the Expiration Date relating to such Warrant shall become void, and all rights of the holder under the Warrant Certificate evidencing such Warrant and under this Agreement shall cease.

“Business Day” shall mean any day on which (i) banks in New York City, New York are open for business, (ii) the principal national securities exchange or market on which the Common Stock is listed or admitted to trading is open for business and (iii) the principal national securities exchange or market, if any, on which the Warrants are listed or admitted to trading are open for business.

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Section 2.02 Exercise, Exercise Price, Settlement and Delivery.

(a) Subject to the provisions of this Agreement, a holder of each Warrant shall have the right to purchase from the Company on or after the Effective Date (the “Exercisability Date”) and on or prior to the Expiration Date one fully paid, registered and non-assessable Share, at the purchase price of $5.00 for each share purchased upon the exercise of the Warrants (the “Exercise Price”), in each case subject to adjustment in accordance with Article V hereof,.

(b) Warrants may be exercised on or after the Exercisability Date by (i) surrendering at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 (each a “Warrant Exercise Office”) the Warrant Certificate evidencing such Warrants with the form of election to purchase Shares set forth on the reverse side of the Warrant Certificate (the “Election to Exercise”) duly completed and signed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and (ii) paying in full the Exercise Price for each such Warrant exercised and any other amounts required to be paid pursuant to Section 1.08(i) hereof. Each Warrant may be exercised only in whole.

(c) Simultaneously with the exercise of each Warrant, payment in full of the Exercise Price shall be made in cash or by certified or official bank check to be delivered to the office or agency where the Warrant Certificate is being surrendered. No payment or adjustment shall be made on account of any dividends on the Shares issued upon exercise of a Warrant.

(d) Upon such surrender of a Warrant Certificate and payment and collection of the Exercise Price at any Warrant Exercise Office (other than any Warrant Exercise Office that also is an office of the Warrant Agent), such Warrant Certificate and payment shall be promptly delivered to the Warrant Agent. The “Exercise Date” for a Warrant shall be the date when all of the items referred to in the first sentence of paragraphs (b) and (c) of this Section 2.02 are received by the Warrant Agent at or prior to 2:00 p.m., New York City, New York time, on a Business Day and the exercise of the Warrants will be effective as of such Exercise Date. If any items referred to in the first sentence of paragraphs (b) and (c) are received after 2:00 p.m., New York City, New York time, on a Business Day, the exercise of the Warrants to which such item relates will be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date (as defined in Section 2.01), if all of the items referred to in the first sentence of paragraphs (b) and (c) are received by the Warrant Agent at or prior to 5:00 p.m., New York City, New York time, on such Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. If all of the items referred to in the first sentence of paragraphs (b) and (c) are received by the Warrant Agent after 5:00 p.m., New York City time, on such Expiration Date, the exercise of the Warrants to which such items relate will not be effective and shall be void.

(e) Upon the exercise of a Warrant in accordance with the terms hereof, the receipt of a Warrant Certificate and payment of the Exercise Price, the Warrant Agent shall: (i) cause an amount equal to the Exercise Price to be paid to the Company by crediting the same to

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the account designated by the Company in writing to the Warrant Agent for that purpose; (ii) advise the Company immediately by telephone of the amount so deposited to the Company’s account and promptly confirm such telephonic advice in writing and (iii) as soon as practicable, advise the Company in writing of the number of Warrants (giving effect to Section 5.01(i) below) exercised in accordance with the terms and conditions of this Agreement and the Warrant Certificates, the instructions of each exercising holder of the Warrant Certificates with respect to delivery of the Shares to which such holder is entitled upon such exercise, and such other information as the Company shall reasonably request.

(f) Subject to Section 5.02 hereof, as soon as practicable after the exercise of any Warrant or Warrants in accordance with the terms hereof, the Company shall issue or cause to be issued to or upon the written order of the registered holder of the Warrant Certificate evidencing such exercised Warrant or Warrants, a certificate or certificates evidencing the Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the Election to Exercise, as set forth on the reverse of the Warrant Certificate. The Warrant Agent shall have no obligation to ascertain the number of Shares to be issued with respect to the exercised Warrant or Warrants. Such certificate or certificates evidencing the Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Shares as of the close of business on the Exercise Date. After such exercise of any Warrant or Warrants, the Company shall also issue or cause to be issued to or upon the written order of the registered holder of such Warrant Certificate, a new Warrant Certificate, countersigned by the Warrant Agent pursuant to the Company’s written instruction, evidencing the number of Warrants, if any, remaining unexercised unless such Warrants shall have expired.

Section 2.03 Cancellation of Warrant Certificates. In the event the Company shall purchase or otherwise acquire Warrants, the Warrant Certificates evidencing such Warrants may thereupon be delivered to the Warrant Agent, and if so delivered, shall be canceled by it and retired. The Warrant Agent shall cancel all Warrant Certificates properly surrendered for exchange, substitution, transfer or exercise. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all monies received by the Warrant Agent for the purchase of Warrant Shares through the exercise of such Warrants.

ARTICLE III

OTHER PROVISIONS RELATING TO

RIGHTS OF HOLDERS OF WARRANTS

Section 3.01 Enforcement of Rights.

(a) Notwithstanding any of the provisions of this Agreement, any holder of any Warrant Certificate, without the consent of the Warrant Agent, the holder of any Shares or the holder of any other Warrant Certificate, may, in and for his own behalf, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, his right to exercise the Warrant or Warrants evidenced by his Warrant Certificate in the manner provided in such Warrant Certificate and in this Agreement.

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(b) Neither the Warrants nor any Warrant Certificate shall entitle the holders thereof to any of the rights of a holder of Shares, including, without limitation, the right to vote or to receive any dividends or other payments or to consent or to receive notice as stockholders in respect of the meetings of stockholders or for the election of directors of the Company or to share in the assets of the Company in the event of the liquidation, dissolution or winding up of the Company’s affairs or any other matter, or any rights whatsoever as stockholders of the Company.

ARTICLE IV

CERTAIN COVENANTS OF THE COMPANY

Section 4.01 Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrants and of the Shares upon the exercise of Warrants or to the separation of the Warrants and Shares; provided, however, that the Company shall not be required to pay any tax or other governmental charge which may be payable in respect of any transfer or exchange of any Warrant Certificates or any certificates for Shares in a name other than the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant. In any such case, no transfer or exchange shall be made unless or until the person or persons requesting issuance thereof shall have paid to the Company the amount of such tax or other governmental charge or shall have established to the satisfaction of the Company that such tax or other governmental charge has been paid or an exemption is available therefrom.

Section 4.02 Issuance and Reservation of Shares. The Company shall take all actions necessary to ensure that the shares of Common Stock issuable upon exercise of the Warrants shall be duly authorized and, when issued upon exercise or exchange of any Warrant in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable, free and clear of all taxes, liens, charges and security interests and free and clear of all preemptive or similar rights. There has been reserved and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized Common Stock, such number of shares of Common Stock as shall be subject to purchase under the Warrants. On or before taking any action that would cause an adjustment pursuant to the terms of the Warrants resulting in an increase in the number of shares of Common Stock deliverable upon such conversion or exercise above the number thereof previously authorized, reserved and available therefore, the Company shall take all such action so required for compliance with this Section.

Section 4.03 Registration of Securities. The Company agrees, for so long as any Warrants continue to be outstanding, to use its best efforts to (i) maintain the effectiveness of the Company’s Registration Statement on Form S-3 (Registration No. 333-62290) (the “Shelf Registration Statement”) and file any and all post effective amendments to the Shelf Registration Statement, (ii) make all required filings under applicable securities laws and regulations necessary to keep current the Shelf Registration Statement, (iii) reserve capacity under the Shelf Registration Statement of a sufficient number of shares of Common Stock to accommodate the exercise of all outstanding Warrants, (iv) make all filings required under applicable federal and state securities laws, as may be necessary to permit the issuance of registered shares of Common Stock upon the exercise of the Warrants at any and all times during the period the Warrants are exercisable and (v) take all actions required to cause the exchange of Warrants for shares of Common Stock as provided below in this Section 4.03 to be exempt from the registration

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requirements of the Securities Act of 1933, as amended, and state qualification requirements; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. If at any time the effectiveness of the Shelf Registration Statement lapses or the Shelf Registration Statement is otherwise not available for the issuance of shares of Common Stock upon the exercise of the Warrants, the Company shall use its best efforts to prepare and file with the Securities and Exchange Commission (the “SEC”), a registration statement and such other documents as may be necessary and use its commercially reasonable efforts to have such registration statement declared effective as promptly thereafter as practical, in order to comply with the provisions of the Act so as to permit the registered resale of the shares of Common Stock issuable upon exercise of the Warrants. In the event that at the time a notice of exercise is delivered to the Warrant Agent either (i) a registration statement covering issuance or resale of the shares of Common Stock issuable upon exercise of the Warrants is not in effect or (ii) the Shelf Registration Statement is not available or qualifications under applicable state securities laws are not in effect for the issuance of shares of Common Stock upon the exercise of the Warrants and such purchase and the resale of Warrant Shares by the Warrantholders are not exempt from the registration requirements of the Securities Act of 1933, as amended, and such state qualification requirements, then, the Company shall, if requested by the Warrantholder giving the notice of exercise, exchange the Warrants being exercised for a number of shares of Common Stock equal to the whole number nearest to (a) the number of shares of Common Stock issuable upon exercises of such Warrants minus (b) the number of shares of Common Stock equal to the quotient obtained by dividing (i) the product obtained by multiplying (A) the Exercise Price by (B) the number of shares of Common Stock issuable upon exercises of such Warrants by (ii) the Current Market Value. In the event that the Shelf Registration Statement or another registration statement is not effective and available or qualifications under applicable state securities laws are not in effect for the issuance of shares of Common Stock upon the exercise of the Warrants, a holder of a Warrant would not be permitted under applicable securities laws to purchase shares of Common Stock upon exercise of the Warrants unless such purchase or exchange is exempt from the registration requirements of the Securities Act of 1933, as amended, and such state qualification requirements, provided that the holders would be allowed to exchange Warrants for shares of Common Stock as provided in Section 4.03.

ARTICLE V

ADJUSTMENTS

Section 5.01 Adjustment of Exercise Price and Number of Shares Issuable. The number and kind of Shares purchasable upon the exercise of Warrants and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events, as follows:

(a) Stock Splits, Combinations, etc. In case the Company after the date hereof shall (A) make or pay a dividend or make a distribution in shares of Common Stock on its Common Stock, (B) subdivide its outstanding shares of Common Stock into a greater number of shares or (C) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the number of Shares purchasable upon exercise of the Warrants immediately prior to such action shall be adjusted so that the holder of any Warrant upon exercise of the

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Warrants shall be entitled to receive the number of shares of Common Stock which such holder would have owned or would have been entitled to receive immediately following such action had the Warrants been exercised immediately prior thereto. An adjustment made pursuant to this paragraph shall become effective on the day immediately after the record date, except as provided in Section 5.03 below, in the case of a dividend or distribution and shall become effective on the day immediately after the effective date in the case of a subdivision or combination or reclassification. Whenever the number of Shares purchasable upon the exercise of a Warrant is adjusted as provided in this paragraph (a), the Exercise Price shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of the Warrants immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately thereafter.

