We have also recognized depreciation, depletion and amortization expense related to office and computer equipment, buildings and leasehold improvements and patents. We have reduced our costs and expenses over the past two years with the completion of our research and development efforts related to running the CDF and Pilot Plant, operating costs declined as a result of suspending operations at both plants, reducing our workforce and focusing on cost minimization. In the fourth quarter of 2007, we completed all other research and development activities, including all laboratory work and reduced our work force and focused on cost minimization. Our workforce decreased by 39 employees during 2007 to a current headcount of 22 employees as of December 31, 2008. Our reduction in workforce included research and development employees and general and administrative employees. Our current workforce consists of engineers and general and administrative employees. These cost saving measures implemented in the fourth quarter of 2007 and in 2006 had a significant favorable impact on our operating expenses and we expect to continue to focus on these cost saving measures on a go-forward basis. We do not expect to rehire any of the employees included in the reductions if we accelerate the development of a commercial project. Our operating expenses are not expected to increase further within the near future.
We have incurred costs related specifically to the development and design of the Bio-Synfining™ and Syntroleum® Process. These costs, which relate primarily to engineers, outside contract services for initial engineering, design, and development are included in engineering costs in our consolidated statements of operations.
If we are successful in developing a Bio-Synfining™ plant in which we own an interest, we expect to invest our portion of start-up and capital expenditures, including working capital of $29.25 million for our shares of the engineering design, construction and start-up of the plant, of which $18.25 million has already been contributed. Upon the commencement of commercial operations of a plant, we will incur our share of initial working capital which includes expenses relating primarily to the cost of feedstocks for the plant and operating expenses relating to the plant, including labor, consumables and product marketing costs. Due to the substantial capital expenditures associated with the construction of a Bio-Synfining™ plant, we expect the plant will incur significant depreciation and amortization expense in the future. Discontinued Operations
Research and Development
Our policy is to expense costs associated with the Catoosa Demonstration Facility and pilot plant, and research and development costs as incurred in accordance with Statement of Financial Accounting Standards ("SFAS") No. 2, Accounting for Research and Development Costs. All of these research and development expenses were associated with the development of our Syntroleum® Process. The Catoosa Demonstration Facility expenses previously included costs to maintain and operate the facility for further research and development as well as for demonstrations for licensees and other customers. The expenses associated with the facility in 2008 include certain expenses associated with the mothball state of the facility, primarily rent and utilities associated with the office space. Research and development expenses previously included costs to operate 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 or other projects until we begin our process design package and front-end engineering and design program on the respective projects. We have incurred costs related specifically to the development of the Syntroleum® Process.
International Oil and Gas
We previously pursued international oil and gas activities, which primarily included the leasehold acquisition, geological and geophysical work covering various areas in Nigeria, and drilling costs for the Aje-3 discovery well ("Aje-3") in Oil Mining Lease 113 ("OML") offshore Nigeria. In the fourth quarter of 2006, we decided to exit our international oil and gas activities due to limited access to capital requirements. We sold all the stock of various subsidiaries, including Syntroleum Nigeria Limited which held our interests in the Ajapa and Aje fields offshore Nigeria to African Energy Equity Resources Limited ("AEERL"), a direct wholly owned subsidiary of Energy Equity Resources (Norway) Limited ("EERNL") for a total of $12,172,000. Significant Developments During 2008
Commercial and Licensee Projects
On June 22, 2007, we entered into definitive agreements with Tyson to form a joint venture Limited Liability Company, Dynamic Fuels, LLC, a Delaware limited liability company ("Dynamic Fuels"), to construct facilities in the United States using our Bio-Synfining™ Technology. The purpose of Dynamic Fuels is to construct multiple stand-alone commercial plants in the United States. The first facility is being constructed in Geismar, Louisiana and, based on current estimates, will produce approximately 75 million gallons per year of renewable synthetic fuels beginning in 2010. 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. It was initially capitalized on July 13, 2007 with $4.25 million in capital contributed from Tyson and $4.25 million in capital contributions from Syntroleum.

