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, 2008 (including our audited financial statements and the accompanying notes).
Overview
Our focus is the commercialization of innovative technology to produce synthetic liquid hydrocarbons. Our Bio-Synfining™ Technology processes triglycerides and/or fatty acids from fats and vegetable oils with heat, hydrogen and proprietary catalysts to make renewable synthetic fuels, such as diesel, heating oil, jet fuel (subject to certification), kerosene, naphtha and propane. Syntroleum has quantified in excess of 100 different fats and oils, which cover the spectrum of both cost and quality, for conversion to synthetic fuels via the Bio-Synfining™ Technology.
Operations to date have consisted of activities related to the commercialization of a proprietary process (the "Syntroleum® Process") and previously consisted of research and development of the Syntroleum® Process designed to convert carbonaceous material (biomass, coal, natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons produced by the Syntroleum® Process can be further processed using the Syntroleum Synfining®Process into high quality liquid fuels. Our Bio-Synfining™ Technology is a renewable fuels application of our Synfining® technology. We are centered on being a recognized provider of the Bio-Synfining™ Technology, Syntroleum® Process and Synfining® product upgrading technology to the energy industry through strategic relationships and deployment of our technology. Significant Developments
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 products 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. 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 have made capital contributions in the amount of $20.0 million each in 2008 and 2009. The remaining estimated $5.0 million each will be required to be funded in the second half of 2009, if needed.

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

    Funded Proceeds from Debt Issuance*                    $  100.0             -
    Funded Equity Contributions from Members               $   40.0     $    20.0

    Committed Equity Contributions from Members - 2009     $   10.0     $     5.0

    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. The interest rate as of June 30, 2009 was 0.2%. 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.

This project continues to progress forward with milestones met on time and budget. Engineering work is 81 percent complete, procurement is 60 percent complete, construction is 37 percent complete and the total project is 51 percent complete. Mechanical completion of the project is expected in the fourth quarter of 2009 and plant start up is scheduled for the first quarter of 2010.
Tyson is responsible for supplying feedstock to the plant, 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. 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. 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.
The agreements with Tyson allow for additional plants to be constructed. Both parties are performing due diligence for the possibility of a second plant.

Results of Operations
Consolidated Unaudited Results for the Three Months and Six Months Ended,

                                                Three Months Ended                         Six Months Ended
Revenues                                June 30, 2009         June 30, 2008        June 30, 2009       June 30 2008
                                                                      (In Thousands)
Technology Revenue                     $           150       $             -      $        19,203      $           -
Technical Services Revenue                       1,447                   752                2,459              1,659
Other Revenue                                       97                   135                  222                790

                                       $         1,694       $           887      $        21,884      $       2,449

Technology Revenue. The increase in Technology Revenue for the three months and six months ended June 30, 2009 over the same periods in 2008 relates to the delivery of technology documents or transference of the technology. Technology Agreements will be unique to individual customers. Revenue recognition will be determined on an individual contract basis. We are actively pursuing other agreements. Due to the complexity and due diligence requirements of these agreements, the business development requirements typically span current year timing.
Technical Services Revenue. Revenues from engineering services for a process design package for Dynamic and other engineering services increased 92 percent for the quarter ended June 30, 2009 compared to the same period last year and 48 percent for the six months ended June 30, 2009 compared to the same period last year. This increase is attributable to increased technical services contracts related to certain Technology Revenue Agreements and continued work on the engineering design and project management of the Dynamic Fuels plant. Other Revenue. Other revenues decreased in the quarter ended and six months ended June 30, 2009 compared to the same periods last year. The increased revenue in 2008 consisted of GTL fuel sales and recognition of revenue for the completion of the second milestone for our work with testing of 500 gallons of renewable jet fuel in the amount of $330,000. Our contract with the Department of Defense is complete and we do not expect to receive significant revenues from the sale of our remaining GTL fuel produced from our demonstration plant in the future.

                                                     Three Months Ended                         Six Months Ended
Operating Costs and Expenses                 June 30, 2009         June 30, 2008        June 30, 2009       June 30 2008
                                                                           (In Thousands)
Engineering                                             676                 1,353                2,206              2,328
Depreciation and amortization                            94                   139                  188                303
Non-cash equity compensation                            615                   341                3,011                734
General, administrative and other                     1,402                 1,735                4,226              3,347

                                            $         2,787       $         3,568      $         9,631      $       6,712

Engineering. Expenses from engineering activities decreased in the second quarter ended June 30, 2009 compared to the same period in 2008 primarily from higher analytical expenses associated with certain revenue producing contracts in 2008.
Non-cash Equity Compensation. Non-cash equity compensation increased in the quarter ended and six months ended June 30, 2009 compared to the same period in 2008. The increased expense primarily relates to the vesting of stock options and awards to all employees. The awards vest upon the achievement of certain company milestones relating to the Dynamic Fuels plant and we expect these awards to be fully expensed by the second quarter of 2010.
General, Administrative and Other. General and administrative expenses for the quarter ended June 30, 2009 decreased compared to the same period in 2008. The higher expenses in 2008 related to certain retention award bonuses granted to the management team. For the first six months ended 2009 compared to the same period in 2008, the expenses increased. The increase relates to increased legal fees from ongoing litigation with Fletcher International, Ltd. ("Fletcher") as discussed in Note 9 in the footnotes to the Consolidated Financial Statements and for bonus compensation for the execution and delivery of technology document agreements.