(b) In case the Company or any subsidiary of the Company after the date hereof shall distribute to all holders of Common Stock any of its assets, evidences of indebtedness, cash or securities (excluding any distributions referred to in paragraph (a) and any dividend or distribution paid in cash out of earned surplus of the Company) then in each such case the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the record date of such distribution by a fraction of which the numerator shall be the then Current Market Value per share of the Common Stock (determined as provided in paragraph (c) below) on the record date mentioned below less the then fair market value (as reasonably determined in good faith by the Board of Directors of the Company) of the portion of the assets, evidences of indebtedness, cash or securities so distributed applicable to one share of Common Stock, and of which the denominator shall be such Current Market Value per share of the Common Stock. Such adjustment shall, except as provided in Section 5.03, become effective on the day immediately after the record date for the determination of stockholders entitled to receive such distribution.

(c) For the purposes of this Warrant Agreement, the Current Market Value per share of Common Stock on any date shall be deemed to be the average of the Market Value of the Common Stock for the 10 trading days before, and ending not later than, the earlier of the date in question and the date before the “‘ex’ date”, with respect to the issuance or distribution requiring such computation. For purposes of this paragraph (c), the term “‘ex’ date,” when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the Nasdaq Stock Market (“Nasdaq”) (or, if not listed or admitted to trading thereon, then on the principal national securities exchange or automated quotation system on which the Common Stock is listed or admitted to trading and if not listed or admitted to trading on any national securities exchange or automated quotation system, as determined in good faith by the Company’s Board of Directors) without the right to receive such issuance or distribution. “Market Value” on any trading day shall mean (i) in the case of a security traded on the over-the-counter market and not on Nasdaq nor on any national securities exchange, the per share last sale price of the Common Stock on such trading day as reported by Nasdaq or an equivalent generally accepted reporting service; (ii) in the case of a security traded on Nasdaq or on a national securities exchange, the per share last sale price of the Common Stock on such trading day on Nasdaq or on the principal stock exchange on which it is listed, as the case may be or (iii) if neither clause (i) or (ii) above is applicable, then the fair value thereof as determined in good faith by the Company’s Board of Directors. For purposes of clause (i) above, if trading

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in the Common Stock is not reported by Nasdaq, the bid price referred to in said clause shall be the lowest bid price as reported in the “pink sheets” published by National Quotation Bureau, Incorporated. The last sale price referred to in clause (ii) above shall be the last reported sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case on Nasdaq or on the national securities exchange on which the Common Stock is then listed.

(d) Reclassification, Combinations, Mergers, etc. In case of any reclassification or change of outstanding shares of Common Stock (other than as set forth in Section 5.01(a) above and other than a change in par value, or from par value to no par value, or from no par value to par value, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination)) or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company (computed on a consolidated basis), then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company or such a successor or purchasing corporation, as the case may be, shall forthwith make lawful and adequate provision whereby the holder of such Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and enter into a supplemental warrant agreement so providing. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article V. If the issuer of securities deliverable upon exercise of Warrants under the supplemental warrant agreement is an affiliate of the surviving or transferee corporation, that issuer shall join in the supplemental warrant agreement. The above provisions of this paragraph (d) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances.

In case of any such reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant Agreement to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Article V. The foregoing provisions of this Section 5.01(d) shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

If, as a result of an adjustment made pursuant to this paragraph, the holder of any Warrant thereafter exercised shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock.

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(e) Issuance of Common Stock, Options or Convertible Securities. For the purposes of this Warrant Agreement, “Additional Shares of Common Stock” shall mean all shares of Common Stock issued or deemed to be issued by the Company after the Effective Date, other than Excluded Shares (as defined below).

In the event the Company shall, at any time or from time to time after the Effective Date, issue, sell, distribute or otherwise grant in any manner (including by assumption) shares of Common Stock or any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (any such rights, warrants or options being herein called “Options” and any such convertible or exchangeable stock or securities being herein called “Convertible Securities”) or any Convertible Securities (other than upon exercise of any Option), whether or not such Options or the rights to convert or exchange such Convertible Securities are immediately exercisable, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise and/or conversion of such Options or Convertible Securities, shall be deemed to be Additional Shares of Common Stock.

For purposes of this Warrant Agreement, the term “Issuance Date” shall mean (i) with respect to Additional Shares of Common Stock deemed to have been issued in connection with the issuance of an Option or Convertible Security, the date such Option or Convertible Security is issued and (ii) in all other cases, the actual date Additional Shares of Common Stock are issued.

For the purposes of this Warrant Agreement, “Excluded Shares” shall mean: (i) shares for which the consideration per share as determined pursuant to paragraph (f) below would be equal to or more than the Current Market Value determined on the day prior to the Issuance Date; (ii) shares for which the consideration per share as determined pursuant to (f) below is equal to or greater than the initial Exercise Price; (iii) shares of Common Stock issuable upon the exercise of Options or conversion or payment of Convertible Securities existing as of the Effective Date; (iv) shares of Common Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes) issued pursuant to (A) any stock incentive plan existing as of the Effective Date or (B) any amendment thereto or any additional stock incentive plan adopted by the stockholders of the Company after the Effective Date; and (v) shares issued pursuant to the adjustment provisions of this Section 5.01. The issuance of Excluded Shares shall not be an issuance of Additional Shares of Common Stock, and shall not give rise to an adjustment or a right to purchase the securities pursuant to paragraph (f) below.

In any such case in which the Additional Shares of Common Stock are deemed to be issued, no right to receive an adjustment or to purchase securities under Section 5.01(f) below will accrue upon the subsequent issue of shares of Common Stock upon the exercise and/or conversion or exchange of such Option or Convertible Security unless such Option or Convertible Security shall have been amended or modified prior to exercise or conversion or exchange so as to increase the number of Additional Shares of Common Stock deemed to have been issued thereunder or decrease the exercise and/or conversion or exchange price payable thereunder to an amount less than Current Market Value as of the Issuance Date thereof.

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(f) If the price per share at which Common Stock is issued after the Effective Date or Common Stock is issuable upon the exercise of Options or upon the conversion or exchange of Convertible Securities issued after the Effective Date, in either case other than Excluded Shares (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale, distribution or granting of such Common Stock or Options or any such Convertible Security, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance of Common Stock or the exercise of all such Options or upon conversion or exchange of all such Convertible Securities, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock to be issued or issuable upon the exercise of all such Options or upon the conversion or exchange of all such Convertible Securities or upon the conversion or exchange of all Convertible Securities issuable upon the exercise of all Options (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number)) shall be less than the Current Market Value per share of Common Stock (determined pursuant to Section 5.01(c)) on the Issuance Date of such Common Stock, Options or Convertible Securities then, unless the Company offers to sell to each holder of Warrants, at the same price and on the same terms offered to all other prospective buyers (provided that the holders of Warrants shall not be required to buy any securities or other assets in order to buy such Common Stock, Options or Convertible Securities, except in the context of an offering of units of packaged securities), a number of shares of Common Stock, Options or Convertible Securities that is equal to the product of such holder’s portion of the Common Stock then outstanding if immediately prior thereto all the Warrants held by such holder had been exercised, multiplied by the number of shares of Common Stock, Options or Convertible Securities so issued, sold, distributed or granted:

(i) The Exercise Price shall be reduced to an amount equal to the product obtained by multiplying (A) the Exercise Price in effect immediately prior to such issuance or sale times (B) a fraction, (I) the numerator of which shall be the sum of (x) the product of (1) the number of shares of Common Stock outstanding (on a Fully Diluted Basis) immediately prior to such issuance or sale times (2) the Current Market Value per share as of the date of such issuance or sale plus (y) the consideration, if any, received or receivable by the Company upon such issuance, sale, exercise, conversion or exchange calculated in accordance with the procedures set forth above pursuant to this paragraph (f), and (II) the denominator of which shall be the product of (x) the number of shares of Common Stock outstanding (on a Fully Diluted Basis) immediately after such issuance or sale times (y) such Current Market Value per share; and

(ii) The number of Shares issuable upon exercise of such Warrant shall be increased to the number of shares determined by multiplying (A) the number of Shares issuable upon exercise of such Warrant immediately prior to such issuance or sale by (B) a fraction, (1) the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment in clause (i) of this paragraph (f), and (2) the denominator of which shall be the Exercise Price in effect immediately after such adjustment.

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“Fully Diluted Basis” means, with respect to the Common Stock at any time of determination, the number of shares of Common Stock that would be issued and outstanding at such time, assuming full conversion, exercise and exchange of all issued and outstanding Convertible Securities and Options that shall be (or may become) exchangeable for, or exercisable or convertible into, Common Stock, including the Warrants.

Each holder of a Warrant may elect to buy all or any portion of the Common Stock, Options or Convertible Securities offered pursuant to this subsection (f) or may decline to purchase any such securities.

Notwithstanding the provisions of this subsection (f), in no event will the Exercise Price be decreased pursuant to any adjustment under this subsection (f) to a price under $3.95.

(g) Consideration Received. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company in respect thereof shall be deemed to be the then fair market value of such consideration (as determined in good faith by the Board of Directors of the Company). If any Options shall be issued in connection with the issuance and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration; provided, however, that if such Options have an exercise price equal to or greater than the Current Market Value of the Common Stock on the date of issuance of such Options, then such Options shall be deemed to have been issued for consideration equal to such exercise price. For purposes of determining the price per share of any Additional Shares of Common Stock, in the event that shares of Common Stock, Options and Convertible Securities issued in a single transaction or series of related transactions, the price per share shall be determined on the basis of the aggregate consideration received and shares issued or deemed to be issued in such transaction or series of related transactions.

(h) Changes in Options and Convertible Securities. If the exercise price provided for in any Options referred to in Section 5.01(f) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Section 5.01(f) above, or the rate at which any Convertible Securities referred to in Section 5.01(f) above are convertible into or exchangeable for Common Stock shall change at any time to a price which is less than the Current Market Value thereof as of the Issuance Date, then the adjustment provisions of Section 5.01(f) above would be applicable.

(i) Statement of Warrants. Irrespective of any adjustment in the number or kind of Shares issuable upon the exercise of the Warrants, Warrants theretofore or thereafter issued shall continue to express the same number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement.

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(j) Expiration of Rights, Warrants or Options. Upon the expiration of any Options or Convertible Securities, to the extent the Warrants shall not have been exercised, the Exercise Price shall be adjusted to such amount as would have been received by a Warrant holder had the adjustment in such Exercise Price made upon the distribution of such Options or Convertible Securities been made upon the basis of the distribution of only such number of Options or Convertible Securities as were actually exercised or converted.

(k) No Nominal Adjustment. No adjustment in the number of Shares purchasable pursuant to the Warrants or in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1.0% of the number of Shares then purchasable upon exercise of the Warrants or in the Exercise Price; provided, however, that any adjustments which by reason of this subsection (k) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be.

Section 5.02 Fractional Interest. The Company shall not be required to issue fractional shares of Common Stock on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full shares of Common Stock which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of shares of Common Stock acquirable on exercise of the Warrants so presented. If any fraction of a share of Common Stock would, except for the provisions of this Section, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall direct the transfer agent for the Common Stock to pay an amount in cash calculated to equal the then Current Market Value per share (determined pursuant to Section 5.01(c)) multiplied by such fraction computed to the nearest whole cent. Holders of Warrants, by their acceptances of the Warrant Certificates, expressly waive any and all rights to receive any fraction of a share of Common Stock or a stock certificate representing a fraction of a share of Common Stock.

