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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  

EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.

¨    TRANSITION REPORTING PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 

EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     .

COMMISSION FILE NO. 0-21911

SYNTROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

1350 South Boulder, Suite 1100

Tulsa, Oklahoma 74119-3295

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (918) 592-7900

Securities registered pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

and

Preferred Share Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act    YES  ¨    NO  x

At June 28, 2002, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $81,661,677 million based on the closing price of such stock on such date of $2.88 per share (assuming solely for this purpose that all of the registrant’s directors, executive officers and 10% stockholders are its affiliates).

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At March 3, 2003, the number of outstanding shares of the registrant’s common stock was 33,760,357.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 2002 for its 2002 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements as well as historical facts. These forward-looking statements include statements relating to the Syntroleum Process and related technologies including Synfining, gas-to-liquids (GTL) plants based on the Syntroleum Process, anticipated costs to design, construct and operate these plants, the timing of commencement and completion of the design and construction of these plants, obtaining required financing for these plants and our other activities, the economic construction and operation of GTL plants, the value and markets for plant products, testing, certification, characteristics and use of plant products, the continued development of the Syntroleum Process (alone or with partners), anticipated capital expenditures, anticipated expense reductions, anticipated cash outflows, anticipated expenses, use of proceeds from our 2000 public offering of common stock, anticipated revenues, the sale of and costs associated with our real estate inventory and any other statements regarding future growth, cash needs, capital availability, operations, business plans and financial results. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions are intended to be among the statements that identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these kinds of statements involve risks and uncertainties. Actual results may not be consistent with these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking statements include risks that the cost of designing, constructing and operating commercial-scale GTL plants will exceed current estimates, the schedule for construction of commercial-scale GTL plants will extend beyond current estimated schedules, financing for design and construction of commercial-scale GTL plants and our other activities may not be available, commercial-scale GTL plants will not achieve the same results as those demonstrated on a laboratory or pilot basis, GTL plants may experience technological and mechanical problems, improvements to the Syntroleum Process currently under development may not be successful, markets for GTL plant products may not develop, plant economics may be adversely impacted by operating conditions, including energy prices, construction risks and risks associated with investments and operations in foreign countries, our ability to implement corporate strategies, competition, intellectual property risks, our ability to obtain necessary financing and other risks described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

As used in this Annual Report on Form 10-K, the terms “Syntroleum,” “we,” “our” or “us” mean Syntroleum Corporation, a Delaware corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.

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PART I

Item 1. Business

Overview

We are seeking to develop projects that will allow us to use and license our proprietary process for converting natural gas or synthesis gas from coal to synthetic liquid hydrocarbons, a process generally known as gas-to-liquids (GTL) technology utilizing Fischer-Tropsch synthesis. We seek to form joint ventures and acquire equity interests in oil and gas development projects where GTL is critical to a project’s success by monetizing remote and/or stranded natural gas. We also license our technology, which we refer to as the “ the Syntroleum Process,” to others for the production of fuels. We anticipate that the Syntroleum Process will be an attractive solution in many instances where there are natural gas reserves, including flared gas, that are not economic to produce using traditional technology. We intend to pursue short-term cash flow with prospects for gas monetization projects. These projects may initially involve gas field development in concert with conventional cryogenic gas processing technologies and, later, evolve into integrated projects that would encompass GTL activities. These activities would allow us to bridge our short-term cash flow needs as we pursue long lead-time GTL projects.

The Syntroleum Process produces synthetic liquid hydrocarbons that are substantially free of contaminants normally found in conventional products made from crude oil. These synthetic liquid hydrocarbons can be further processed into higher margin products through conventional refining processes, including a proprietary process we developed called the Synfining Process. These products include:

We believe the key advantages of our technology over traditional technologies are (1) the use of air in the conversion process, which is inherently safer than the requirement for pure oxygen in other GTL technologies and (2) the use of our proprietary catalysts, which enhance the conversion efficiency of the catalytic reaction. We believe these advantages will reduce capital and operating costs of GTL plants based on the Syntroleum Process and permit smaller plant sizes, including mobile plants that could be mounted on barges and ocean-going vessels. Based on demonstrated research, we believe the Syntroleum Process can be economically applied in GTL plants with throughput levels from less than 10,000 to over 100,000 barrels per day (b/d). We believe the advantages afforded by the Syntroleum Process together with the large worldwide resource base of stranded natural gas and underutilized coal reserves provide significant market opportunities for the use of this technology by our company and our licensees in the development of commercial GTL plants. While we have not yet built a commercial-scale GTL plant based on the Syntroleum Process, we have successfully demonstrated numerous elements and variations of the Syntroleum Process in demonstration plant operations and laboratory tests.

We currently have a number of licensing agreements with oil companies plus the Commonwealth of Australia and have active projects under development with current licensees Ivanhoe Energy, Inc. (Ivanhoe Energy), Marathon Oil Company (Marathon) and Repsol-YPF, S.A. (Repsol-YPF). Additionally, we have strategic relationships with various companies in support of the Syntroleum Process, including AMEC Process and Energy Ltd. as a preferred engineering provider.

