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, 2011 (including our audited financial statements and the accompanying notes).

Overview

Our focus is the commercialization of our technologies to produce synthetic liquid hydrocarbons. 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, such as diesel, jet fuel (HRJ), kerosene, naphtha, propane and other chemical products.

Our Bio-Synfining™ Technology is a renewable fuels application of our Synfining ® Technology. This technology is applied commercially via our Dynamic Fuels, LLC joint venture. The technology processes renewable feedstocks such as triglycerides and/or fatty acids to make renewable synthetic products.

Commercial and Licensee Projects

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").

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 June 30, 2012, Syntroleum's total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $45,627,000, which represents our equity investment in and loans to this entity in the amount of $45,405,000 and accounts receivable from this entity in the amount of $222,000, which fluctuates from time to time with certain operating activities.

As of June 30, 2012, Syntroleum had contributed $50.1 million in capital contributions and an additional $14.0 million in the form of working capital loans to Dynamic Fuels. The $14.0 million non-interest bearing loan does not have a stated term but will be repaid upon Dynamic Fuels generating sufficient operating cash flow.

On October 21, 2008, Dynamic Fuels issued tax exempt bonds through the Louisiana Public Facilities Authority in the amount of $100 million at an initial interest rate of 1.3% to fund construction of the plant. The Bonds required a letter of credit in the amount of $100 million as collateral for Dynamic Fuels' obligations under the Bonds. Tyson agreed under the terms of the Warrant Agreement to provide credit support for the entire $100 million Bond issue. The interest rate for the Bonds is a daily floating interest rate and may change significantly from this amount. In the fourth quarter of 2008, Dynamic Fuels entered into an interest rate swap, which had the effect of locking in the interest rate at 2.19% for a period of 5 years with declining swap coverage. The daily floating interest rate as of June 30, 2012 was 1.8%. This debt funding is in addition to the equity contributions and loans provided by each member.

The renewable diesel produced by Dynamic Fuels meets the ASTM D975 standard for petroleum diesel fuel. The diesel fuel produced by Dynamic Fuels generates 1.7 Renewable Identification Number's, ("RIN") per gallon. As of June 30, 2012, RIN prices were $1.36 per gallon and therefore worth $2.31 per gallon with the 1.7 multiplier.

In 2011, we received approval for registration of our neat renewable diesel from the Environmental Protection Agency. The registration of the neat renewable diesel allows combustion in regular on-road engines of up to 100 percent renewable fuel, which means no blending of petroleum based diesel is required (previously we had registration approval for blends up to 20 percent renewable diesel). This allows Dynamic Fuels to market its fuel directly to third party fuel end-users, such as operators of on-road fleet vehicles. In 2012, Dynamic Fuels entered into strategic marketing alliance, commercial off-take and supply chain management agreements with Mansfield Oil Company ("Mansfield") to efficiently distribute the plants renewable products to the commercial fleet vehicle market.

Dynamic Fuels began commercial operations in November of 2010. As of June 30, 2012, the plant had sold 50.1 million gallons of renewable products, such as diesel, jet fuel, and naphtha. Nameplate capacity for the plant is 75.0 million gallons per year. During the six months ended March 31, 2012, the plant produced renewable products at an average rate of 54% of design capacity or a total of 20.1 million gallons compared to 17% of design capacity or 6.5 million gallons for the same period in 2011. For the quarter ended June 30, 2012, the plant produced renewable products at an average rate of 34% of design or a total of 6.3 million gallons. Dynamic Fuels had its routine scheduled turnaround for three weeks in April. The plant was down from May 1st to May 24th due to a scheduled plant turnaround at our hydrogen supplier and then again for another six days in June with hydrogen curtailment.

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 systems are being enacted to deal with variability seen in the delivered feedstock. Upgrades to the feedstock pre-treatment area is progressing with one unit installed, two additional units procured and scheduled for delivery in October with installation and commissioning to follow in November. The unit installed in May has provided consistent and steady operational service since completion of commissioning and startup.