Section 5.03 When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

Section 5.04 Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Article V, such determination may be challenged in good faith by holders holding a majority of the outstanding Warrants (the “Majority Holders”), and any dispute shall be resolved by an investment banking firm of national standing selected by the Company. The fee of such investment banking firm shall be paid by the Company, unless such fair market value as determined by the investment banking firm is more than 95% of the fair market value determined by the Board of Directors of the Company, in which case the challenging holders shall be jointly and severally liable for such fee.

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Section 5.05 Treasury Stock. The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Company shall be deemed an issuance thereof and a repurchase thereof and designation of such shares as treasury stock shall be deemed to be a redemption thereof for the purposes of this Agreement.

Section 5.06 Notices to Warrant Holders. In connection with any adjustment pursuant to this Article V, the Company shall (i) promptly after such adjustment, cause to be filed with the Warrant Agent a certificate of an officer of the Company setting forth the number of shares (or portion thereof) issuable after such adjustment, upon exercise of a Warrant and the Exercise Price after such adjustment, which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) promptly after such adjustment cause to be given to each of the registered holders of the Warrant Certificates at his address appearing on the Warrant Register written notice of such adjustments by first-class mail, postage prepaid. The Warrant Agent shall be entitled to conclusively rely on the above-referenced officer’s certificate and shall be under no duty or responsibility with respect to any such certificate, except to exhibit the same from time to time to any holder desiring an inspection thereof during normal business hours upon reasonable notice. The Warrant Agent shall not at any time be under any duty or responsibility to any holder to determine whether any facts exist that may require any adjustment of the number of Shares issuable on exercise of the Warrants or the Exercise Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment or the validity or value (or the kind or amount) of any Shares which may be issuable on exercise of the Warrants. The Warrant Agent shall not be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of Common Stock or stock certificates or other common stock or property upon the exercise of any Warrant.

The Company shall, in addition, promptly notify the holders of the Warrants of any determination of its Board of Directors that any actions affecting its Common Stock will not require an adjustment to the number of Shares for which a Warrant is exercisable, and shall specify in such notice the reasons for such determination. In the event that the Majority holders shall challenge any of the calculations set forth in such notice within 20 days after the Company’s delivery thereof, the Company shall retain a firm of independent certified public accountants or law firm of national standing selected by the Company to prepare and execute a certificate verifying that no adjustment is required. The Company shall promptly cause a signed copy of any certificate prepared pursuant to this Section 5.06 to be delivered to each holder at his address appearing in the Warrant Register. The Company shall keep at its office or agency designated pursuant to Section 1.10 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours upon reasonable notice by any holder or any prospective purchaser of a Warrant designated by a holder thereof.

Section 5.07 Par Value of Shares of Common Stock. Before taking any action which would cause an adjustment effectively reducing the portion of the Exercise Price allocable to each Share below the then par value per share of the Common Stock issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Stock upon exercise of the Warrants.

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ARTICLE VI

CONCERNING THE WARRANT AGENT

Section 6.01 Warrant Agent. The Company hereby appoints American Stock Transfer and Trust Company as warrant agent (and in all capacities in this Agreement, the “Warrant Agent”) of the Company in respect of the Warrants and the Warrant Certificates upon the terms and subject to the conditions herein and in the Warrant Certificates set forth; and American Stock Transfer and Trust Company hereby accepts such appointment. The Warrant Agent shall have the powers and authority specifically granted to and conferred upon it in the Warrant Certificates and hereby and such further powers and authority to act on behalf of the Company as the Company may hereafter grant to or confer upon it and it shall accept in writing. All of the terms and provisions with respect to such powers and authority contained in the Warrant Certificates are subject to and governed by the terms and provisions hereof.

Section 6.02 Conditions of Warrant Agent’s Obligations. The Warrant Agent accepts its obligations herein set forth upon the terms and conditions hereof and in the Warrant Certificates, including the following, to all of which the Company agrees and to all of which the rights hereunder of the holders from time to time of the Warrant Certificates shall be subject:

(a) The Warrant Agent shall be entitled to compensation to be agreed upon with the Company in writing for all services rendered by it and the Company agrees promptly to pay such compensation and to reimburse the Warrant Agent for its reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel) incurred without gross negligence or willful misconduct on its part in connection with the services rendered by it hereunder. The Company also agrees to indemnify the Warrant Agent, each successor Warrant Agent, and their respective directors, officers, affiliates, agents and employees for, and to hold it and its directors, officers, affiliates, agents and employees harmless against, any loss, liability or expense of any nature whatsoever (including, without limitation, fees and expenses of counsel) incurred without gross negligence or willful misconduct on the part of the Warrant Agent or successor Warrant Agent, arising out of or in connection with its acting as such Warrant Agent hereunder and its exercise or failure to exercise of its rights and performance of its obligations hereunder. The obligations of the Company under this Section 6.02 shall survive the exercise and the expiration of the Warrant Certificates and the resignation and removal of the Warrant Agent.

(b) In acting under this Agreement and in connection with the Warrant Certificates, the Warrant Agent is acting solely as agent of the Company and does not assume any obligation or relationship of agency or trust for or with any of the owners or holders of the Warrant Certificates.

(c) The Warrant Agent may consult with counsel and any advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion.

(d) The Warrant Agent shall be fully protected and shall incur no liability for or in respect of any action taken or omitted to be taken or thing suffered by it in reliance upon any Warrant Certificate, notice, direction, consent, certificate, affidavit, opinion of counsel, instruction, statement or other paper or document reasonably believed by it, in the absence of bad faith, to be genuine and to have been presented or signed by the proper parties.

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(e) The Warrant Agent, and its officers, directors, affiliates and employees (“Related Parties”), may become the owners of, or acquire any interest in, Warrant Certificates, shares or other obligations of the Company with the same rights that it or they would have it if were not the Warrant Agent hereunder and, to the extent permitted by applicable law, it or they may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of holders of shares or other obligations of the Company as freely as if it were not the Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent the Warrant Agent or such Related Parties from acting in any other capacity for the Company.

(f) The Warrant Agent shall not be under any liability for interest on, and shall not be required to invest, any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Warrant Certificates.

(g) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement (or any term or provision hereof) or the execution and delivery hereof (except the due execution and delivery hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its authentication thereof).

(h) The recitals and other statements contained herein and in the Warrant Certificates (except as to the Warrant Agent’s authentication thereon) shall be taken as the statements of the Company and the Warrant Agent assumes no responsibility for the correctness of the same. The Warrant Agent does not make any representation as to the validity or sufficiency of this Agreement or the Warrant Certificates, except for its due execution and delivery of this Agreement; provided, however, that the Warrant Agent shall not be relieved of its duty to authenticate the Warrant Certificates as authorized by this Agreement. The Warrant Agent shall not be accountable for the use or application by the Company of the proceeds of the exercise of any Warrant.

(i) Before the Warrant Agent acts or refrains from acting with respect to any matter contemplated by this Warrant Agreement, it may require:

(1) an Officers’ Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Warrant Agreement relating to the proposed action have been complied with; and

(2) if reasonably necessary in the sole judgment of the Warrant Agent, an opinion of counsel for the Company stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

Each Officers’ Certificate or, if requested, an opinion of counsel with respect to compliance with a condition or covenant provided for in this Warrant Agreement shall include:

(1) a statement that the person making such certificate or opinion has read such covenant or condition;

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(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.

(j) The Warrant Agent shall be obligated to perform such duties as are herein and in the Warrant Certificates specifically set forth and no implied duties or obligations shall be read into this Agreement or the Warrant Certificates against the Warrant Agent. The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any of the Warrant Certificates authenticated by the Warrant Agent and delivered by it to the Company pursuant to this Agreement. The Warrant Agent shall have no duty or responsibility in case of any default by the Company in the performance of its covenants or agreements contained in the Warrant Certificates or in the case of the receipt of any written demand from a holder of a Warrant Certificate with respect to such default, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or, except as provided in Section 7.02 hereof, to make any demand upon the Company. The Warrant Agent shall not be obligated to perform any duty to the extent prohibited by law.

(k) Unless otherwise specifically provided herein, any order, certificate, notice, request, direction or other communication from the Company made or given under any provision of this Agreement shall be sufficient if signed by its chief executive officer, its president, its treasurer, its controller or any vice president or its secretary or any assistant secretary.

(l) The Warrant Agent shall have no responsibility in respect of any adjustment pursuant to Article V hereof.

(m) The Company agrees that it will perform, execute, acknowledge and deliver, or cause to be performed, executed, acknowledged and delivered, all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement.

(n) The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from any one of the chief executive officer, the president, the treasurer, the controller, any vice president or the secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and to apply to such officers or officials for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions with respect to any matter arising in connection with the Warrant Agent’s duties and obligations arising under this

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Agreement. Such application by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent with respect to its duties or obligations under this Agreement and the date on or after which such action shall be taken and the Warrant Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall be not less than 10 Business Days after the Company receives such application unless the Company consents to a shorter period), provided that (i) such application includes a statement to the effect that it is being made pursuant to this paragraph (n) and that unless objected to prior to such date specified in the application, the Warrant Agent will not be liable for any such action or omission to the extent set forth in such application and (ii) prior to taking or omitting any such action, the Warrant Agent has not received written instructions objecting to such proposed action or omission.

(o) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the chief executive officer, the president, the treasurer, the controller, any vice president or the secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate.

(p) The Warrant Agent shall not be required to risk or expend its own funds in the performance of its obligations and duties hereunder.

Section 6.03 Resignation and Appointment of Successor.

(a) The Company agrees, for the benefit of the holders from time to time of the Warrant Certificates, that there shall at all times be a Warrant Agent hereunder.

(b) The Warrant Agent may at any time resign as Warrant Agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective, provided that such date shall be at least 30 days after the date on which such notice is given unless the Company agrees to accept less notice. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Warrant Agent, qualified as provided in Section 6.03(d) hereof, by written instrument in duplicate signed on behalf of the Company, one copy of which shall be delivered to the resigning Warrant Agent and one copy to the successor Warrant Agent. As provided in Section 6.03(d) hereof, such resignation shall become effective upon the earlier of (x) the acceptance of the appointment by the successor Warrant Agent or (y) 30 days after receipt by the Company of notice of such resignation. The Company may, at any time and for any reason, and shall, upon any event set forth in the next succeeding sentence, remove the Warrant Agent and appoint a successor Warrant Agent by written instrument in duplicate, specifying such removal and the date on which it is intended to become effective, signed on behalf of the Company, one copy of which shall be delivered to the Warrant Agent being removed and one copy to the successor Warrant

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Agent. The Warrant Agent shall be removed as aforesaid if it shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Warrant Agent or of its property shall be appointed, or any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation. Any removal of the Warrant Agent and any appointment of a successor Warrant Agent shall become effective upon acceptance of appointment by the successor Warrant Agent as provided in Section 6.03(d). As soon as practicable after appointment of the successor Warrant Agent, the Company shall cause written notice of the change in the Warrant Agent to be given to each of the registered holders of the Warrants in the manner provided for in Section 7.04 hereof

(c) Upon resignation or removal of the Warrant Agent, if the Company shall fail to appoint a successor Warrant Agent within a period of 30 days after receipt of such notice of resignation or removal, then the holder of any Warrant Certificate or the Warrant Agent may apply to a court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company.

