4. Investment in and Loans to Dynamic Fuels, LLC

On June 22, 2007, we entered into definitive agreements with Tyson Foods, Inc. ("Tyson") to form Dynamic Fuels, to construct and operate facilities in the United States using our Bio-Synfining®Technology. The agreements included a technology license agreement whereby we would provide for the transfer of our Bio-Synfining® technology, provide technology support services to Dynamic Fuels, and receive payment of royalties for plant production. These agreements also included a sales agreement whereby Tyson would be paid a sourcing fee to procure feedstock. In order to induce Tyson to enter into the agreements with us, we granted Tyson warrants to purchase our common stock. On June 27, 2012, the process guarantee and performance test requirements set forth in the Master License and Site License Agreements were waived and deemed unnecessary, the warrants issued to Tyson were vested and a revised Site License Agreement was executed between Syntroleum and Dynamic Fuels. In addition, the Sales Agreement was amended whereby Tyson will be paid an additional $.01 per pound of identified types of low cost feedstock procured limited to procurement of 1.1 billion pounds.

The plant has experienced mechanical issues, hydrogen supply disruptions and feedstock adulterants all of which have contributed to plant down time and higher than expected operational costs. Upgrades to the feedstock pre-treatment area are progressing with one unit installed and two additional units in the process of being installed with commissioning expected in November. The unit installed in May has provided consistent and steady service.

Throughout 2011 and 2012 Syntroleum has provided engineering and other services and paid costs for services performed by others on behalf of Dynamic Fuels. On June 27, 2012 a Settlement Agreement was reached among the owners of Dynamic Fuels' whereby the obligations to its two members for sourcing fees, running royalty fees, line of credit or interest fees and services and expenses under technical service agreement in the amount of $6,597,000 each were contributed to Dynamic Fuels' equity. At June 30, 2012 Syntroleum recorded previously unrecognized technical services revenue of $3,701,000 and $166,000 for the fair value of the vested warrants. Dynamic Fuels reported the financial impact of the Settlement Agreement during the fiscal quarter ended June 30, 2012 except for an additional equity contribution recorded in September 2012 to clear the final remaining unpaid invoices of $1.2 million due Tyson and $13,000 due Syntroleum.

Dynamic Fuels is organized and operated pursuant to the provisions of its Limited Liability Company Agreement between the Company and Tyson (the "LLC Agreement"). The LLC Agreement provides for management and control of Dynamic Fuels to be exercised jointly by representatives of the Company and Tyson equally with no LLC member exercising control. This entity is accounted for under the equity method and is not required to be consolidated in our financial statements; however, our share of the Dynamic Fuels net income or loss is reflected in the Consolidated Statements of Operations. Dynamic Fuels has a different fiscal year than us. The Dynamic Fuels fiscal year ends on September 30 and we report our share of Dynamic Fuels results of operations on a three month lag. As of September 30, 2012, Syntroleum's total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $42,919,000, which represents our equity investment in and loans to this entity in the amount of $42,682,000 and accounts receivable from this entity in the amount of $237,000 which fluctuates from time to time with certain operating activities.

Dynamic Fuels, LLC Quarter Ended June 30, 2012 unaudited financials (in thousands):


		June 30,
Balance Sheet		2012
Cash and Receivables	$	4,980
Inventory		21,135
Property, Plant and Equipment and Other Assets		154,679
Total Assets	$	180,794


Accounts Payable and Accrued Liabilities	$	4,994
Notes and Accounts Payable to Related Parties		31,726
Long-Term Liabilities		100,050
Total Liabilities		136,770
Total Members' Equity		44,024
Total Liabilities and Members' Equity	$	180,794


		For the Quarter			For the Nine
		Ended			Months Ended
Statement of Operations		June 30, 2012		June 30, 2012
Revenue	$	24,031		$	124,318
Operating Expenses		28,444			130,599
Loss from Operations		(4,413	)		(6,281	)

Other Income (Expense)		(508	)		(1,570	)
Net Loss	$	(4,921	)	$	(7,851	)

Dynamic Fuels began commercial operations in November of 2010. As of September 30, 2012, the plant had sold 63.0 million gallons of renewable products, such as diesel, jet fuel, naphtha, and LPG since it began commercial operations. Nameplate capacity for the plant is 75.0 million gallons per year. During the nine months ended June 30, 2012, the plant produced renewable products at an average rate of 47% of design capacity or a total of 26.5 million gallons compared to 25% of design capacity or 14.0 million gallons for the same period in 2011. For the quarter ended September 30, 2012, the plant produced renewable products at an average rate of 56% of design or a total of 10.6 million gallons. During the quarter ended September 30, 2012 the plant ran a total of 51 days at full rates, was down a total of 5 days due to Hurricane Isaac, down 16 days due to transition from shutdown to start up and down 20 days due to various mechanical issues related to the heat exchangers and hydrogen compressor.

During the nine months ended September 30, 2012 and 2011, we recognized technical services and royalty revenue from Dynamic Fuels in the amount of $5,482,000 and $1,449,000 respectively. This revenue is reported in "Technical services from Dynamic Fuels, LLC" and "Royalties from Dynamic Fuels, LLC Plant Production" in the Consolidated Statements of Operations. We had a receivable from Dynamic Fuels of $237,000 and $2,624,000 as of September 30, 2012 and December 31, 2011, respectively.