Business Strategy

Our objective is to monetize stranded hydrocarbon resources by utilizing the Syntroleum Process and other process technologies. Our business strategy to achieve this objective involves the following key elements:

Participate in Gas Development Projects. We intend to establish equity participation in projects involving monetization of stranded natural gas and coal assets and associated activities. We are actively pursuing such projects

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in Australia, Bolivia, Cameroon, Peru and the Russian Federation. Under this strategy, we will provide our gas-to-liquids and related technologies to partner with companies that have remote and/or stranded resources that can be economically monetized with our technology. Such projects may involve conventional gas processing and/or gas-to-liquids activities.

Develop and Own GTL and Other Gas Processing Plants. We intend to develop projects and own significant equity interests in joint ventures with our licensees and other energy-industry and financial partners that will develop and own GTL and other gas processing plants for the production of fuels and specialty products. We are actively pursuing development of GTL and/or other gas processing plants in several locations, where we expect to own significant equity interests, including potential projects in Australia, Bolivia, Cameroon, Peru and the Russian Federation.

License the Syntroleum Process. We intend to work with our existing licensees to develop new GTL plants and to continue selling licenses to use the Syntroleum Process and the Synfining Process. We believe that our research and development capabilities combined with our extensive pilot plant testing facilities provide advantages over competing and alternative technologies. We also believe these advantages enable us to attract new licensees, maintain strong relationships with existing licensees and gain project participation opportunities for us.

Expand and Develop Product Markets. We intend to continue developing markets for our synthetic fuels and specialty products in order to promote construction of GTL plants by our licensees, and to establish markets for GTL products from plants developed and owned by us. We believe that our technology can provide economic and environmentally superior transportation fuels, including diesel and JP-5/JP-8 jet fuels. We also believe that availability of these fuels will foster the development and economic application of fuel cells and other clean combustion technologies.

The Syntroleum Process

The Syntroleum Process involves two catalytic reactions: (1) conversion of natural gas into synthesis gas in our proprietary flameless autothermal reformer; and (2) conversion of the synthesis gas into hydrocarbons over our proprietary Fischer-Tropsch catalyst. These reactions are expressed in the following equations:

Step 1

Conversion of Natural Gas to Synthesis Gas

Step 2

Fischer—Tropsch Synthesis

In the Syntroleum Process, the source of oxygen in the first reaction is air. This results in dilution of the Synthesis gas with nitrogen. Competitive processes typically use nearly pure oxygen in generation of the synthesis gas and, instead of being diluted with nitrogen, are typically diluted with recycle gas. Our slightly higher level of dilution results in reactors that are slightly larger than reactors in competitive processes because reactor volume is primarily a function of the volume of reactor internals for heat removal, synthesis gas volume, diluent volume, and catalyst volume. Although the difference in reactor sizes increases the overall plant cost slightly, this cost is offset by eliminating the need for an oxygen plant. Furthermore, the elimination of pure oxygen from a Fischer-Tropsch plant, which always has hydrocarbons present, results in an inherently safer process.

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The flameless autothermal reformer in the Syntroleum Process is similar to units used for over 30 years in the ammonia industry. This reformer was operated successfully for over 6,500 hours at a 70-b/d demonstration facility with one of our licensees, ARCO, at its Cherry Point refinery in Washington. It has also been operating since 1995 as the sole source of synthesis gas for our pilot and demonstration facility in Tulsa, Oklahoma. The nitrogen in the gas entering the autothermal reformer passes through the reactor essentially unchanged, although very low levels of other nitrogen compounds are produced. These trace contaminants may be removed from the process stream and are not incorporated into the finished products in significant quantities.

Although our proprietary cobalt-based Fischer-Tropsch catalyst was originally developed for use with synthesis gas produced from natural gas, it is capable of functioning with synthesis gas produced from other sources, such as coal or petroleum coke. In order to efficiently utilize coal or petroleum coke, these feedstocks are converted into synthesis gas using a gasifier, and then the ratio of hydrogen to carbon monoxide in the synthesis gas may be adjusted using a water gas shift reactor.

We have also developed refining technology – the Synfining Process – for conversion of the Fischer-Tropsch products into a variety of products including diesel fuels, jet fuels, lubricants, and other materials. The high purity and highly paraffinic, or waxey, nature of the Fischer-Tropsch products generally require lower temperature processing conditions than conventional petroleum derived feedstocks to obtain high yields of the desired products. This refining technology has been used to produce fuels for testing by automobile manufacturers in the U.S. and Japan as well as the U.S. Department of Defense. This refining technology is available for license to our Syntroleum Process licensees and others.

Our goal in developing the Syntroleum Process has been to substantially reduce both the capital and operating costs and the minimum economic size of a GTL plant. We have developed and continue to develop variations of our basic process design in an effort to further lower costs and increase the adaptability of the Syntroleum Process to a wide variety of potential applications. We are also working closely with a number of qualified catalyst vendors to reduce the manufacturing cost for our proprietary Fischer-Tropsch catalyst.