(d) Any successor Warrant Agent, whether appointed by the Company or by a court, shall be a bank or trust company in good standing, incorporated under the laws of the United States of America or any State thereof and having, at the time of its appointment, a combined capital surplus of at least $50 million. Such successor Warrant Agent shall execute and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder and all the provisions of this Agreement, and thereupon such successor Warrant Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Warrant Agent hereunder, and such predecessor shall thereupon become obligated to (i) transfer and deliver, and such successor Warrant Agent shall be entitled to receive, all securities, records or other property on deposit with or held by such predecessor as Warrant Agent hereunder and (ii) upon payment of the amounts then due it pursuant to Section 6.02(a) hereof, pay over, and such successor Warrant Agent shall be entitled to receive, all monies deposited with or held by any predecessor Warrant Agent hereunder.

(e) Any corporation or bank into which the Warrant Agent hereunder may be merged or converted, or any corporation or bank with which the Warrant Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation or bank to which the Warrant Agent shall sell or otherwise transfer all or substantially all of its corporate trust business, shall be the successor to the Warrant Agent under this Agreement (provided that such corporation or bank shall be qualified as aforesaid) without the execution or filing of any document or any further act on the part of any of the parties hereto.

(f) No Warrant Agent under this Warrant Agreement shall be personally liable for any action or omission of any successor Warrant Agent or of the Company.

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ARTICLE VII

MISCELLANEOUS

Section 7.01 Amendment. This Agreement and the terms of the Warrants may be amended by the Company and the Warrant Agent, without the consent of the holder of any Warrant Certificate, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained herein or therein or, subject to the provisions of the second paragraph of this Section 7.01, in any other manner which the Company may deem necessary or desirable and which shall not adversely affect in any material respect the interests of the holders of the Warrant Certificates.

The Company and the Warrant Agent may modify this Agreement and the terms of the Warrants with the consent of not less than a majority in number of the then outstanding Warrants for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this Agreement or modifying in any manner the rights of the holders of the outstanding Warrants; provided, however, that no such modification that increases or decreases the Exercise Price, decreases the number of shares purchasable upon exercise of the Warrants, reduces the period of time during which the Warrants are exercisable hereunder, otherwise materially and adversely affects the exercise rights of the holders of the Warrants, reduces the percentage required for modification, or effects any change to this Section 7.01 may be made with respect to an outstanding Warrant without the consent of the holder of such Warrant.

Any modification or amendment made in accordance with this Agreement will be conclusive and binding on all present and future holders of Warrant Certificates whether or not they have consented to such modification or amendment or waiver and whether or not notation of such modification or amendment is made upon such Warrant Certificates. Any instrument given by or on behalf of any holder of a Warrant Certificate in connection with any consent to any modification or amendment will be conclusive and binding on all subsequent holders of such Warrant Certificate.

Section 7.02 Notices and Demands to the Company and Warrant Agent. If the Warrant Agent shall receive any notice or demand addressed to the Company by the holder of a Warrant Certificate pursuant to the provisions hereof or of the Warrant Certificates, the Warrant Agent shall promptly forward such notice or demand to the Company.

Section 7.03 Addresses for Notices to Parties and for Transmission of Documents. All notices hereunder to the parties hereto shall be deemed to have been given when sent by certified or registered mail, postage prepaid, or by telex or telecopy, confirmed by first class mail, postage prepaid, addressed to any party hereto as follows:

To the Company:	Syntroleum Corporation
	4322 South 49th West Avenue
	Tulsa, Oklahoma 74107
	Attention:    Chief Executive Officer
To the Warrant Agent:	American Stock Transfer and Trust Company
	59 Maiden Lane
	New York, New York 10038
	Attention:    Corporate Trust Department

or at any other address of which either of the foregoing shall have notified the other in writing.

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Section 7.04 Notices to Holders . Notices to holders of Warrants shall be mailed to such holders at the addresses of such holders as they appear in the Warrant Register. Any such notice shall be sufficiently given if sent by first-class mail, postage prepaid.

Section 7.05 APPLICABLE LAW. THE VALIDITY, INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER AND OF THE RESPECTIVE TERMS AND PROVISIONS THEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF.

Section 7.06 Obtaining of Governmental Approvals. The Company will from time to time take all action required to be taken by it which may be necessary to obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities and securities acts filings under United States Federal and State laws, and the rules and regulations of all stock exchanges on which the Warrants are listed which may be or become requisite in connection with the issuance, sale, transfer, and delivery of the Warrant Certificates, the exercise of the Warrants or the issuance, sale, transfer and delivery of the shares issued upon exercise of the Warrants.

Section 7.07 Persons Having Rights Under Agreement. Nothing in this Agreement expressed or implied and nothing that may be inferred from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent and the holders of the Warrant Certificates any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement hereof; and all covenants, conditions, stipulations, promises and agreements in this Agreement contained shall be for the sole and exclusive benefit of the Company and the Warrant Agent and their successors and of the holders of the Warrant Certificates.

Section 7.08 Headings. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

Section 7.09 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument.

Section 7.10 Inspection of Agreement. A copy of this Agreement shall be available at all reasonable times at the principal corporate trust office of the Warrant Agent, for inspection by the holder of any Warrant Certificate. The Warrant Agent may require such holder to submit his Warrant Certificate for inspection by it.

Section 7.11 Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.

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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written.

SYNTROLEUM CORPORATION
By:	/s/ Richard Edmonson
Name:	Richard Edmonson
Title:	Vice President, General Counsel and Secretary
AMERICAN STOCK TRANSFER AND TRUST COMPANY, as Warrant Agent
By:	/s/ Herbert J. Lemmer
Name:	Herbert J. Lemmer
Title:	Vice President

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EXHIBIT A

[FORM OF WARRANT CERTIFICATE]

[FACE]

[Unless and until it is exchanged in whole or in part for Warrants in certificated form, this Warrant may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.¹

CUSIP#[  ]

No. [  ] [  ] Warrants

WARRANT CERTIFICATE

SYNTROLEUM CORPORATION

This Warrant Certificate certifies that [            ], or registered assigns, is the registered holder of [  ] Warrants (the “Warrants”) to purchase shares of Common Stock, par value $.01 per share (the “Common Stock”), of Syntroleum Corporation a Delaware corporation (the “Company”). Each Warrant entitles the holder to purchase from the Company at any time on or after              until 5:00 p.m., New York City, New York time, on              (the “Expiration Date”),              fully paid and non-assessable shares of Common Stock (a “Share”, or, if adjusted, the “Shares”, which may also include any other securities or property purchasable upon exercise of a Warrant, such adjustment and inclusion each as provided in the Warrant Agreement) at the exercise price (the “Exercise Price”) of              per Share upon surrender of this Warrant Certificate and payment of the Exercise Price at any office or agency maintained for that purpose by the Company (the “Warrant Agent Office”), subject to the conditions set forth herein and in the Warrant Agreement.

The Exercise Price shall be payable by cash, certified check or official bank check or by such other means as is acceptable to the Company in the lawful currency of the United States of America which as of the time of payment is legal tender for payment of public or private debts. The Company has initially designated at its agent’s office in New York City, New York, as the initial Warrant Agent Office. The number of Shares issuable upon exercise of the Warrants (“Exercise Rate”) is subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement.

¹ This paragraph is to be included only if the Warrant is in global form.

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Any Warrants not exercised on or prior to 5:00 p.m., New York City, New York time, on              shall thereafter be void.

Reference is hereby made to the further provisions on the reverse hereof which provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Warrant Certificate but not defined herein shall have the meanings ascribed thereto in the Warrant Agreement.

This Warrant Certificate shall not be valid unless authenticated by the Warrant Agent, as such term is used in the Warrant Agreement.

THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF.

WITNESS the facsimile seal of the Company and facsimile signatures of its duly authorized officers.

Dated:	SYNTROLEM CORPORATION
	By:
	Name:
	Title:

[Seal]

Attest:

By:

Name:

Title:

Certificate of Authentication:

This is one of the Warrants referred to in the within mentioned Warrant Agreement:

[

            as Warrant Agent

By:
	Authorized Signatory

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EXHIBIT A

[FORM OF WARRANT CERTIFICATE]

[REVERSE]

SYNTROLEUM CORPORATION

The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants, each of which represents the right to purchase at any time on or after             , until 5:00 p.m., New York City, New York time, on             ,          share of Common Stock of the Company, subject to adjustment as set forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement dated as of October     , 2003 (the “Warrant Agreement”), duly executed and delivered by the Company to             , as Warrant Agent (the “Warrant Agent”), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words “holders” or “holder” meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised by (1) surrendering at any Warrant Agent Office this Warrant Certificate with the form of Election to Exercise set forth hereon duly completed and executed and (ii) paying in full the Exercise Price for each such Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement.

If all of the items referred to in the last sentence of the preceding paragraph are received by the Warrant Agent at or prior to 2:00 p.m., New York City, New York time, on a Business Day, the exercise of the Warrant to which such items relate will be effective on such Business Day. If any items referred to in the last sentence of the preceding paragraph are received after 2:00 p.m., New York City, New York time, on a Business Day, the exercise of the Warrants to which such item relates will be deemed to be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in the last sentence of the preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York City, New York time, on such Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date.

Subject to the terms of the Warrant Agreement, as soon as practicable after the exercise of any Warrant or Warrants, the Company shall issue or cause to be issued to or upon the written order of the registered holder of this Warrant Certificate pursuant to the Election to Exercise, as set forth on the reverse of this warrant Certificate, a certificate or certificates evidencing the Share. Such certificate or certificates evidencing the Share or Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph.

The Company will not be required to issue fractional shares of Common Stock upon exercise of the Warrants or distribute Share certificates that evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, there shall be paid to the registered holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Current Market Value per share as determined in accordance with the Warrant Agreement.

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EXHIBIT A

Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith.

Upon due presentment for registration of transfer of this Warrant Certificate at any office or agency maintained by the Company for that purpose, a new Warrant Certificate evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith.

The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary.

The term “Business Day” shall mean any day on which (i) banks in New York City, New York are open for business, (ii) the principal national securities exchange or market on which the Common Stock is listed or admitted to trading is open for business and (iii) the principal national securities exchange or market on which the Warrants are listed or admitted to trading are open for business.

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EXHIBIT A

(FORM OF ELECTION TO EXERCISE)

(To be executed upon exercise of Warrants on the Exercise Date)

The undersigned hereby irrevocably elects to exercise              of the Warrants represented by this Warrant Certificate and purchase the whole number of Shares issuable upon the exercise of such Warrants and herewith tenders payment for such Shares in the amount of $             in cash or by certified or official bank check, in accordance with the terms hereof The undersigned requests that a certificate representing such Shares be registered in the name of              whose address is              and that such certificate be delivered to              whose address is             . Any cash payments to be paid in lieu of a fractional Share should be made to              whose address is              and the check representing payment thereof should be delivered to              whose address is             .