The table below shows average revenue per gallon we receive for the renewable diesel, naphtha and LPG we sell and cost of goods sold and operating expenses and general and administrative expenses. The net operating loss per gallon listed below for the quarters ended December 31, 2011 and 2010 corresponds to "Loss from Operations" as reported in the GAAP Dynamic Fuels summarized financial information in Note 4, "Investment in and Loans to Dynamic Fuels, LLC".

                                           Quarter        Quarter         Quarter           Quarter         Quarter        Quarter       Quarter
                                            Ended          Ended           Ended             Ended           Ended          Ended         Ended
                                           12/31/10       3/31/11        6/30//2011        9/30/2011        12/31/11       3/31/12       6/30/12
Renewable Products Sold (in millions)            1.3           4.5               7.2             12.5            11.0           8.9           4.7
% of Design Capacity                               7 %          23 %              39 %             67 %            58 %          47 %          25 %

Revenue $/Gal                             $     6.04      $   4.57      $       4.84      $      5.11      $     4.87      $   5.23          5.13
Feedstock $/Gal                                 2.67          3.05              4.11             4.26            3.83          3.93          3.94
OPEX and General & Administrative/Gal           6.83          3.39              2.24             1.09            1.19          1.32          2.19

Net Operating Loss/ Gal                   $    (3.46 )    $  (1.87 )    $      (1.51 )    $     (0.24 )    $    (0.15 )    $  (0.02 )    $  (1.00 )

Results of Operations

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



                                           Three Months Ended                            Six Months Ended
Revenues                          June 30, 2012          June 30, 2011          June 30, 2012          June 30, 2011
                                                                    (In Thousands)
Technology                       $          6,150       $           150       $           6,300       $           300
Technical Services                            473                   383                     954                   884
Technical Services from
Dynamic Fuels                               4,052                   316                   4,431                   514
Royalties from Dynamic
Fuels, LLC Plant Production                   135                   339                     375                   339

                                 $         10,810       $         1,188       $          12,060       $         2,037

Technology Revenue. Technology Revenue was $6,300,000 and $300,000 for the six months ended June 30, 2012 and 2011, respectively. $6 million dollars at June 30, 2012 relates to the recognition of unearned revenue from an expired license agreement.

Technical Services Revenue. Revenues from engineering services for technical services and continued work on the engineering design and project management of Dynamic Fuels were $4,431,000 and $514,000 for the six months ended June 30, 2012 and 2011, respectively. We expect to continue to earn revenues for engineering services to other customers on an individual contract basis in 2012. Revenue from Dynamic Fuels increased in 2012 due to the recognition of revenue from services billed but previously not recognized.

Royalty Revenue. Revenues from royalties of renewable fuel production at the Dynamic Fuels plant is recognized from production of renewable products from the date of commercial operations to June 30, 2012. We will continue to recognize royalties from actual plant production of renewable products quarterly.

                                                   Three Months Ended                               Six Months Ended
Operating Costs and Expenses              June 30, 2012           June 30, 2011           June 30, 2012           June 30, 2011
                                                                             (In Thousands)
Engineering                              $           592         $           588         $          1,190        $         1,144
Depreciation and amortization                         49                      50                      101                     99
Non-cash equity compensation                         102                      (8 )                    415                    459
General, administrative and other                  1,304                     772                    2,377                  2,136

                                         $         2,047         $         1,402         $          4,083        $         3,838

Engineering. Expenses from engineering activities were $1,190,000 for the six months ended June 30, 2012 compared to $1,144,000 during the same period in 2011. There was no change in engineering activities during 2012 compared to 2011.

Non-cash Equity Compensation. Non-cash equity compensation for the six months ended June 30, 2012 was $415,000 compared to $459,000 for the same period in 2011. The expense primarily relates to the vesting schedule of performance based awards granted to all employees in 2008. The vesting of these awards is based on achieving certain milestones associated with the Bio-Synfining™ Technology project. A majority of the expense associated with these awards was recognized in 2009 and 2010. We have recognized the remaining amount of equity compensation for the milestone based awards in 2012.

