4. INVESTMENT IN AND LOANS TO DYNAMIC FUELS

On June 22, 2007, we entered into definitive agreements with Tyson to form Dynamic Fuels, to construct and operate facilities in the United States using our Bio-Synfining® Technology. Dynamic Fuels is organized and operated pursuant to the provisions of its Limited Liability Company Agreement between the Company and Tyson (the "LLC Agreement"). Other agreements entered into 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.

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 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 basis. Our carrying value in Dynamic Fuels is reflected in "Investment in and Loans to Dynamic Fuels, LLC" in our Consolidated Balance Sheets. As of December 31, 2012, Syntroleum's total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $38,659,000, which represents our equity investment in and loans to this entity, net of recognized losses and other equity accounting adjustments, in the amount of $38,407,000 and accounts receivable from this entity in the amount of $252,000. The carrying value of our investment in Dynamic Fuels exceeds the amount of underlying equity in net assets of Dynamic Fuels by approximately $8,000,000, related to warrants issued to Tyson, and is being amortized over the remaining life of the bonds which expire in 2033.

In prior years, Dynamic Fuels was engaged in the development and construction of its renewable fuels plant. Dynamic Fuels began commercial operations in November of 2010. As of September 30, 2012, the plant sold 63.0 million gallons of renewable products such as diesel, naphtha, and LPG. Nameplate capacity for the plant is 75.0 million gallons per year. During its fiscal year ended September 30, 2012, the plant produced renewable products at an average rate of 49% of design capacity compared to 35% during the fiscal year ended September 30, 2011.

Since inception of commercial operations, the plant has experienced mechanical issues, hydrogen supply disruptions and feedstock adulterants which have contributed to plant down time, higher than expected operational costs and operating losses. Throughout 2011, Syntroleum provided engineering and other services and paid costs for services performed by others on behalf of Dynamic Fuels. As Dynamic Fuels' cash flow was insufficient to pay Syntroleum for these services, Syntroleum's account receivable from Dynamic Fuels, including accrued royalties, grew to $2,624,000 at December 31, 2011. Because Dynamic Fuel's near term ability to pay the amount owed without additional loans from its owners was uncertain, Syntroleum classified the account receivable as non-current as of December 31, 2011.

In order to help resolve differences between us and Tyson regarding plant operational and other issues, on June 27, 2012, we entered into a Settlement Agreement whereby the obligations to us and Tyson for sourcing fees, running royalty fees, line of credit or interest fees and services and expenses under the technical service agreement in the amount of $6,597,000 each were contributed to Dynamic Fuels' equity. Contemporaneous with the execution of the Settlement Agreement, we entered into a revised site license agreement, rights and obligations under the master license agreement were amended, warrants to purchase our common stock that had been issued to Tyson were vested, and the sales agreement under which Tyson procures feedstock was amended to pay Tyson an additional $.01 per pound, up to 1.1 billion pounds, to procure certain low cost feedstock.

Upgrades to the feedstock pre-treatment area were installed during 2012. After completion of the maintenance turnaround on December 10, 2012 the plant was placed in standby mode as Dynamic Fuels monitored economic conditions to determine the appropriate time to resume production. The economic outlook improved when, on January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which reinstated tax credits of $1.00 per gallon for the production of renewable diesel and $.50 per gallon for the production of qualified alternative fuels. The Act applies to 2013 production, but also retroactively reinstates the credits for 2012. Dynamic Fuels or its owners will receive approximately $23 million for 2012 production of diesel plus $.50 per gallon for a portion of the renewable naphtha produced during 2012.

On February 15, 2013 and February 19, 2013, respectively, Syntroleum and Tyson each made an additional $2.3 million working capital loan to Dynamic Fuels (for a total of $4.6 million).

As of the date these financial statements were issued, the plant continues to be in standby mode. While the economic conditions have improved in 2013, Syntroleum and Tyson have not agreed on the economic conditions required for plant start-up. As start-up costs may require each of us to make additional loans to Dynamic Fuels, receipt of the tax credits, sometime during 2013, may play a role in start-up timing.

Accounting standards for equity method investments require us to consider all factors that may indicate that the value of our investment in Dynamic Fuels is less than the amount resulting from the application of the equity method reported in our balance sheet. If such a value deficiency has occurred and is other than temporary, it must be recognized currently. Our management has considered Dynamic Fuel's financial condition, current status and outlook and has concluded that should a current valuation deficiency exist, it does not meet the "other than temporary" criteria of the accounting standards. When we and Tyson reach agreement to resume production, for which there is no assurance, should the plant upgrades and improvements fail to improve operational performance or industry economics make the plant uneconomic to operate, we may be required to assess the recoverability of our investment in and loans to Dynamic Fuels.

During the years ended September 30, 2012, 2011 and 2010, we recognized revenue associated with our technical services agreement between us and Dynamic Fuels in the amount of $6,017,000, $1,895,000 and $2,005,000, respectively. This revenue is reported in "Technical services from Dynamic Fuels, LLC" and "Royalties from Dynamic Fuels, LLC Plant Production" in the Consolidated Statement of Operations. During 2012, $3.7 million in technical service revenue from Dynamic Fuels was recognized for services that had been provided prior to 2012

Dynamic Fuels, LLC 2012 and 2011 Audited Financials (in thousands):


Balance Sheet		September 30,		September 30,
		2012		2011
Cash and Current Assets	$	9,337	$	6,950
Inventory		17,509		16,555
Property, Plant and Equipment
and Other Assets		150,258		146,929
Total Assets	$	177,104	$	170,434
Accounts Payable	$	10,241	$	7,210
Notes and Accounts Payable to
Related Parties		29,976		32,506
Long-Term Liabilities		100,051		100,040
Total Liabilities		140,268		139,756
Total Members' Equity		36,836		30,678
Total Liabilities and Members'
Equity	$	177,104	$	170,434


		For the Year			For the Year			For the
		Ended			Ended			Year Ended
		September 30,			September 30,			September
Statement of Operations		2012			2011			30, 2010

Revenue	$	166,986		$	127,069		$	-
Cost of Goods Sold and Operating
Expenses		179,550			151,341			10,426
General and Administrative		1,595			2,516			1,616
Loss from Operations		(14,159	)		(26,788	)		(12,042	)
Other Income (Expense)		(2,086	)		(2,548	)		902
Net Loss	$	(16,245	)	$	(29,336	)	$	(11,140	)