Dated:
Name of holder of Warrant Certificate:
	(Please Print)
Tax Identification or Social Security Number:
Address:
Signature:

Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever.

Dated:

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EXHIBIT A

[FORM OF ASSIGNMENT]

For value received              hereby sells, assigns and transfers unto              the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises.

Dated:

Signature:

Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever.

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EXHIBIT A

SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS²

The following exchanges of a part of this Global Warrant for certificated Warrants have been made:

Date of Exchange Amount of decrease in
Number of Warrants of
this Global Warrant Amount of increase
in Number of
Warrants of this
Global Warrant Number of Warrants
of this Global
Warrant following
such decrease (or
increase) Signature of
authorized officer of
Warrant Agent

² This is to be included only if the Warrant is in global form.

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EXHIBIT B

CERTIFICATE TO BE DELIVERED UPON EXCHANGE

OR REGISTRATION OF TRANSFER OF WARRANTS

Re: Warrants to Purchase Common Stock (the “Warrants”) of Syntroleum Corporation.

This Certificate relates to              Warrants held in* book-entry or*              certificated form by              (the “Transferor”).

The Transferor: *

¨ has requested the Warrant Agent by written order to deliver in exchange for its beneficial interest in the Global Warrant held by the Depositary a Warrant or Warrants in definitive, registered form of authorized denominations and an aggregate number equal to its beneficial interest in such Global Warrant (or the portion thereof indicated above); or

¨ has requested the Warrant Agent by written order to exchange or register the transfer of a Warrant or Warrants.

In connection with such request and in respect of each such Warrant, the Transferor does hereby certify that the Transferor is familiar with the Warrant Agreement relating to the above captioned Warrants and the restrictions on transfers thereof as provided in such Warrant Agreement, and that the transfer of this Warrant does not require registration under the Securities Act of 1933, as amended (the “Act”).

	[INSERT NAME OF TRANSFEROR]
Date:	By:

*Check applicable box.

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EX-10.1

Exhibit 10.1

Employment Agreement

CONFIDENTIAL

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into on the 30th day of July, 2003, by and between Syntroleum Corporation, a Delaware corporation (the “Company”), and Richard Edmonson, an individual (the “Employee”).

WHEREAS, the Company desires to enter into an employment relationship with Employee and Employee is willing to accept such employment on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the Company and Employee hereby agree as follows.

1. Employment and Duties. The Company employs Employee in the capacity of General Counsel, or in such other position and at such location as the Company may direct or desire and Employee hereby accepts such employment, on the terms and conditions hereinafter set forth. Employee agrees to perform such services and duties (including reasonable travel) and hold such offices at such locations as may be reasonably assigned to him from time to time by the Company and to devote substantially his full business time, energies and best efforts to the performance thereof to the exclusion of all other business activities, except any activities disclosed to the Company in advance and consented to by the Company.

2. Compensation. As compensation for the services to be rendered by Employee to the Company pursuant to this Agreement, Employee shall be paid the following compensation and other benefits.

(a) Salary in the amount of $185,000 per year, payable in equal bi-weekly installments in arrears, or such higher compensation as may be established by the Company from time to time. Payments of salary shall be made in accordance with the Company’s usual payroll procedures.

(b) Employee shall be eligible to participate, to the extent he may be eligible, in any group medical and hospitalization, profit sharing, retirement, life insurance or other employee benefit plans which the Company may from time to time offer to its employees. All group insurance provided to Employee shall be in such form and provide such coverage as is provided to other employees of the Company.

(c) All compensation payments to Employee shall be made subject to normal deductions therefrom, including federal and state social security and withholding taxes.

3. Life Insurance. The Company, in its discretion, may apply for and procure in its own name and for its own benefit, life insurance on the life of Employee in any amount or amounts considered advisable by the Company. Employee shall submit to any medical or other examination and execute and deliver any application or other instrument in writing, reasonably necessary for the Company to acquire such insurance.

Syntroleum—Employment Agreement

CONFIDENTIAL

4. Expenses. The Company shall reimburse Employee for his actual out-of-pocket expenses incurred in carrying out his duties hereunder in the conduct of the Company’s business, which expenses shall be limited to ordinary and necessary items and which shall be supported by vouchers, receipts or similar documentation submitted in accordance with the Company’s expense reimburse policy and as required by law.

5. Vacations and Leave. Employee shall be entitled to vacation and leave in accordance with the Company’s policies in effect from time to time.

6. Non-Disclosure of Confidential Information.

(a) Employee acknowledges that in and as a result of his employment by the Company, he will be making use of, acquiring, and/or adding to the Company’s Trade Secret Information. Except as required in the performance of Employee’s duties under this Agreement, Employee will not use any Trade Secret Information of the Company for Employee’s own benefit or purposes or disclose to third parties, directly or indirectly, any Trade Secret Information of the Company, either during or after Employee’s employment with the Company.

(b) As used in this Agreement, “Trade Secret Information” means information, including, but not limited to, any formula, pattern, compilation, program, device, method, technique or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. For purposes of this Agreement, “Trade Secret Information” includes both information disclosed to Employee by the Company and information developed by Employee in the course of his employment with the Company. The types and categories of information which are considered to be Trade Secret Information include, without limitation: (a) specifications, descriptions, designs, dimensions, content (including chemical composition) and tolerances of products, parts and components; (b) plans, blueprints, design packages construction, part and assembly drawings and diagrams; (c) design, construction and component costs and cost estimates; (d) the existence, terms or conditions of any agreements (including license agreements) between the Company and any third party; (e) computer programs (whether in the form of source code, object code or any other form, including software, firmware and programmable array logic), formulas, algorithms, methods, techniques, processes, designs, specifications, diagrams, flow charts, manuals, descriptions, instructions, explanations, improvements, and the ideas, systems and methods of operation contained in such programs; (f) information concerning or resulting from research and development work performed by the Company; (g) information concerning the Company’s management, financial condition, financial operations, purchasing activities, sales activities, marketing activities and business plans; (h) information acquired or compiled by the Company concerning actual or potential customers;

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and (i) all other types and categories of information (in whatever form) with respect to which, under all the circumstances, Employee knows or has reason to know that the Company intends or expects secrecy to be maintained and as to which the Company has made reasonable efforts to maintain its secrecy.

(c) In the event that Employee is requested or required by applicable law or by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process to disclose any of the Company’s Trade Secret Information, Employee shall provide the Company with prompt written notice of such request or requirement prior to making the requested disclosure, and shall cooperate with the Company so that the Company may seek to protect the proprietary nature of such Trade Secret Information through available procedures, including a protective order or other appropriate remedy.

(d) The Company may also advise Employee from time to time as to restrictions upon the use or disclosure of specified information which has been licensed or otherwise disclosed to the Company by third parties pursuant to license or confidential disclosure agreements which contain restrictions upon the use or disclosure of such information. Employee agrees to abide by the restrictions upon use and/or disclosure contained in such agreements.

(e) Employee has not and will not use or disclose to the Company any confidential or proprietary information belonging to others without the written consent of the person to whom such information is confidential, and Employee represents that his employment with the Company will not require the use of such information or the violation of any confidential relationship with any third party.

7. Other Property of the Company. All documents, encoded media, and other tangible items provided to Employee by the Company or prepared, generated or created by Employee or others in connection with any business activity of the Company are the property of the Company. Upon termination of Employee’s employment with the Company, Employee will promptly deliver to the Company all such documents, media and other items in his possession, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents, media, items or information contained therein. Employee will neither have nor claim any right, title or interest in any trademark, service mark or trade name owned or used by the Company.

8. Inventions and Works of Authorship.

(a) Employee agrees to assign and hereby irrevocably assigns to the Company all of Employee’s right, title and interest in and to any and all Inventions and Works of Authorship made, generated or conceived by Employee during the period of his employment with the Company, and Employee agrees to and shall promptly disclose all such Inventions and Works of Authorship to the Company in writing. As used herein, “Invention” means any

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discovery, improvement, innovation, idea, formula, or shop right (whether or not patentable, whether or not put into writing and whether or not put into practice) made, generated or conceived by Employee (whether alone or with others) while employed by the Company. For purposes of this Agreement, any discovery, improvement, innovation, idea, formula, or shop right (whether or not patentable, whether or not put into writing and whether or not put into practice) relating directly or indirectly to the business of the Company or to the Company’s actual or demonstrably anticipated business, research or development with respect to which Employee files a patent application within two years after termination of employment with the Company shall be presumed to be an Invention. As used herein, “Work of Authorship” means any original work of authorship within the purview of the copyright laws of the United States of America, and both the Company and Employee intend and agree that all Works of Authorship created by Employee in the course of his employment with the Company will be and shall constitute works made for hire within the meaning and purview of such copyright laws.

(b) Employee will execute and assign any and all applications, assignments, and other documents and will render all assistance which may be reasonably necessary for the Company to obtain patent, copyright, or any other form of intellectual property protection with respect to all Inventions and Works of Authorship in all countries and will cooperate with Syntroleum as reasonably necessary to enforce any such intellectual property protection. The Company will pay Employee $200 for each patent issued to the Company upon which Employee’s name appears as an inventor.

(c) The provisions of this Paragraph 8 do not apply to an invention for which no equipment, supplies, facility or Trade Secret Information of the Company was used and which was developed entirely on Employee’s own time, and which does not relate (i) directly or indirectly to the business, research or development of the Company, or (ii) to the Company’s actual or demonstrably anticipated business, research or development. A reasonable determination of the applicability of this Paragraph 8(a) to an Employee’s invention shall be made by Syntroleum after the Employee submits notification in writing of the invention. Said notice shall include adequate detail for Syntroleum to evaluate the invention.

9. Limited Covenants Against Competition; Non-Solicitation.

(a) Employee acknowledges that the services he is to render to the Company are of a special and unusual character with a unique value to the Company, the loss of which cannot adequately be compensated by damages in an action at law. In view of the unique value to the Company of the services of Employee and because of the confidential Trade Secret Information to be obtained by or disclosed to Employee, as set forth above, and as a material inducement to the Company to enter into this Agreement and to pay to Employee the compensation stated in Paragraph 2, Employee covenants and agrees that during the period of Employee’s employment within the Company and for a period of two years following

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termination of Employee’s employment with the Company for any reason, voluntarily or involuntarily, Employee will not directly or indirectly: (i) start or participate or assist (as a proprietor, partner, shareholder, lender, investor, director, employee, consultant, independent contractor or otherwise) in starting any Competing Business; (ii) assist (as a proprietor, partner, shareholder (except as a holder of 1% or less of the outstanding voting securities or income interest), lender, investor (except as a holder of 1% or less of the outstanding voting securities or income interest), director, employee, consultant, independent contractor or otherwise) any existing Competing Business in the design, development or manufacture of any Competing Product; (iii) sell or assist in the sale of any Competing Product to any person or organization with whom Employee had any contact while employed with the Company; (iv) directly or indirectly solicit for employment or employ any of the Company’s employees; or (v) become employed by a former employee of the Company. Because Syntroleum actively pursues opportunities throughout the world and is engaged in a world-wide oriented business the Employee acknowledges the reasonableness of having no geographic limitation hereunder.

