**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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**(Mark One)**

**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the Fiscal Year Ended September 30, 2006**

**OR**

**o**                                   TRANSITION REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the Transition Period from *            *to *            ***

**Commission File No. 0-19260**

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**RENTECH, INC.**

(Exactname of registrant as specified in its charter)

| **Colorado**                    |   | **84-0957421**      |
|---------------------------------|--------|---------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer    |
| incorporation or organization)  |   | Identification No.) |

 

**10877Wilshire Boulevard, Suite 710Los Angeles, California  90024**

(Addressof principal executive offices, including zip code)

**Telephone number: (310) 571-9800**

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**Securities registered pursuant to Section 12(b) ofthe Act:Common Stock (and associated Preferred Stock Purchase Rights)**

**Nameof Each Exchange on Which Registered: The American Stock Exchange**

**Securities registered pursuant to Section 12(g) ofthe Act: None**

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes  o.   No  x.

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.   Yes  o.   No  x.

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes  x.   No  o.

Indicateby check mark if disclosure of delinquent filers in response to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of Exchange Act. (Check one):
| Large accelerated  filer     o | Accelerated  filer     x | Non-accelerated  filer     o |
|---------------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.   Yes  o.   No  x.

Theaggregate market value of the registrant’s common stock held by nonaffiliates,based upon the closing price of the common stock on March 31, 2006, asreported by the American Stock Exchange, was approximately $386,567,000.

AtDecember 1, 2006, the number of outstanding shares of common stock was141,986,937.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s definitive ProxyStatement for its 2007 annual meeting of shareholders which the registrant willfile with the Securities and Exchange Commission within 120 days after the endof the fiscal year covered by this report, are incorporated by reference in Part IIIof this Form 10-K to the extent stated in this report.

 

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**TABLEOF CONTENTS**
|               | ** ** | ** **                                                                                                          | ** ** | **Page**   |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **    | ** ** | **PART I**                                                                                                     | ** ** | ** ** |
| ITEM 1.  |       | Business                                                                                                            |       | 2          |   |
| ITEM 1A. |       | Risk Factors                                                                                                        |       | 18         |   |
| ITEM 1B.      |       | Unresolved  Staff Comments                                                                                          |       | 33         |   |
| ITEM 2.       |       | Properties                                                                                                          |       | 33         |   |
| ITEM 3.       |       | Legal  Proceedings                                                                                                  |       | 34         |   |
| ITEM 4.       |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 34         |   |
| ** **    | ** ** | **PART II**                                                                                                    | ** ** | ** ** | ** ** |
| ITEM 5.       |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 35         |   |
| ITEM 6.       |       | Selected  Financial Data                                                                                            |       | 36         |   |
| ITEM 7.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 37         |   |
| ITEM 7A.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 72         |   |
| ITEM 8.       |       | Financial  Statements and Supplementary Data                                                                        |       | 74         |   |
| ITEM 9.       |       | Changes  in and Disagreements With Accountants On Accounting and Financial Disclosure           |       | 75         |   |
| ITEM 9A.      |       | Controls  and Procedures                                                                                            |       | 75         |   |
| ITEM 9B.      |       | Other  Information                                                                                                  |       | 76         |   |
| ** **    | ** ** | **PART III**                                                                                                   | ** ** | ** ** | ** ** |
| ITEM 10.      |       | Directors  and Executive Officers of the Registrant                                                                 |       | 77         |   |
| ITEM 11.      |       | Executive  Compensation                                                                                             |       | 77         |   |
| ITEM 12.      |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters     |       | 77         |   |
| ITEM 13.      |       | Certain  Relationships and Related Transactions                                                                     |       | 77         |   |
| ITEM 14.      |       | Principal  Accountant Fees and Services                                                                             |       | 77         |   |
| ** **    | ** ** | **PART IV**                                                                                                    | ** ** | ** ** | ** ** |
| ITEM 15.      |       | Exhibits  and Financial Statement Schedules                                                                         |       | 77         |   |