Although we believe that the Syntroleum Process can be utilized in commercial-scale GTL plants, there can be no assurance that commercial-scale GTL plants based on the Syntroleum Process will be successfully constructed and operated or that these plants will yield the same economics and results as those demonstrated on a laboratory, pilot plant and demonstration plant basis. In addition, improvements to the Syntroleum Process currently under development may not prove to be commercially applicable. See “Risk Factors–Risks Relating to Our Technology.”

Syntroleum Advantage

We believe that the Syntroleum Process and the Synfining Process will be an attractive solution for companies that are unable to economically produce their natural gas reserves using traditional methods. We believe that the Syntroleum Process will enable owners of stranded natural gas to monetize a significant portion of these resources by converting them into synthetic liquid hydrocarbons in the form of ultra-clean fuels, based on our belief that these products can be:

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Resource Base

Set forth below and elsewhere in this Annual Report on Form 10-K are estimates of identified reserves of oil, natural gas and coal. These estimates do not constitute proved reserves in accordance with the regulations of the Securities and Exchange Commission. Under Securities and Exchange Commission regulations, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). Under Securities and Exchange Commission regulations, proven coal reserves are the reserves for which (a) the quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, and the grade and/or quality are computed from the results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape depth and mineral content of reserves are well-established. We compiled these estimates of identified reserves from the referenced industry publications and other publicly available reports to identify the magnitude of the gas and coal resource base. We have not independently verified this information. Accordingly, we cannot assure you as to the existence or recoverability of the estimates of identified reserves of oil, natural gas and coal set forth in this Annual Report on Form 10-K. References below and elsewhere in this Annual Report on Form 10-K to the conversion of identified amounts of natural gas and coal into amounts of synthetic crude oil assume that all of the referenced natural gas and coal could be converted at anticipated conversion rates. Actual amounts of synthetic crude oil produced will vary based on the ability of the producer to extract the natural gas and coal, the composition of the natural gas and coal and process conditions selected for the plant, and this variance may be material.

The following table presents the 2001 worldwide identified natural gas reserves, consumption and ratio of reserves to consumption (i.e., reserve life) by region:

Natural Gas

2001 Worldwide Natural Gas Reserves, Consumption and Reserve Life

Source: Information derived from BP Statistical Review of World Energy 2002.

World natural gas reserves have increased in recent years. Identified gas reserves in 1991 were estimated to be approximately 4,378 trillion cubic feet, according to the BP statistical Review of World Energy 2002. However, by 2001, natural gas reserves were estimated to be approximately 5,477 TCF. This increase occurred while the demand for natural gas increased 20% over the same time period.

The Oil and Gas Journal has estimated that of the world’s identified natural gas reserves, approximately 60% or the equivalent of more than 300 billion barrels of synthetic crude oil currently have no economic market.

The term “stranded gas” generally refers to gas existing in reservoirs that have been discovered but no economic market can be found for the production, or production would be too prolific for the limited markets available. Typically this low value gas is managed by either not producing it, flaring, venting, or re-injecting it into the geologic formation from which it is produced.

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We believe that energy companies with stranded natural gas reserves will be able to cost-effectively use our GTL technology to produce fuels that can be sold in well-developed global markets. As a result, we believe these companies would be able to generate a return on these already discovered reserves, which are currently undeveloped.

Coal

In addition to enabling monetization of stranded natural gas, our GTL technology can be applied to coal. According to BP Statistical Review of World Energy 2002, in 2001 identified world coal reserves were approximately 984,453 million tons. Much of these reserves are difficult and expensive to utilize because of environmental concerns. By applying the Syntroleum Process, these underused resources could be converted to ultra-clean transportation fuels, thus providing a new source of clean energy and lessening dependence on oil from politically unstable regions.

Market Demand

We believe significant market potential exists for the Syntroleum Process and its products because of steadily increasing demand for transportation fuels, the anticipated increased demand for ultra-clean fuels for both internal combustion engines and fuel cells, and the existing demand for high-quality specialty products—underpinned by the vast amounts of stranded natural gas worldwide.

We expect demand for products created via the Syntroleum Process to result from:

The Large Market for Transportation Fuels. According to the Energy Information Administration (EIA), diesel fuel demand is estimated to be growing at a faster rate than the total demand for refined products, due to superior fuel efficiency of the diesel engine. We believe that a significant portion of the demand growth for transportation fuels can be satisfied through the conversion of natural gas into ultra-clean Syntroleum fuels.

Increasing Demand for Ultra-Clean Fuels. Market demand for ultra-clean fuels is increasing due to more stringent environmental standards in most of the world’s industrialized countries and the need for vehicle manufacturers to respond to the challenge of producing fuel-efficient engines that meet these standards. The burden of producing cleaner fuels from conventional crude oil is expected to substantially increase refining costs. We believe these factors will promote the creation of markets for premium, ultra-clean fuels produced by the Syntroleum Process. In addition, we believe that fuels produced by the Syntroleum Process either alone or blended with conventional fuels, can be used in existing and new generation diesel engines on a cost-effective basis to meet or exceed current and scheduled fuel specifications and emissions standards.