(b) Employee further acknowledges that, while employed by the Company, he will have contact with and become aware of the Company’s customers and licensees and their respective representatives, including their names and addresses, specific needs and requirements, as well as leads and references to prospective customers and licensees. Employee further acknowledges that loss of such customers or licensees would cause the Company great and irreparable harm. Employee agrees that for a period of two years following termination of Employee’s employment with the Company for any reason, voluntarily or involuntarily, Employee will not directly or indirectly solicit, contact, call upon, communicate with or attempt to communicate with any customer or licensee, former customer or licensee, or prospective customer or licensee of the Company for the purpose of selling, installing, implementing, or modifying any Competing Product. This restriction shall apply only to any customer or licensee, former customer or licensee, or prospective customer or licensee of the Company with whom Employee had contact during the last two years of Employee’s employment with the Company.

(c) The Employee agrees that for as long as he is employed by the Company and for a period of two years after termination of Employee’s employment with the Company for any reason, voluntarily or involuntarily, Employee will not solicit, recruit, hire or attempt to solicit, recruit or hire, directly or by assisting others, any other employee of the Company.

(d) As used in this Agreement, (i) “Competing Business” means any person, entity or organization other than the Company which is engaged in or is about to become engaged in the design, manufacture or sale of a Competing Product, (ii) “Competing Product” means any product (including, without limitation, any chemical formula or process) which is or may be marketed in competition with any product marketed or under development by the Company at any time, and (iii) “contact” means interaction between Employee and a customer or licensee, former customer or licensee, or prospective customer or licensee of the

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Company, which takes place to further any business relationship; or performing services for the customer or licensee, former customer or licensee, or prospective customer or licensee on behalf of the Company.

10. Reasonableness of Restrictions.

(a) Employee expressly acknowledges that he has carefully read and considered the provisions of Paragraphs 6, 7, 8 and 9, and, having done so, agrees that the restrictions set forth in these Paragraphs, including, but not limited to, the time periods and geographic areas of restriction are fair and reasonable and are reasonably required for the protection of the interests of the Company and its officers, directors, shareholders and other employees.

(b) In the event that, notwithstanding the foregoing, any of the provisions of Paragraphs 6, 7, 8 and 9 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. In the event that any provision of Paragraphs 6, 7, 8 and 9 relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court.

11. Requests for Clarification. In the event Employee is uncertain as to the meaning of any provision of this Agreement or its application to any particular information, item or activity, Employee will inquire in writing to the Company, specifying any areas of uncertainty. The Company will respond in writing within a reasonable time and will endeavor to clarify any areas of uncertainty, including such things as whether it considers particular information to be its Trade Secret Information or whether it considers any particular activity or employment to be in violation of this Agreement.

12. Remedies. In the event of a breach or threatened breach of any of the covenants in Paragraphs 6, 7, 8 and 9, the Company shall have the right to seek monetary damages and equitable relief, including specific performance by means of an injunction against Employee or against Employee’s partners, agents, representatives, servants, employers, employees, family members and/or any and all persons acting directly or indirectly by or with him, to prevent or restrain any such breach.

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13. Term and Termination.

(a) The term of this Agreement shall be for an initial term of 12 months from the effective date hereof, unless sooner terminated as provided herein, and shall thereafter be automatically renewed for successive terms of 12 months each unless sooner terminated as provided herein.

(b) Employment of Employee under this Agreement may be terminated:

(i) by the Company upon the death of Employee.

(ii) by the Company if Employee becomes disabled. For the purposes of this Agreement, Employee will be deemed disabled if he (i) has been declared legally incompetent by a final court decree (the date of such decree being deemed to be the date on which the disability occurred), or (ii) receives disability insurance benefits from any disability income insurance policy maintained by the Company for a period of three consecutive months, or (iii) has been found to be disabled pursuant to a disability determination. A “disability determination” means a finding that Employee, because of a medically determinable disease, injury, or other mental or physical disability, is unable to perform substantially all of his regular duties to the Company and that such disability is determined or reasonably expected to last at least six months. The disability determination shall be based upon the written opinion of the physician regularly attending Employee whose disability is in question. If the Company disagrees with the opinion of this physician (the “First Physician”), it may engage, at its own expense, another physician of its choice (the “Second Physician”) to examine Employee. If the First and Second Physicians agree in writing that Employee is or is not disabled, their written opinion shall, except as otherwise set forth in this subsection, be conclusive on the issue of disability. If the First and Second Physicians disagree on the disability of Employee, they shall choose a third consulting physician (whose expense shall be borne by the Company), and the written opinion of a majority of these three physicians shall, except as otherwise provided in this subsection, be conclusive as to Employee’s disability. The date of any written opinion conclusively finding Employee to be disabled is the date on which the disability will be deemed to have occurred. If there is a conclusive finding that Employee is not totally disabled, the Company shall have the right to request additional disability determinations provided it agrees to pay all the expenses of the disability determinations and does not request an additional disability determination more frequently than once every three months. In connection with any disability determination, Employee hereby consents to any required medical examination, and agrees to furnish any medical information requested by any examining physician and to waive any applicable physician-patient privilege that may arise because of such examination. All physicians except the First Physician must be board-certified in the specialty most closely related to the nature of the disability alleged to exist.

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(iii) by the Company when Employee reaches mandatory retirement age under any retirement policy applicable to all executive officers adopted by the Company.

(iv) by mutual agreement of Employee and the Company.

(v) by the Company upon the dissolution and liquidation of the Company (other than as part of a reorganization, merger, consolidation or sale of all or substantially all of the assets of the Company whereby the business of the Company is continued).

(vi) by the Company for just cause at any time upon written notice. For purposes of this Agreement, “just cause” shall mean any one or more of the following: (A) Employee’s material breach of his obligations, duties and responsibilities under any term or provision of this Agreement, which breach remains uncured for a period of five days after written notice by the Company to Employee; (B) Employee’s failure to adhere to the reasonable standards of performance prescribed by the Company; (C) Employee’s act of insubordination to the Company’s Board of Directors; (D) Employee’s gross negligence or willful misconduct in the performance of his duties under this Agreement; (E) Employee’s dishonesty, fraud, misappropriation or embezzlement in the course of, related to or connected with the business of the Company; (F) Employee’s conviction of a felony; or (G) Employee’s failure (after written notice to Employee of such failure and Employee not correcting such failure within five days of such notice) to devote his time, attention and best efforts to the business of the Company as provided in this Agreement.

(vii) by either the Company or Employee upon 60 days written notice.

(c) Any termination of Employee’s employment, either by the Company or Employee, shall be communicated by a written notice of termination to the other party.

(d) If Employee’s employment is terminated pursuant to the terms of this Agreement for any reason, Employee shall be entitled to all arrearages of salary and expenses up to and including the date of termination but shall not be entitled to further compensation. Provided, that if, at any time after the first 12 months from the date of this Agreement, Employee’s employment is terminated by the Company for any reason other than Employee’s death, disability or retirement, the Company’s dissolution or just cause as provided in Paragraphs 13(b)(i), (ii), (iii), (v) or (vi), respectively, Employee shall be entitled to and the Company shall pay Employee all arrearages of salary and expenses up to and including the date of termination and, in addition, Employee’s monthly base salary for an additional period of 24 months.

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(e) Upon expiration of the term of this Agreement or upon earlier termination of this Agreement, Employee shall deliver all Trade Secret Information of the Company to an authorized representative of the Company, and the non-disclosure provisions of Paragraph 6 shall survive such expiration or termination and shall remain in full force and effect for a period of 15 years from such expiration or termination.

14. Change of Control.

(a) In the event of a Change of Control of the Company and (i) during the one-year period immediately following any Change of Control, the Company terminates Employee’s employment for any reason other than Employee’s death, disability, retirement or just cause as provided in Paragraphs 13(b)(i), (ii), (iii) and (vi), respectively, (ii) the Employee terminates his employment for Good Reason, or (iii) during the Window Period the Company or Employee terminates Employee’s employment for any reason, then the Company or its successor shall pay Employee his full base salary in effect at the time of the notice of termination through the date of termination, and in lieu of any further salary payments for periods subsequent to the date of termination, the Company or its successor shall pay Employee as severance pay an amount equal to two times Employee’s full base salary in effect on the date of termination payable in 24 equal monthly installments beginning on the first day of the first calendar month following the date of Employee’s termination and continuing on the first day of each month thereafter until paid.

(b) Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Employee’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Employee that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement, the “Change of Control” shall be deemed to have occurred on the date immediately prior to the date of such termination of employment.

(c) as used in this Agreement, the terms set forth below shall have the following respective meanings:

(i) “Affiliate” shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the Agreement Effective Date.

(ii) “Agreement Effective Date” shall mean July 30, 2003.

(iii) “Associate” shall mean, with reference to any Person, (a) any corporation, firm, partnership, association, unincorporated organization or other entity (other than the Company or a subsidiary of the Company) of which such Person is an officer or

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general partner (or officer or general partner of a general partner) or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person.

(iv) “Beneficial Owner” shall mean, with reference to any securities, any Person if:

(a) such Person or any of such Person’s Affiliates and Associates, directly or indirectly, is the “beneficial owner” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act, as in effect on the Agreement Effective Date) such securities or otherwise has the right to vote or dispose of such securities, including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially own,” any security under this subsection (a) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (i) arises solely from a revocable proxy or consent given in response to a public (i.e., not including a solicitation exempted by Rule 14a-2(b)(2) of the General Rules and Regulations under the Exchange Act) proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act and (ii) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report);

(b) such Person or any of such Person’s Affiliates and Associates, directly or indirectly, has the right or obligation to acquire such securities (whether such right or obligation is exercisable or effective immediately or only after the passage of time or the occurrence of an event) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to “beneficially own,” (i) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange or (ii) securities issuable upon exercise of Exempt Rights; or

(c) such Person or any of such Person’s Affiliates or Associates (i) has any agreement, arrangement or understanding (whether or not in writing) with any other Person (or any Affiliate or Associate thereof) that beneficially owns such securities for the purpose of acquiring, holding, voting (except as set forth in the proviso to subsection (a) of this definition) or disposing of such securities or (ii) is a member of a group (as that term is used in Rule 13d-5(b) of the General Rules and Regulations under the Exchange Act) that includes any other Person that beneficially owns such securities;

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provided, however, that nothing in this definition shall cause a Person engaged in business as an underwriter of securities to be the Beneficial Owner of, or to “beneficially own,” any securities acquired through such Person’s participation in good faith in a firm commitment underwriting until the expiration of 40 days after the date of such acquisition. For purposes hereof, “voting” a security shall include voting, granting a proxy, consenting or making a request or demand relating to corporate action (including, without limitation, a demand for a stockholder list, to call a stockholder meeting or to inspect corporate books and records) or otherwise giving an authorization (within the meaning of Section 14(a) of the Exchange Act) in respect of such security.

The terms “beneficially own” and “beneficially owning” shall have meanings that are correlative to this definition of the term “Beneficial Owner.”