This project continues to progress forward. All previous milestones have been met on time and on budget. In accordance with the agreement, the site selection has been finalized and the process design package has been delivered to Dynamic Fuels by our engineers. The Front End Engineering and Design (FEED) package outlining the estimated capital budget was delivered to each party in May of 2008. Upon completion of this final activity, the parties met to approve plant sanction based upon the capital budget for plant design and construction. Both parties approved plant sanction in July of 2008. The official groundbreaking occurred on October 6, 2008.
The capital and working capital budget for Dynamic Fuels' financing, construction and initial operations of the first plant to use our Bio-Synfining Technology is estimated to equal $150.0 million in total. Dynamic Fuels received approval from the Louisiana State Bond Commission to sell $100 million in Gulf Opportunity Tax Exempt Bonds to partially finance the plant. These bonds were sold on October 21, 2008, in the amount of $100 million. Syntroleum and Tyson made capital contributions in the amount of $14.0 million each to satisfy current funding requirements for capital expenditures relating to procurement of long lead equipment and construction of the plant in July 2008. On July 11, 2008, both members approved plant sanction and committed collectively an additional $12.0 million in 2009 in capital contributions for funding of the construction of the plant. The remaining estimated $10.0 million will be required to be funded proportionately in the second half of 2009. Timing of funding is contingent based on cash needs during construction. The funding in 2008 from Syntroleum was paid out of available cash.

    Proceeds - Debt and Equity Contributions               Dynamic        Synm
    (in Millions)                                           Fuels        Portion

    Funded Proceeds from Debt Issuance*                    $  100.0             -
    Funded Equity Contributions from Members - July 2008   $   28.0     $    14.0
    Committed Equity Contributions from Members - 2009     $   22.0     $    11.0

    Total Proceeds - Debt and Equity Contributions         $  150.0     $    25.0

* Interest during construction is calculated based on the daily interest rate stated at closing of 1.30 percent for 15 months. The interest rate for the bonds is a daily floating interest rate and may change significantly from this amount. Dynamic Fuels entered into an interest rate swap of 2.19% for a period of 5 years with declining swap coverage in the fourth quarter of 2008.

Tyson is responsible for supplying feedstock to the plant, which can range from high quality canola or soy vegetable oils to fats and greases, either from its own internal sources or from supplies it procures in the open market. The feedstock supply agreement provides a pricing formula for the feedstock, which is generally equivalent to the market price. The Tyson fat blend feedstock is expected to provide us with a notable cost advantage compared to users of soybean oil feedstock. The feedstock slate will be subject to change based upon market availability and other factors. We currently expect that the first facility will produce approximately 77% diesel, 13% naphtha and 10% liquefied petroleum gases (based on annual gallons of feedstock), although actual production will depend upon market conditions and other factors. We expect that Dynamic Fuels will be eligible for a federal excise tax credit of $1.00 per gallon for diesel produced and $0.50 per gallon for naphtha and liquefied petroleum gases produced.
DOD Projects.
In June 2007 we signed a contract to produce an initial 500 gallons of aviation grade renewable research fluid (Syntroleum® R-8, a product of Bio-Synfining™) for analysis by the same group in the Department of Defense that previously tested Syntroleum® S-8. This contract was later expanded to include production of an additional 100 gallons of R-8 and test quantities of same fuel derived from other renewable sources. The Syntroleum R-8 produced by our Bio-Synfining™ Technology from waste fats and greases was found to exhibit substantially similar properties to our Syntroleum® S-8 produced by our Synfining® Process under comparative analysis of the two products. This successful testing of this product was completed in 2008.
Results of Operations
Consolidated Results for the Years Ended December 31,

            Revenues                           2008         2007        2006
                                                       (in thousands)
            Licensing Revenue from Marathon   $     -     $ 13,665     $     -
            Technical Services Revenue          3,168        1,948           -
            Other Revenue                       1,722          859       2,700