Increasingly Restrictive Environmental Legislation. Key domestic and international environmental regulations and initiatives that affect the demand for ultra-clean fuels include the Clean Air Act of 1970, which establishes specific responsibilities for government and private industry to reduce emissions from vehicles, factories and other pollution sources. In December 1999, the EPA issued rules mandating that sulfur levels in highway diesel fuel be lowered from the current level of 500 parts per million (ppm) to 15 ppm beginning in 2006. The burden placed on the petroleum refining and automobile industries to meet these new gasoline and diesel sulfur levels is significant.

The European Union is also seeking sharp reductions in engine emissions. Sulfur content from the current 350 ppm to below 50 ppm is currently mandated for diesel fuel by 2005. In addition, the Commission of the European Communities has issued a proposal which, if adopted, would require diesel fuel with a maximum sulfur content of 10 parts per million to be made available on a broad geographic basis within each member state of the European Union by January 1, 2005. The proposal would require all diesel fuel to have a maximum sulfur content of 10 parts per million by 2011.

We believe that fuels produced by the Syntroleum Process are positioned to take advantage of the demand for ultra-clean fuels that we expect will develop as a result of these stringent emission standards. Fuels produced by the Syntroleum Process are substantially free of contaminants – sulfur, aromatics and heavy metals – and

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demonstrate high operating efficiency. As a result, we believe that fuels produced by the Syntroleum Process, either alone or blended with conventional fuels, can be cost-effectively used to meet scheduled fuel specifications.

Increasing Demand for Fuel Cells. Fuel cells combine hydrogen – which can be derived from natural gas, propane, methanol, gasoline or diesel – with oxygen from the air to produce electric power without combustion. Fuel cell systems have advantages over conventional power systems, which include low or no pollution, higher fuel efficiency, greater flexibility in installation and operation, quiet operation, low vibration and potentially lower maintenance and capital costs. Fuel cells are being developed to support a variety of markets, including transportation and continuous stationary (residential and commercial) power.

We believe that fuels produced by the Syntroleum Process have the potential to become preferable fuel cell fuels and to significantly enhance commercial opportunities for many fuel-cell applications. The absence of contaminants from fuels produced by the Syntroleum Process allows for simplified fuel cell processor design, construction and operation. As the storage and processing of the fuel for a fuel cell are simplified, the physical size of fuel-cell components can be reduced. Because fuels produced by the Syntroleum Process have almost twice the hydrogen content of other liquid fuels, including methanol, fuels produced by the Syntroleum Process enable greater utility and wider application of fuel-cell power for vehicles. We also believe that fuels produced by the Syntroleum Process have lower toxicity and similar solubility compared to conventional fuels, and can be distributed via existing conventional fuel distribution infrastructure.

Existing Market for High-Quality Specialty Products. Synthetic crude oil produced by the Syntroleum Process can be further refined into specialty products using conventional refining processes that can be simplified to take advantage of the ultra-clean nature of the synthetic feedstock. We retain the exclusive right to manufacture these products using the Syntroleum Process under our license agreements and intend to develop and own significant equity interests in GTL plants designed to produce these specialty products. We believe that specialty products produced by the Syntroleum Process have environmental and performance characteristics that are superior to comparable conventional crude oil products.

Sales and Marketing

We intend to maintain an active marketing and sales effort to promote the Syntroleum Process through several channels, working to further develop current projects as well as to look for additional project opportunities. We also intend to continue efforts to establish brand recognition for “Syntroleum,” which is a registered trademark and service mark in the United States, with applications pending in various foreign countries.

Licensing Arrangements

Under three different licensing programs that include pre-paid deposits, a licensee receives pricing terms for future project site licenses and secures (1) the right to use the Syntroleum Process, (2) the right to acquire catalysts from us for which we charge a fixed mark-up over our cost and (3) the right to future improvements in our GTL technology. Current licensees with active projects include Ivanhoe Energy, Marathon, the Commonwealth of Australia and Repsol-YPF. We intend to continue to market the Syntroleum Process for license primarily to companies with significant stranded natural gas reserves.

As part of our network model for improving our GTL technology, we generally acquire a royalty-free, non-exclusive license to any invention or improvement to the Syntroleum Process that is developed by the licensee, together with the right to grant corresponding sublicenses to our other licensees who have granted us similar rights. Licensees also generally acquire the right to use subsequent inventions or improvements to the Syntroleum Process that we acquire from other licensees. Our license agreements may be terminated by the licensee, with or without cause, upon 90 days’ notice to us. For a further discussion of our license agreements and license fees, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Operating Revenues-License Revenues” in Item 7 of this Annual Report on Form 10-K.