(v) “Change of Control” shall mean any of the following (provided, however, that without limiting the generality of any other provision hereof, no Change of Control shall be deemed to have occurred as a result of the consummation of any of the transactions contemplated by the Agreement and Plan of Merger dated as of March 30, 1998 by and between SLH Corporation, a Kansas corporation, and the Company (the “Merger Agreement”)):

(a) any Person (other than an Exempt Person) shall become the Beneficial Owner of 30% or more of the shares of Common Stock then outstanding or 30% or more of the combined voting power of the Voting Stock of the Company then outstanding; provided, however, that no Change of Control shall be deemed to occur for purposes of this subsection (a) if such Person shall become a Beneficial Owner of 30% or more of the shares of Common Stock or 30% or more of the combined voting power of the Voting Stock of the Company solely as a result of (i) an Exempt Transaction or (ii) an acquisition by a Person pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this definition are satisfied;

(b) individuals who, as of the Agreement Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Agreement Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; provided, further, that there shall be excluded, for this purpose, any such individual whose initial assumption of office occurs as a result of any actual or threatened election contest that is subject to the provisions of Rule 14a-11 under the Exchange Act;

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(c) approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 80% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding Voting Stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the Beneficial Owners of the outstanding Common Stock immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the outstanding Common Stock, (ii) no Person (excluding any Exempt Person or any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the Common Stock then outstanding or 30% or more of the combined voting power of the Voting Stock of the Company then outstanding) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding Voting Stock of such corporation and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or initial action by the Board providing for such reorganization, merger or consolidation; or

(d) approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company unless such liquidation or dissolution is approved as part of a plan of liquidation and dissolution involving a sale or disposition of all or substantially all of the assets of the Company to a corporation with respect to which, following such sale or other disposition, all of the requirements of clauses (ii)(A), (B) and (C) of this subsection (d) are satisfied, or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which, following such sale or other disposition, (A) more than 80% of the then outstanding shares of common stock of such corporation and the combined voting power of the Voting Stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the Beneficial Owners of the outstanding Common Stock immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Common Stock, (B) no Person (excluding any Exempt Person and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the Common Stock then outstanding or 30% or more of the combined voting power of the Voting Stock of the Company then outstanding)

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beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding Voting Stock of such corporation and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or initial action of the Board providing for such sale or other disposition of assets of the Company.

(vi) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(vii) “Exempt Person” shall mean the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company, and any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan.

(viii) “Exempt Rights” shall mean any rights to purchase shares of Common Stock or other Voting Stock of the Company if at the time of the issuance thereof such rights are not separable from such Common Stock or other Voting Stock (i.e., are not transferable otherwise than in connection with a transfer of the underlying Common Stock or other Voting Stock) except upon the occurrence of a contingency, whether such rights exist as of the Agreement Effective Date or are thereafter issued by the Company as a dividend on shares of Common Stock or other Voting Securities or otherwise.

(ix) “Exempt Transaction” shall mean an increase in the percentage of the outstanding shares of Common Stock or the percentage of the combined voting power of the outstanding Voting Stock of the Company beneficially owned by any Person solely as a result of a reduction in the number of shares of Common Stock then outstanding due to the repurchase of Common Stock or Voting Stock by the Company, unless and until such time as (a) such Person or any Affiliate or Associate of such Person shall purchase or otherwise become the Beneficial Owner of additional shares of Common Stock constituting 1% or more of the then outstanding shares of Common Stock or additional Voting Stock representing 1% or more of the combined voting power of the then outstanding Voting Stock, or (b) any other Person (or Persons) who is (or collectively are) the Beneficial Owner of shares of Common Stock constituting 1% or more of the then outstanding shares of Common Stock or Voting Stock representing 1% or more of the combined voting power of the then outstanding Voting Stock shall become an Affiliate or Associate of such Person.

(x) “Good Reason” shall mean:

(a) the assignment to the Employee of any duties materially inconsistent in any respect with the Employee’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1 of this Agreement, or any other action by the

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Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee;

(b) any material failure by the Company to comply with any of the provisions of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee;

(c) the Company’s requiring the Employee to be based at any office outside the Tulsa metropolitan area;

(d) any purported termination by the Company of the Employee’s employment otherwise than as expressly permitted by this Agreement; or

(xi) “Person” shall mean any individual, firm, corporation, partnership, association, trust, unincorporated organization or other entity.

(xii) “Voting Stock” shall mean, with respect to a corporation, all securities of such corporation of any class or series that are entitled to vote generally in the election of directors of such corporation (excluding any class or series that would be entitled so to vote by reason of the occurrence of any contingency, so long as such contingency has not occurred).

(xiii) “Window Period” shall mean the 60-day period immediately following elapse of one year after any Change of Control.

15. Resignation Upon Termination. In the event of termination of this Agreement other than for death, Employee agrees to resign from all positions held in the Company, including without limitation any position as a director, officer, agent, trustee or consultant of the Company or any affiliate of the Company.

16. Notice to Subsequent Employers. For a period of two years after termination of Employee’s employment with the Company for any reason, Employee will inform any new employer (before accepting employment) of the obligations of Employee under Paragraphs 6, 7, 8, 9, and 10 of this Agreement.

17. Obligations Unconditional. The obligations of the parties under this Agreement are unconditional and do not depend upon the performance of any agreements, duties, obligations, or terms outside this Agreement.

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18. Waiver. A party’s failure to insist on compliance or enforcement of any provision of this Agreement shall not affect the validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement by that party or any other party.

19. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA, UNITED STATES OF AMERICA, WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. The Company and Employee expressly and irrevocably consent and submit to the nonexclusive jurisdiction of any state or federal court sitting in Tulsa County, Oklahoma and agree that, to the fullest extent allowed by law, such Oklahoma state or federal courts shall have jurisdiction over any action, suit or proceeding arising out of or relating to this Agreement. The Company and Employee each irrevocably waive, to the fullest extent allowed by law, any objection either of them may have to the laying of venue of any such suit, action or proceeding brought in any state or federal court sitting in Tulsa County, Oklahoma based upon a claim that such court is inconvenient or otherwise an objectionable forum. Any process in any action, suit or proceeding arising out of or relating to this Agreement may, among other methods, be served upon the Company or Employee by delivering it or mailing it to their respective addresses set forth herein. Any such delivery or mail service shall be deemed to have the same force and effect as personal service in the State of Oklahoma.

20. Severability. If for any reason any paragraph, term or provision of this Agreement is held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed and enforced as if such provision had not been included herein and all other valid provisions herein shall remain in full force and effect. If for any reason the restrictions and covenants contained herein are held to cover a geographical area or be for a length of time which is unreasonable or unenforceable, or in any other way are construed to be too broad or to any extent invalid, then to the extent the same are or would be valid or enforceable under applicable law, any court of competent jurisdiction shall construe and interpret or reform this Agreement to provide for a covenant having the maximum area, time or other provisions (not greater than those contained herein) as shall be valid and enforceable under such applicable law.

21. Jurisdiction. The Company and Employee intend to and hereby confer jurisdiction to enforce the provisions of this Agreement and any restrictive covenants contained herein upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the provisions of this Agreement or any of the restrictive covenants contained herein unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Employee that such determination not bar or in any way affect the Company’s right to the relief provided herein in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

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22. Notice. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to the Company at its principal place of business and to Employee at the address hereinafter set forth following Employee’s signature, or at such other address or addresses as either party may hereafter designate in writing to the other.

23. Amendments. This Agreement may be amended at any time by mutual consent of the parties hereto, with any such amendment to be invalid unless in writing, signed by the Company and Employee.

24. Burden and Benefit. This Agreement, together with any amendments hereto, shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. The Company may, in its sole discretion, assign this Agreement or its rights hereunder to any parent, affiliate, shareholder, or successor of the Company, or to any person or entity which purchases substantially all of the assets of the Company. Employee may not transfer or assign this Agreement or any of Employee’s rights or obligations under this Agreement.

25. References to Gender and Number Terms. In construing this Agreement, feminine or number pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place which the context so requires.

26. Headings. The various headings in this Agreement are inserted for convenience only and are not part of the Agreement.

27. Entire Agreement. This Agreement contains the entire understanding and agreement between the parties relating to the subject matter hereof.

28. Counterparts. This Agreement may be executed in one or more counterparts, and all such counterparts shall constitute one and the same instrument.

29. Severance Compensation. In the event of termination of Employee’s employment with the Company under the terms of this Agreement which provide for payment by the Company to Employee of severance compensation, the amount of such severance compensation shall in no event be greater than the amount which would be deductible by the Company under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), after taking into consideration all payments to Employee covered by Code Section 280G which Employee receives or is deemed to receive (i) under this Agreement; (ii) under the Company’s 1993 Stock Option and Incentive Plan, as amended,

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by reason of the acceleration of the right to exercise any options (including any related stock appreciation rights) granted thereunder or the acceleration of the vesting of any restricted stock awards granted thereunder; or (iii) under any new plan or arrangement implemented by the Company after the date of this Agreement which would otherwise be considered a “parachute payment” under Section 280G. In the event such payments exceed the amount which would be deductible by the Company under Code Section 280G, the timing of such payments shall be extended or otherwise modified such that such payments shall be deductible by the Company under Code Section 280G and in a manner which, to the extent possible, provides Employee the full benefit of such payments as originally agreed to.

IN WITNESS WHEREOF, the Company and Employee have duly executed this Agreement as of the date and year first above written.

COMPANY:
SYNTROLEUM CORPORATION
By:
	John B. Holmes, Jr. President
	Syntroleum Corporation.
	1350 South Boulder, Suite 1100
	Tulsa, Oklahoma 74119
EMPLOYEE:
By:
	Richard Edmonson
	Home address:

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EX-10.2

Exhibit 10.2

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “Agreement”), is made and entered into as of the 11th day of April, 2003 by and between Syntroleum Corporation, a Delaware corporation (the “Corporation”), and Richard Edmonson (“Indemnitee”).

WITNESSETH:

WHEREAS, Indemnitee is currently serving or is about to begin serving as a director and/or officer of the Corporation and/or in another Corporate Status, and Indemnitee is willing, subject to, among other things, the Corporation’s execution and performance of this Agreement, to continue in or assume such capacity or capacities; and

WHEREAS, the Bylaws of the Corporation provide that the Corporation shall indemnify directors and officers of the Corporation in the manner set forth therein; and

WHEREAS, the Corporation and Indemnitee desire to enter into this Agreement to induce Indemnitee to provide services as contemplated hereby and the Corporation has deemed it to be in its best interest to enter into this Agreement with Indemnitee.

NOW, THEREFORE, in consideration of Indemnitee’s agreement to provide services to the Corporation and/or certain of its affiliates as contemplated by this Agreement, the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows.

1. Certain Definitions

As used herein, the following words and terms shall have the following respective meanings (whether singular or plural):

“Change of Control” means a change in control of the Corporation after the date Indemnitee acquired his Corporate Status, which shall be deemed to have occurred in any one of the following circumstances occurring after such date: (i) there shall have occurred an event required to be reported with respect to the Corporation in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Corporation is then subject to such reporting requirement; (ii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) shall have become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation’s then outstanding voting securities without prior approval of at least two-thirds of

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the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (iii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including, for this purpose, any new director whose election or nomination for election by the Corporation’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

“Corporate Status” describes the status of Indemnitee as a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, limited liability company, association, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the request of the Corporation.

“Court” means the District Court of Tulsa County of the State of Oklahoma or any other court of competent jurisdiction.

“DGCL” means the Delaware General Corporation Law, as amended from time to time.

“Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

“Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the five years previous to his selection or appointment has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.

“Matter” is a claim, a material issue or a substantial request for relief.

“Proceeding” includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by Indemnitee pursuant to Section 6.01 of this Agreement to enforce his rights under this Agreement.

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2. Services by Indemnitee

2.01 Services by Indemnitee. Indemnitee agrees to serve or continue to serve in his current capacity or capacities as a director, officer, employee, agent or fiduciary of the Corporation. Indemnitee also agrees to serve, as the Corporation may request from time to time, as a director, officer, employee, agent or fiduciary of any other corporation, partnership, limited liability company, association, joint venture, trust or other enterprise in which the Corporation has an interest. Indemnitee and the Corporation each acknowledge that they have entered into this Agreement as a means of inducing Indemnitee to serve the Corporation in such capacities.

2.02 Termination of Services. Indemnitee may at any time and for any reason resign from such position or positions (subject to any other contractual obligation or any obligation imposed by operation of law). The Corporation shall have no obligation under this Agreement to continue Indemnitee in any such position for any period of time and shall not be precluded by the provisions of this Agreement from removing or terminating Indemnitee from any such position at any time.

3. Indemnification

3.01 General. The Corporation shall, to the fullest extent permitted by applicable law in effect on the date hereof, and to such greater extent as applicable law may thereafter permit, indemnify and hold Indemnitee harmless from and against any and all losses, liabilities, claims, damages and, subject to Section 3.02, Expenses (as this and all other capitalized words are defined in Article 1. of this Agreement), whatsoever arising out of any event or occurrence related to the fact that Indemnitee is or was a director or officer of the Corporation or is or was serving in another Corporate Status.

3.02 Expenses. If Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to such Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter. To the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

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4. Advancement of Expenses

4.01 Advances. In the event of any threatened or pending action, suit or proceeding in which Indemnitee is a party or is involved and that may give rise to a right of indemnification under this Agreement, following written request to the Corporation by Indemnitee, the Corporation shall promptly pay to Indemnitee amounts to cover expenses reasonably incurred by Indemnitee in such proceeding in advance of its final disposition upon the receipt by the Corporation of (i) a written undertaking executed by or on behalf of Indemnitee providing that Indemnitee will repay the advance if it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Corporation as provided in this Agreement and (ii) satisfactory evidence as to the amount of such expenses.

4.02 Repayment of Advances or Other Expenses. Indemnitee agrees that Indemnitee shall reimburse the Corporation for all expenses paid by the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding against Indemnitee in the event and only to the extent that it shall be determined pursuant to the provisions of this Agreement or by final judgment or other final adjudication under the provisions of any applicable law that Indemnitee is not entitled to be indemnified by the Corporation for such expenses.

5. Procedure for Determination of Entitlement to Indemnification

5.01 Request for Indemnification. To obtain indemnification, Indemnitee shall submit to the Secretary of the Corporation a written claim or request. Such written claim or request shall contain sufficient information to reasonably inform the Corporation about the nature and extent of the indemnification or advance sought by Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request.

5.02 Determination of Entitlement; No Change of Control. If there has been no Change of Control at the time the request for indemnification is submitted, Indemnitee’s entitlement to indemnification shall be determined in accordance with Section 145(d) of the DGCL. If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shall furnish notice to Indemnitee within 10 days after receipt of the request for indemnification, specifying the identity and address of Independent Counsel. The Indemnitee may, within 14 days after receipt of such written notice of selection, deliver to the Corporation a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis for such assertion. If there is an objection to the selection of Independent Counsel, either the Corporation or Indemnitee may petition the Court for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counsel selected by the Court.

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5.03 Determination of Entitlement; Change of Control. If there has been a Change of Control at the time the request for indemnification is submitted, Indemnitee’s entitlement to indemnification shall be determined in a written opinion by Independent Counsel selected by Indemnitee. Indemnitee shall give the Corporation written notice advising of the identity and address of the Independent Counsel so selected. The Corporation may, within seven days after receipt of such written notice of selection, deliver to the Indemnitee a written objection to such selection. Indemnitee may, within five days after the receipt of such objection from the Corporation, submit the name of another Independent Counsel and the Corporation may, within seven days after receipt of such written notice of selection, deliver to the Indemnitee a written objection to such selection. Any objections referred to in this Section 5.03 may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and such objection shall set forth with particularity the factual basis for such assertion. Indemnitee may petition the Court for a determination that the Corporation’s objection to the first and/or second selection of Independent Counsel is without a reasonable basis and/or for the appointment as Independent Counsel of a person selected by the Court.

5.04 Procedures of Independent Counsel. If a Change of Control shall have occurred before the request for indemnification is sent by Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided in this Agreement) to be entitled to indemnification upon submission of a request for indemnification in accordance with Section 5.01 of this Agreement, and thereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption. The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel convinces him by clear and convincing evidence that the presumption should not apply.

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person or persons empowered under Section 5.02 or 5.03 of this Agreement to determine entitlement to indemnification shall not have made and furnished to Indemnitee in writing a determination within 60 days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by applicable law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner that he reasonably believed to be in or not opposed to

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the best interests of the Corporation, or with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. A person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan of the Corporation shall be deemed to have acted in a manner not opposed to the best interests of the Corporation.

For purposes of any determination hereunder, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or Proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term “another enterprise” as used in this Section shall mean any other corporation or any partnership, limited liability company, association, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this paragraph shall not be deemed to be exclusive or to limit in any way the circumstances in which an Indemnitee may be deemed to have met the applicable standards of conduct for determining entitlement to rights under this Agreement.

5.05 Independent Counsel Expenses. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred acting pursuant to this Article 5. and in any proceeding to which it is a party or witness in respect of its investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such Independent Counsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his selection until a Court has determined that such objection is without a reasonable basis.

6. Certain Remedies of Indemnitee

6.01 Adjudication. In the event that (i) a determination is made pursuant to Section 5.02 or 5.03 hereof that Indemnitee is not entitled to indemnification under this Agreement; (ii) advancement of Expenses is not timely made pursuant to Section 4.01 of this Agreement; (iii) Independent Counsel has not made and delivered a written opinion determining the request for indemnification (a) within 90 days after being appointed by the Court, or (b) within 90 days after objections to his selection have been overruled by the Court or (c) within 90 days after the time for the Corporation or Indemnitee to object to his selection; or (iv) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been

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made pursuant to Section 5.02, 5.03 or 5.04 of this Agreement, Indemnitee shall be entitled to an adjudication in the Court, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 6.01 shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding commenced pursuant to this Section 6.01, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made or deemed to have been made that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 6.01, or otherwise, unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification, or such indemnification is prohibited by law.

The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 6.01 that the procedures and presumptions of this Agreement are not valid, binding and enforceable, and shall stipulate in any such proceeding that the Corporation is bound by all provisions of this Agreement. In the event that Indemnitee, pursuant to this Section 6.01, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

7. Participation by the Corporation

7.01 Participation by the Corporation. With respect to any such claim, action, suit, proceeding or investigation as to which Indemnitee notifies the Corporation of the commencement thereof: (a) the Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, to the extent that it may wish, the Corporation (jointly with any other indemnifying party similarly notified) will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After receipt of notice from the Corporation to Indemnitee of the Corporation’s election so to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his own counsel in such action, suit, proceeding or investigation but the fees and expenses of such counsel

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incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel employed by Indemnitee shall be subject to indemnification pursuant to the terms of this Agreement (the Corporation shall not be entitled to assume the defense of any action, suit, proceeding or investigation brought in the name of or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above); and (c) the Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which consent shall not be unreasonably withheld. The Corporation shall not settle any action or claim in any manner that would impose any limitation or unindemnified penalty on Indemnitee without Indemnitee’s written consent, which consent shall not be unreasonably withheld.

8. Miscellaneous

8.01 Nonexclusivity of Rights. The rights of indemnification and advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled to under applicable law, the Corporation’s Certificate of Incorporation, the Corporation’s Bylaws, any agreement, a vote of shareholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or any provision hereof shall be effective as to Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Agreement shall continue as to Indemnitee whose Corporate Status has ceased for any reason and shall inure to the benefit of his heirs, executors and administrators.

8.02 Insurance and Subrogation. The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if, but only to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action reasonably requested by the Corporation to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights.

8.03 Acknowledgment of Certain Matters. Both the Corporation and Indemnitee acknowledge that in certain instances, applicable law or public policy may prohibit indemnification of Indemnitee by the Corporation under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be

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required in the future to undertake, by the Securities and Exchange Commission, to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation’s right under public policy to indemnify Indemnitee.

8.04 Amendment. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties hereto.

8.05 Waivers. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term only by a writing signed by the party against which such waiver is to be asserted. Unless otherwise expressly provided herein, no delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

8.06 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement between the parties hereto with respect to the matters covered hereby, and any other prior or contemporaneous oral or written understandings or agreements with respect to the matters covered hereby are superseded by this Agreement.

8.07 Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

8.08 Certain Actions For Which Indemnification Is Not Provided. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any Matter therein, brought or made by Indemnitee against the Corporation.

8.09 Notices. Promptly after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee shall, if he anticipates or contemplates making a claim for expenses or an advance pursuant to the terms of this Agreement, notify the Corporation of the commencement of such action, suit or proceeding; provided, however, that any delay in so notifying the Corporation shall not constitute a waiver or release by Indemnitee of rights hereunder and that any omission by Indemnitee to so notify the Corporation shall not relieve the Corporation from any liability that it may have to Indemnitee otherwise than under this Agreement. Any communication required or permitted to the Corporation shall be addressed to the Secretary of the Corporation and

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any such communication to Indemnitee shall be addressed to the Indemnitee’s address as shown on the Corporation’s records unless the Indemnitee specifies otherwise and shall be personally delivered or delivered by overnight mail delivery. Any such notice shall be effective upon receipt.

8.10 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware without regard to any principles of conflict of laws that, if applied, might permit or require the application of the laws of a different jurisdiction.

8.11 Headings. The Article and Section headings in this Agreement are for convenience of reference only, and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof.

8.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.

8.13 Use of Certain Terms. As used in this Agreement, the words “herein,” “hereof,” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph, section, subsection, or other subdivision. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to be effective as of the date first above written.

SYNTROLEUM CORPORATION
By:
	John B. Holmes, Jr.
INDEMNITEE
By:
	Richard Edmonson

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Kenneth L. Agee, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Syntroleum Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     November 13, 2003

By:	/s/    Kenneth L. Agee
	Kenneth L. Agee
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Larry J. Weick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Syntroleum Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:    November 13, 2003

By:	/s/    Larry J. Weick
	Larry J. Weick Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the “Act”), I, Kenneth L. Agee, President and Chief Executive Officer of Syntroleum Corporation (the “Company”), hereby certify, to the best of my knowledge:

(1) The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 13, 2003	/s/    Kenneth L. Agee
	Kenneth L. Agee
	Chief Executive Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Act and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the “Act”), I, Larry J. Weick, Senior Vice President and Chief Financial Officer of Syntroleum Corporation (the “Company”), hereby certify, to the best of my knowledge:

(1) The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 13, 2003	/s/    Larry J. Weick
	Larry J. Weick Senior Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Act and is not being filed as part of the Report or as a separate disclosure document.