            Total Revenues                    $ 4,890     $ 16,472     $ 2,700

Licensing Revenue from Marathon. Licensing revenue was $13,665,000 for the year ended December 31, 2007 related to the new Consolidation and License Agreement granted to Marathon in January 2007 of $12,665,000 and the recognition of previously deferred license fee credits of $1,000,000. The new Licensing Agreement was entered into to settle a convertible debt obligation to Marathon for funding a portion of our Catoosa Demonstration Facility. There was no licensing revenue for the years ended December 31, 2008 and 2006. We do not anticipate receiving additional licensing revenue from Marathon in the near term.
Technical Services Revenue. Revenues from contracted engineering services for a process design package and other engineering services for Dynamic Fuels and other separately contracted engineering services for technical work were recognized in 2008 and 2007. Services provided to Dynamic Fuels were for twelve months compared to 6 months in 2007. There was no revenue received from technical services for the years ended December 31, 2006. We expect to continue to earn revenues for engineering services provided for Dynamic Fuels in 2009 as well as we will provide additional engineering services to other customers on an individual contract basis.
Other Revenue. The revenues recognized in 2008 consisted primarily of initial testing of 600 gallons of renewable jet fuel by the DOD in the amount of $1,012,000 in 2008 and $220,000 in 2007. Revenue in 2007 also consisted of fuel sales to the Department of Transportation of approximately $144,000. In 2006 we completed the delivery of 104,000 gallons of S-8 synthetic diesel to the DOD for testing in aircraft and vehicle engines related to a DOD fuel delivery contract in the amount of approximately $2,300,000. We have nearly sold all of our Fischer Tropsch fuel from our demonstration facility and do not expect significant revenues to be recognized for the sale of the remaining fuel.

        Operating Costs and Expenses              2008         2007         2006
                                                          (in thousands)
        Engineering                                3,803        5,753        3,381
        Depreciation, depletion, amortization        620          745          816
        Non-cash equity compensation               2,418        4,980        7,859
        General and administrative and other       6,430       15,356       19,150

        Total Operating Costs and Expenses      $ 13,271     $ 26,834     $ 31,206

Engineering Expense. The change in expenditures in 2008 from 2007 resulted primarily from decreased expenditures associated with outside engineering firms for work on mechanical reactor designs and retention bonuses were paid and accrued for in 2007 as an incentive to retain key engineers.
Non-Cash Equity Compensation. Equity compensation expense for the vesting of stock compensation awards to employees decreased in 2008. The decrease resulted primarily from a reduction in work force resulting in cancellation of awards and new awards were granted in the fourth quarter of 2008 and valued on the grant date based on underlying stock prices. The higher expense in 2007 is primarily attributable to performance related vesting of restricted stock awards for executives based on achieving certain milestones associated with the Bio-Synfining™ Technology project and expense previously recognized reversed out for modifications to performance/market based stock options. The increased expense in 2006 resulted from a larger number of employees and executives receiving awards. Previously granted awards were also valued at higher prices based on the underlying stock prices of the company at the time of grant. Most of these awards have been cancelled due to termination of employees. We expect equity compensation to remain similar to the expense in 2008.
General and Administrative and Other. The significant decrease in general and administrative expenses year over year results from our cost reduction plan put into place in the fourth quarter of 2007. This reduction primarily consists of decreased expenditures associated with overhead personnel, professional consultants, accountant fees, travel and insurance expenditures. We expect general and administrative expenses to continue at this decreased level throughout 2009 and do not expect increases in general and administrative expenses to occur upon commercialization of our technology. We also incurred increased severance expense in 2007 and 2006 for future payments under retirement agreements with former officers and employees.