                                                    Three Months Ended                         Six Months Ended
Other Income and Expenses                   June 30, 2009         June 30, 2008        June 30, 2009        June 30 2008
                                                                           (In Thousands)
Investment and Interest Income                          29                   202                   63                 389
Loss from Dynamic Investment                          (898 )                (297 )             (3,169 )              (457 )
Other Income (Expense), net                              3                     7                    8                  14
Foreign Currency Exchange                           (1,820 )                (656 )             (1,712 )            (1,273 )

                                           $        (2,686 )     $          (744 )    $        (4,810 )    $       (1,327 )

Loss from Dynamic Investment. Loss from our investment in Dynamic increased in the second quarter ended June 30, 2009 due to increased initial operating expenditures. Expenses incurred in the first six months of 2009 include site rent, project development, site selection, equipment evaluation and labor expenditures for our operations staff. Operating expenditures incurred for the entity total approximately $2,800,000 for the six months ended March 31, 2009. Approximately $3,500,000 is attributable to the expense associated with marking the Dynamic interest rate swap to market. The swap is discussed in Significant Developments. The joint venture capitalizes costs associated with the construction of the plant and we expect to see income from this investment in 2010 upon the start up of commercial operations.
Foreign Currency Exchange. 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. Liquidity and Capital Resources
General
As of June 30, 2009, we had $16,035,000 in cash and cash equivalents. Our current liabilities totaled $4,655,000 as of June 30, 2009.
At June 30, 2009, we had $6,474,000 in accounts receivable outstanding relating to our Technology Transfer Agreements and 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.
Our business plan over the next several years includes potential investments in additional plants and we will need to raise additional capital to accomplish this plan. We expect to obtain additional funding through debt or equity financing in the capital markets, joint ventures, license agreements and other strategic alliances, as well as various other financing arrangements. 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. There can be no assurance as to the availability or terms upon which such financing might be available.
Assuming the commercial success of the plants based on the Syntroleum® Process, we expect that license fees 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. If we are unable to generate funds from operations, our need to obtain funds through financing activities will be increased.
Cash Flows
Cash flows provided by operations was $12,602,000 during the six months ended June 30, 2009, compared to cash flows provided by operations of $1,048,000 during the six months ended June 30, 2008. The increase in cash flows provided by operations primarily results from the collection of revenues from technology deployment agreements of $16,000,000 and engineering technical services. Cash flows used in investing activities were $6,104,000 during the six months ended June 30, 2009, compared to cash flows provided by investing activities of $8,634,000 during the six months ended June 30, 2008. We funded $6,000,000 into Dynamic Fuels in April of 2009 and have committed to an additional $5,000,000 investment by the end of 2009, if needed. We expect to utilize cash flows provided by operations for this investment. The cash provided by investing activities in 2008 was primarily related to the sale of assets associated with our discontinued operations such as, receipt of payments from AEERL of $7,266,000 and the proceeds from the sale of the Technology Center of $1,100,000. We do not have any other assets for sale related to our discontinued operations.
Cash flows used in financing activities during the three months ended June 30, 2009 was $564,000 compared to $0 used by financing activities during the quarter ended June 30, 2008. The cash used in financing was primarily due to cash repurchase of options from certain employees of the Company. Contractual Obligations
Our operating leases include leases for corporate equipment such as copiers, hardware and printers.
We have entered into employment agreements, which provide severance cash benefits to several key employees. Commitments under these agreements totaled approximately $2,139,000 at June 30, 2009. Expense is not recognized until an employee is severed.

The capital and working capital budget for Dynamic Fuels' financing, construction and initial operations of the first plant to use the Company's Bio-Synfining™ Technology is estimated to equal $150.0 million. Dynamic Fuels received approval from the Louisiana State Bond Commission to sell $100 million in Gulf Opportunity Zone 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 have made capital contributions in the amount of $20.0 million each in 2008 and 2009. The remaining estimated $5.0 million each will be required to be funded the second half of 2009. Timing of funding is contingent based on cash needs during construction. We expect to fund the remaining 2009 commitment from available cash. The plant is expected to begin commercial operations by the third quarter of 2010.
New Accounting Pronouncements
For a discussion of applicable new accounting pronouncements see Note 11 to our Unaudited Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes to the Quantitative and Qualitative Disclosures about Market Risk described in our annual report on Form 10-K for the year ended December 31, 2008.
Item 4. Controls and Procedures.

Evaluation of Disclosure 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 Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2009 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. Changes in Internal Control over Financial Reporting. There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.