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Projects

We have made significant progress towards commercializing the Syntroleum Process; however we can provide no assurance that GTL plants will be constructed using this technology, that financing will be attained for projects being developed by us and others, that the design and construction of any of these plants will be successfully completed, that any of these plants will be commercially successful, or that these plants will be constructed or utilized on a cost-effective basis. See “Risk Factors.”

Commercial Projects

Sweetwater Project. In 2000, we began development of a nominal 11,500 b/d specialty product GTL plant on the Burrup Peninsula of Western Australia, which we refer to as the Sweetwater Project. The plant was designed to produce synthetic lube oil, normal paraffins, process oils and light paraffins, using a fixed tube reactor design to produce a high yield of the desired products with high wax content. Tessag Industrie Anlagen GmbH provided engineering for the plant. We worked during 2001-02 to secure project-level financing for the Sweetwater Project, including both debt and equity financing from third parties together with our own equity contribution. Financing efforts were unsuccessful, and we concluded there was insufficient support to continue pursuit of the project under economic conditions at the time. Subsequent to expiration of the engineering, procurement and construction contract with Tessag on August 30, 2002, we announced the suspension of the Sweetwater project on October 29, 2002. As a result, we expensed approximately $31 million of Sweetwater Project costs in the third quarter of 2002, which had been capitalized as property and equipment in our consolidated balance sheet. This amount reflected engineering, catalyst materials, upgrading and other site costs associated with the construction of the Sweetwater plant.

APEL/VPLP Project. We have entered into a letter of intent with Australian Power & Energy Limited (APEL) to form a joint venture to participate in the Victorian Power and Liquids Project (VPLP) that is planned for the co-production of power and hydrocarbon liquids from brown coal in the Latrobe Valley in the State of Victoria. The Latrobe Valley brown coal seams are thick and close to the surface. This joint-venture transaction contemplates that APEL will contribute certain of its licenses to explore for natural resources, including brown coal, in the Latrobe Valley. We will contribute a license for our proprietary GTL technology, taking a 20% interest in the VPLP joint venture and an undivided 20% interest in the coal resources associated with the VPLP. Initial phase of development calls for a 52,000 b/d GTL plant, which could produce 350 million barrels of synthetic fuels over 20 years. The project incorporates subsurface injection of CO_2, called CO₂ geo-sequestration. Before the VPLP can commence operations, environmental and other regulatory permits must be obtained; and there is need for enabling legislation at both state and federal levels in the CO₂ geo-sequestration area. Formation of the joint venture is subject to negotiation and execution of definitive agreements by APEL and us. The obligations of APEL and us to negotiate under the letter of intent will expire on December 31, 2003, unless APEL and us agree to an extension. No assurance can be given that the joint venture will be formed or commence actual business operations.

Peru. We are continuing preparations for development of the 1,155 square mile offshore Peruvian oil and gas block designated as Block Z-1. We acquired exploration and production rights to Block Z-1 in late 2001. Previous concession holders have drilled six exploratory wells on the block, five of which discovered oil, natural gas and gas condensate. We believe our GTL technology can be the key to producing Block Z-1 economically by providing means for monetizing gas that would otherwise have to be re-injected at considerable expense in order to produce the anticipated reserves of oil and condensate. We believe that gas production resulting from Block Z-1 development could supply feed for an integrated NGL/GTL facility in Northwest Peru.

Our activities related to Block Z-1 during 2002 included completing inspections of the two existing offshore platforms on the block and finding the structures to be sound and usable for development efforts. We also contracted with William Cobb & Associates in Dallas for further evaluations of the existing geologic data on the block. Their analysis provided additional information supporting the continued pursuit of the development of the block. We believe that development of Block Z-1, inclusive of oil, natural gas and gas condensate production, as well as NGL/GTL activities, could produce significant cash flow for us when fully developed. No assurance can be given that this project will go forward.

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Early plans for Peruvian project development included the possibility of assuming operating responsibilities for an existing NGL plant owned by EEPSA, a local power company near Talara, Peru. Satisfactory arrangements were not concluded with EEPSA, however, and we are no longer pursuing this additional avenue for development of a project outside of Block Z-1.

Bolivia. We have signed two memoranda of understanding with Repsol-YPF to jointly conduct pre-engineering assessment studies on developing two GTL projects in the Republic of Bolivia. The first project would be a 13,000 b/d plant in central Bolivia to produce clean diesel for the local market. The second project would be a 90,000 b/d plant, located in southern Bolivia near the border with Argentina, that would produce ultra-clean fuels and other products primarily for export. The assessment study for the smaller plant, which would be located in central Bolivia near the gas production, is near completion. The larger plant would be located in Tarija, on the northern border of Argentina. Both plants would use the Syntroleum Process and Synfining Process for converting natural gas to synthetic fuels. If the projects go forward upon completion of the assessment studies, Repsol-YPF and us will determine our individual equity participation. Either Repsol-YPF or us would have the right to sell down its respective equity interests or transfer interests between ourselves, as may be mutually agreed. The memorandum of understanding with respect to the larger plant will expire in October 2003, or earlier if we and Repsol-YPF either agree to proceed with the project or abandon the project. The memorandum of understanding with respect to the smaller plant expired on February 26, 2003 and we are currently working with Repsol-YPF to extend this agreement. There can be no assurance that either of these projects will go forward.