General, Administrative and Other. General and administrative expenses for the six months ended June 30, 2012 were $2,377,000 compared to $2,136,000 during the same period in 2011. The increase in general and administrative expenses primarily relates to increased legal fees.

Loss from Dynamic Investment. Our 50% share of the Dynamic Fuels loss for its six months ended March 31, 2012 decreased compared to the same period last year due to increased production revenue to offset fixed costs of the operating plant. Loss from our investment in Dynamic Fuels was $2,155,000 for the quarter ended March 31, 2012, compared to a loss of $4,829,000 for the same period in 2011. Loss for the six months ended March 31, 2012, compared to the loss for the same period in 2011 was $2,985,000 and $6,938,000 respectively. Dynamic Fuels' revenue was $100,288,000 with operating expenditures of $102,155,000 and other expense of $1,063,000 for the six months ended March 31, 2012. This compares to revenue of $28,098,000 with operating expenditures of $40,464,000 and other expense of $1,305,000 for the six months ended March 31, 2011. We report our 50 percent share of Dynamic Fuels results of operations on a three month lag.

Liquidity and Capital Resources

General

As of June 30, 2012, we had approximately $18,313,000 in cash and cash equivalents. At June 30, 2012, we had $380,000 in accounts receivable outstanding relating to our technical services revenue provided to Dynamic Fuels and other clients. We believe that all of the receivables currently outstanding will be collected and have not established a reserve for bad debts.

Our current liabilities totaled $1,907,000 as of June 30, 2012.

Our business plan over the next several years is perform engineering design and services for a GTL plant. If this would ultimately lead to potential investments in additional plants we will need to raise capital. If we obtain additional funds by issuing equity, dilution to stockholders may occur. In addition, preferred stock could be issued 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.

Until such time the funds provided by Dynamic Fuels operations are sufficient to meet working capital requirements, we expect to fund additional short-term working capital needs through working capital loans. We have contributed cash in the amount of $43,500,000 to the capital of Dynamic Fuels since inception, have loaned Dynamic Fuels $14 million and have receivables due from Dynamic Fuels of $222,000. Although management remains positive about the future of Dynamic Fuels, if Dynamic Fuels fails to achieve profitability, our entire investment could be subject to loss.

If we are unable to generate funds from operations, our need to obtain funds through financing activities will be increased.

Cash Flows

Cash flows used in operations were $1,346,000 during the six months ended June 30, 2012, compared to $2,422,000 during the six months ended June 30, 2011. The decrease in cash flows used in operations primarily relates to the payment of certain accounts payable in 2011 that were not present in 2012.

Cash flows used in investing activities were $3,005,000 during the six months ended June 30, 2012 compared to $3,873,000 during the six months ended June 30, 2011. We funded approximately $3 million in equity capital and $3 million in working capital loans to Dynamic Fuels during 2012 and 2011, respectively.

Cash flows provided by financing activities during the six months ended June 30, 2012 was $63,000 compared to $35,000 during the six months ended June 30, 2011. The cash provided by financing activities during both years is due to net proceeds received from the exercise of stock options.

Contractual Obligations

Our operating leases include leases for corporate headquarters, copiers and software.

We have entered into employment agreements, which provide severance cash benefits to several key employees. Commitments under these agreements totaled approximately $2,195,000 at June 30, 2012. Expense is not recognized until an employee is severed.

We as licensor, entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels, LLC. Under this license agreement at the request of the licensee we must execute a Site License Agreement in favor of licensee. On June 27, 2012 the Site License Agreement was executed and process guarantee and performance test contained therein were waived and deemed unnecessary by Dynamic Fuels. For purposes of the Warrant Agreement dated June 22, 2007 between Syntroleum and Tyson Foods, Inc., the First Plant Commercial Operation Date as defined in the Warrant Agreement was deemed to be June 27, 2012. We may need to fund future short-term working capital needs of Dynamic Fuels on an as needed basis.

New Accounting Pronouncements

No new accounting standards have been adopted since the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 was filed.