     Other Income and Expenses                     2008         2007         2006
                                                            (in thousands)
     Interest Income                              $   542     $  1,454     $   2,528
     Other Income (Expense)                          (399 )       (327 )      (1,200 )
     Foreign Currency Exchange                      2,790       (1,315 )        (892 )
     Minority Interest                                  -          706             -
     Income (Loss) From Discontinued Operations     1,310       13,595       (26,555 )

Interest Income. The decrease in interest income over the years is due to a lower average cash balance and declining interest rates on money market funds. A majority of interest income is generated from money market accounts with our current cash balances.
Other Income (Expense) and Foreign Exchange. Other income (expense) in 2008 and 2007 primarily consists of losses from our investment in Dynamic Fuels. Dynamic Fuels losses result from project development, site selection, equipment evaluation, and government relations. We expect the joint venture to capitalize costs associated with the construction of the plant and expect to see income from this investment in the second half of 2010. The loss in 2006 is attributable to an expense of $1,200,000, which was financing costs previously capitalized. Changes in the foreign currency exchange are due to fluctuation in the value of the Australian dollar compared to the U.S. Dollar. The foreign currency changes result from translation adjustments from our license with the Commonwealth of Australia which is denominated in Australian dollars. These changes have no current cash impact on us.
Income (Loss) from Discontinued Operations. Changes in Income from discontinued operation primarily resulted from:
Oil and Gas
• proceeds received in the amount of $1,500,000 from the settlement of future payments that would have been calculated on first gross revenues from our international oil and gas assets in 2008.

• international oil and gas gains of $10,078,000 recognized for the sale of stock in our Nigerian subsidiary for our interests in Aje and Ajapa assets in 2007,

• this compares to amortization expense of $1,457,000 related to the termination of the stranded gas venture in 2006, and

• an increase in impairment for domestic oil and gas assets sold in January of 2006.

Research and Development
• decrease in expenditures for research and development activities associated with the demonstration plants due to completion of operations of plants in 2008 and 2007offset by increased expenditures associated with laboratory facilities, personnel and termination expenditures in 2007;

• a onetime gain in 2007 resulting from the extinguishment of debt related to the Marathon note for the construction of the demonstration facility in the amount of $11,793,000 contributed to the income recognized in 2007; and

• expenditures of $17,748,000 for activities at both pilot plant facilities for nine months of the year and additional expenses associated with increased staffing levels for operation of demonstration facilities in 2006.

We will not incur further expenses related to our oil and gas activities in the future. We do not expect to incur significant expenses related to our research and development activities in the future as all liabilities associated with the discontinuance of activities have been incurred in 2007. Liquidity and Capital Resources
General
As of December 31, 2008, we had $10,101,000 in cash and cash equivalents. Our current liabilities totaled $3,181,000 as of December 31, 2008. At December 31, 2008, we had $517,000 in accounts receivable outstanding relating to our Technical Services Revenue provided to Dynamic Fuels and other revenue. We believe that all of the receivables currently outstanding will be collected and have not established a reserve for bad debts.
We have expended a significant amount of funds on the research and development of the Syntroleum® Process and Bio-Synfining™ Technology, and will continue to spend significant amounts to develop our other commercial projects. We are actively engaged in generating revenue through the license of our technology or transfer of our technology documentation. We also intend to obtain additional funds through collaborative or other arrangements with strategic partners and others, and through debt and equity financing.
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 the 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. There can be no assurance as to the availability or terms upon which such financing and capital might be available.
We are currently exploring alternatives for raising capital to commercialize the growth of our businesses, including the formation of joint ventures and other strategic alliances. If adequate funds are not available, or if we are not successful in establishing a strategic alliance, we may be required to reduce, delay or eliminate expenditures for our plant development and other activities or may 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. The transactions we outlined above may not 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 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. Cash Flows
2008 vs. 2007
Cash flows used in operations were $2,840,000 during the year ended December 31, 2008, compared to cash flows used in operations of $23,078,000 during the year ended December 31, 2007. The decrease in cash flows used in operations primarily results from lower cash used in continuing operations based on the new cost structure implemented by our management team in 2007, increased cash revenues and the receipt of a non-refundable advance payment of $3,000,000 recorded as deferred revenue. We also decreased our cash used in discontinued operations of research and development activities in 2008 when compared to 2007. Based on current executed agreements and management projections, we expect to receive cash flow from operating activities in 2009. Future cash flows to be used in . . .