Qatar. In the Middle East, Qatar has one of the world’s largest single gas fields and has reserves to support multiple gas-to-liquids projects. Qatar’s Energy Minister recently announced his goal of Qatar becoming the GTL capital of the world. Ivanhoe Energy and Marathon, both licensees of ours, currently have development plans underway for building large commercial plants for gas-to-liquids in Qatar.

Cameroon. During a round of bidding held by the Republic of Cameroon in mid-2002, we submitted a work program together with EurOil Ltd. (EurOil) based on GTL and won the right to negotiate a production-sharing license for the production and monetization of gas from offshore acreage designated Block MLHP-4. EurOil won the right to negotiate the plan of development by demonstrating that their proposal would contain GTL technology. We and EurOil subsequently signed a 50/50 joint participation agreement that, if negotiations with the Government of Cameroon are successful, calls for assessment, development and production of natural gas and condensate in the Sanaga Sud field, which lies within Block MLHP-4.

The Sanaga Sud field lies in offshore Block MLHP-4 at the southern end of Cameroon near the border with Equatorial Guinea, in shallow water less than 20 meters deep. The nearest population center is the city of Kribi, approximately 20 kilometers to the southeast near the end of the Chad-Cameroon oil pipeline that is now under construction. The gas in this field contains modest amounts of NGLs that, if stripped and marketed, could provide early cash flow for the project. No assurance can be given that the project will go forward.

Russian Federation. In March 2003, we announced agreements with Yakutgazprom, Evenkiya, OAO Gazprom/VNIIGAZ organizations within the Russian Federation. The agreements call for us to work with the respective organizations to formalize joint ventures to monetize large reserves of currently stranded gas within the Russian Federation. These joint ventures range from conventional gas processing activities to strip and market natural gas liquids from associated gas in this field produced from several oilfields, to construction of gas-to-liquids plants to convert remote gas assets into marketable synthetic fuels. These agreements generally begin to expire in March of 2004 should joint venture agreements not be formalized prior to this time.

Demonstration and Scale-Up Projects

Cherry Point Project. We jointly participated with ARCO in a 70 b/d GTL demonstration plant located at ARCO’s Cherry Point refinery in Washington State. The plant was put on stream in July 1999 and operated successfully until July 2000, when it was shut down at the completion of testing. ARCO funded the construction and operation of this plant under our joint development agreement. Plant operations met or exceeded expectations and successfully demonstrated key aspects of our proprietary autothermal reformer, moving bed reactor designs and

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related catalyst performance. This plant was disassembled and moved to Tulsa, Oklahoma where it is being reassembled as part of the ultra-clean fuels project with the Department of Energy,(DOE), discussed below. The data and experience generated from this plant’s operations will be useful in our efforts to apply reactor designs on a commercial basis, both for fuels and specialty products. We are currently conducting engineering studies with others for commercial-scale plants using these reactor designs.

DOE Catoosa Project. During 2002 we made continued progress on the DOE GTL Ultra-Clean Fuels Production and Demonstration Project, (the DOE Catoosa project) which was first announced in October 2000. An agreement between DOE and Integrated Concepts & Research Corporation (ICRC) was subsequently announced in July 2001 whereby DOE would provide funding to a team of companies for the project, with Syntroleum as a subcontractor to ICRC. Under the agreement, DOE is to fund $16 million for the entire fuels project, with the other project participants (principally Marathon and us) funding the remaining costs. The project that will be located at the Port of Catoosa in Tulsa, Oklahoma. The project is currently under construction with completion scheduled for third quarter 2003.

Under the DOE Catoosa project program, our Cherry Point GTL facility has been disassembled and relocated from Washington State to a site located at the Port of Catoosa. This plant provides the basis for construction of a new de-bottlenecked and expanded GTL facility expected to produce approximately 70 b/d of our synthetic fuels. Engineering, procurement and construction for the project is being provided by Mustang Engineering of Tampa, Florida. Procurement and construction are currently underway, with fuel deliveries expected to commence in the third quarter of 2003. Fuels from this facility are expected to be tested in bus and vehicle fleets by the Washington Metropolitan Area Transit Authority and the U.S. National Park Service at Denali National Park in Alaska. They are also expected to be tested by other project participants in advanced power train and emission control technologies. Construction of this project, which commenced with groundbreaking on August 20, 2002, will be subject to the risks of delay inherent in any large construction project.

DOD Project. In January 2002, Congress appropriated $3.5 million for a proposed Flexible JP-8 (single battlefield fuel) Pilot Plant program under Department of Defense (DOD) Appropriation Bill, 2002. In September 2002, we contracted with the DOD to participate in the program. We will receive $2.3 million under the terms of the contract for providing design for a marine-based fuel-production plant, using our GTL technology and for providing 18 drums of fuel. We invoiced $731,000 of this amount during 2002 and will invoice the remaining amount during 2003. We are currently working with the DOD and the engineering firm AMEC, developing and evaluating options for the integration of the Syntroleum Process onto a barge, together with the required utility systems. Design work is expected to be completed by the end of 2003. The contract also requires us to provide quantities of synthetic JP-8 fuel for testing in military diesel and turbine engine applications. Using our Synfining technology, test quantities of synthetic JP-8 were manufactured during 2002 and delivered to the U.S. Army Tank-Automotive and Armaments Command (TACOM) for performance testing.

Japanese Testing. In addition to providing fuels for the DOD program, we manufactured and supplied synthetic diesel fuel to the Japanese Automotive Research Institute. These fuels will be used for performance and emission testing for a consortium of Japanese automobile manufacturers.

Commercial Barge-Mounted Facilities. Parallel with the DOD program, we are pursuing stranded gas development opportunities by initiating conceptual designs for a simplified commercial barge-mounted GTL facility that would require estimated capital costs of less than $300 million. We believe that our air-based system provides unique advantages in the offshore environment in terms of cost, safety and operability. The conceptual design work is expected to be completed mid-2003.

Research and Development

Our ongoing strategy includes continuing to lower GTL capital and operating costs through research and development. Our expenditures for research and development and pilot plant activities totaled approximately $12.6 million in 2000, $16.2 million in 2001 and $28.2 million in 2002. The 2003 budget for these activities is $32.5

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million with $26.3 million being funded by the DOE and Marathon for the Catoosa Project. The ongoing research and development efforts will focus primarily on commercialization of the technology we previously have developed.

We currently lease a 4,500 square-foot laboratory and own a 16,500 square-foot laboratory facility located on approximately 95 acres in Tulsa, Oklahoma. These facilities house laboratory-scale testing of the Fischer-Tropsch process, laboratory and pilot-scale testing of refining technologies, and American Society for Testing and Materials (ASTM), and proprietary product and catalyst characterization tests. We also have arrangements with a number of universities and companies for a full range of state-of-the-art catalyst evaluation.

We recently completed construction and start-up of our new 3 b/d advanced slurry reactor process demonstration facility, which was integrated into our existing pilot plant facilities. Synthesis gas production at the facility was increased by 50% in order to provide feed for the new reactor system. The new plant will demonstrate process performance and conduct parametric studies requested by clients and engineering contractors involved in developing commercial GTL plants. The system will also allow for testing and qualification of commercial-sized batches of Fischer-Tropsch catalysts.

Research and development continues to lead to new Syntroleum patents. We have recently been granted a new patent for using multiple sources of synthesis gas with our Fischer-Tropsch technology. This new patent, together with our patents on the use of cobalt-based Fischer-Tropsch catalysts with an air-blown synthesis gas process (U.S. Patent 6,169,120, U.S. Patent 6,201,030, U.S. Patent 6,239,184, U.S. Patent 6,344,491) and other patent licenses, gives us and our licensees a firm foundation on which to practice GTL technology based on the Syntroleum Process.

Intellectual Property

Our success depends on our ability to obtain, protect, and enforce our intellectual property rights, to successfully avoid infringing the valid and enforceable intellectual property rights of others and, if necessary, to defend against any alleged infringements. We regard the protection of our proprietary technologies as critical to our future success and we rely on a combination of patent, copyright, trademark and trade secret law and contractual restrictions to protect our proprietary rights. We pursue protection of the Syntroleum Process primarily through patents and trade secrets. It is our policy to seek, when appropriate, protection for our proprietary products and processes by filing patent applications in the United States and selected foreign countries and to encourage or further the efforts of others who have licensed technology to us to file patent applications. Our ability to protect and enforce these rights involves complex legal, scientific and factual questions and uncertainties. Our policy is to honor the valid, enforceable intellectual property rights of others. While we have made efforts to avoid any such infringement, commercialization of our GTL technologies may give rise to claims that the technologies infringe upon the patents or other proprietary rights of others. We have not been notified of any claim that our GTL technology infringes the proprietary rights of any third party. However, we can provide no assurance can be given that third parties will not claim infringement by us with respect to past, present or future GTL technologies.

We currently own, or have licensed rights to more than 96 patents or patent applications pending in the United States and various foreign countries that relate, generally to one or more embodiments of the Syntroleum Process.

In addition to patent protection, we also rely significantly on trade secrets, know-how and technological advances, which we seek to protect, in part, through confidentiality agreements with our collaborators, licensees, employees and consultants. If these agreements are breached, we might not have adequate remedies for the breach. In addition, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others.

As part of our intellectual property program we have reviewed the large amount of Fischer-Tropsch patents and prior art literature. In conjunction with outside patent counsel, our technical staff and management have reviewed thousands of existing patents with respect to our own proprietary position and for patent clearance related to specific projects. Together with licensees, we have spent more than $2.0 million to establish a strong patent

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position; and we do not believe our technology infringes on the valid enforceable patents of others. As a result of these efforts, we are able to provide easy access to this literature for the entire industry through our website, www.fischer-tropsch.org. This growing site now includes over 5,800 patents, 6,000 literature documents, and 850 government reports. Recently we have had as many as 10,000 users and 60,000 hits per month from all parts of the world.

In any potential intellectual property dispute involving us, our licensees could also become the target of litigation. Our license agreements require us to indemnify the licensees against specified losses, including the losses resulting from patent and trade secret infringement claims, subject to a cap of 50% of the license fees received. Our indemnification and support obligations could result in substantial expenses and liabilities to us. These expenses or liabilities could have a material adverse effect on our business, operating results and financial condition. See “Risk Factors—Risks Relating to Our Technology.”

Employees

As of March 26, 2003, we had 94 employees, none of which are represented by a labor union. We have experienced no work stoppages and believe that our relations with our employees are excellent.

Government Regulation

We are subject to extensive federal, state and local laws and regulations relating to the protection of the environment, including laws and regulations relating to the release, emission, use, storage, handling, cleanup, transportation and disposal of hazardous materials, as well as to employee health and safety. Additionally, our GTL plants will be subject to environmental, health and safety laws and regulations of any foreign countries in which these plants are located. Violators of these laws and regulations may be subject to substantial fines, criminal sanctions or third-party lawsuits. We may be required to install costly pollution control equipment or, in some extreme cases, curtail operations to comply with these laws. These laws and regulations may also limit or prohibit activities on lands lying within wilderness areas, wetlands or other protected areas. Our operations in the United States are also subject to the federal “Superfund” law and similar state laws, which can impose joint and several liability for site cleanup, regardless of fault, upon statutory categories of parties, including our company, that sent waste offsite for disposal and current owners and operators of property. Environmental laws and regulations often require acquisition of a permit or other authorization before activities may be conducted and compliance with laws, regulations and any requisite permits can increase the costs of designing, installing and operating our GTL plants. GTL plants will generally be required to obtain permits under applicable state and federal clean air and water laws; and various permits for industrial siting and construction. Emissions from a GTL plant, primarily from the gas turbine, will contain nitrous oxides and may require abatement equipment to be installed in order to meet state and federal permit requirements. Additionally, GTL plants will be required to adhere to state and federal laws applicable to the disposal of byproducts produced, including waste water and spent catalyst.

Although we do not believe that compliance with environmental and health and safety laws in connection with our current operations will have a material adverse effect on us, we cannot predict with certainty the future costs of complying with environmental laws and regulations, and containing or remediating contamination. In the future we could incur material liabilities or costs related to environmental matters, and these environmental liabilities or costs (including fines or other sanctions) could have a material adverse effect on our business, operating results and financial condition. We do not currently carry environmental impairment liability insurance to protect us against these contingencies but may, in the future, seek to obtain insurance in connection with our participation in the construction and operation of GTL plants, if coverage is available at reasonable cost and without unreasonably broad exclusions.

Our subsidiary, Scout Development Corporation (Scout), which owns our real estate assets, is subject to several U.S. environmental laws, including the Clean Air Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Emergency Planning and Community Right-to-Know Act, the Federal Water Pollution Control Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act, the Safe Drinking Water Act and the Toxic Substances Control Act. Scout is also subject to U.S. environmental regulations

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promulgated under these acts, as well as state and local environmental regulations that have their foundation in the foregoing United States environmental laws. As is the case with many companies, Scout may face exposure to actual or potential claims and lawsuits involving environmental matters with respect to its current inventory of real estate, as well as previously owned real estate. However, no such claims are presently pending. Scout has not suffered and does not anticipate that it will suffer a material adverse effect as a result of any past action by any governmental agency or other party, or as a result of noncompliance with such environmental laws and regulations.

Operating Hazards

Operations at our GTL plants will involve a risk of incidents involving personal injury and property damage due to the operation of machinery in close proximity to individuals and the highly flammable nature of natural gas and the materials produced at these plants. Depending on the frequency and severity of personal injury and property damage incidents, such incidents could affect our operating costs, insurability and relationships with customers, employees and regulators. Any significant frequency or severity of these incidents, or the general level of compensation awards, could affect our ability to obtain insurance and could have a material adverse effect on our business, operating results and financial condition.

Available Information

Our website address is www.syntroleum.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this website under “Investor Relations-Filings”, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (“SEC”). The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.

Risk Factors

You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock.

Risks Relating to Our Technology

We might not successfully commercialize our technology, and commercial-scale GTL plants based on the Syntroleum Process may never be successfully constructed or operated.

No commercial-scale GTL plant based on the Syntroleum Process has been constructed to date. A commercial-scale GTL plant based on the Syntroleum Process may never be successfully built either by us or by our licensees. Success depends on our ability and the ability of our licensees to economically design, construct and operate commercial-scal