 

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**FORWARD-LOOKINGSTATEMENTS**

Certain information included in this report contains,and other reports or materials filed or to be filed by the Company with theSecurities and Exchange Commission (as well as information included in oralstatements or other written statements made or to be made by the Company or itsmanagement) contain or will contain, “forward-looking statements” within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended,Section 27A of the Securities Act of 1933, as amended, and pursuant to thePrivate Securities Litigation Reform Act of 1995. The forward-lookingstatements may relate to financial results and plans for future businessactivities, and are thus prospective. The forward-looking statements aresubject to risks, uncertainties and other factors that could cause actualresults to differ materially from future results expressed or implied by theforward-looking statements. They can be identified by the use of terminologysuch as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “anticipate,”“should” and other comparable terms or the negative of them. You are cautionedthat, while forward-looking statements reflect our good faith belief and bestjudgment based upon current information, they are not guarantees of futureperformance and are subject to known and unknown risks and uncertainties. Factorsthat could affect Rentech’s results include our ability to obtain financing foracquisitions, capital expenditures and working capital purposes; integratingand operating our recently acquired nitrogen fertilizer plant in East Dubuque,Illinois, and obtaining financing for the proposed conversion of the plant; ouracquisition, construction, or conversion of other plants to produce liquidhydrocarbon products using our technology; our ability to obtain natural gas atreasonable prices while we convert the East Dubuque plant to use coal; ourability to secure long-term coal supply contracts on reasonable terms; salesprices for the products of the East Dubuque plant; our ability to successfullyintegrate and operate other acquisitions; environmental requirements; successin obtaining customers for our technology, products and services; the decisionof our licensees, potential licensees, joint developers and potential jointdevelopers to proceed with and the timing and success of any project using ourtechnology; the entry into definitive agreements with others related to aproject; and the risk factors detailed in “Part II. Other Information—Item1A. Risk Factors” below and from time to time to time in the Company’s periodicreports and registration statements filed with the Securities and ExchangeCommission. Any forward-looking statements are made pursuant to the PrivateSecurities Litigation Reform Act of 1995, and thus are current only as of thedate made. Other factors that could cause actual results to differ from thosereflected in the forward-looking statements include dangers associated withfacilities construction and operation of gas processing plants like those usingthe Rentech Process, risks inherent in making investments and conductingbusiness in foreign countries, protection of intellectual property rights,competition, and other risks described in this report.

Our actual results may differ materially from theresults predicted or from any other forward-looking statements made by, or onbehalf of, us and reported results should not be considered as an indication offuture performance. The potential risks and uncertainties include, among other things,those described in the following sections of this report.

Although we believe that the expectations reflected inthe forward-looking statements are reasonable, we cannot guarantee futureresults, events, levels of activity, performance, or achievements. We undertakeno responsibility to update any of the forward-looking statements after thedate of this report to conform them to actual results.

As used in this Annual Report on Form 10-K,the terms “we,” “our,” “us” and “the Company” mean Rentech, Inc., aColorado corporation and its subsidiaries, unless the context indicatesotherwise.

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**PART I**

**ITEM 1.     BUSINESS**

The information containedin this section on business is qualified in its entirety by, and is subject to,the detailed information, consolidated financial statements and notes theretocontained elsewhere within this document.

**Our Company**

Rentech offers energy independence technologiesutilizing domestic resources to economically produce ultra-clean syntheticfuels. We were incorporated in 1981 to develop technologies that transformunder-utilized energy resources into valuable and clean alternativefuels, chemicals and power. We have developed an advanced derivative of thewell-established Fischer-Tropsch, or FT, process for manufacturing dieselfuel and other fuel products. The FT process was originally developed inGermany in the 1920s. Our proprietary application of the FT process, which werefer to as the Rentech Process, efficiently converts synthetic gas, referredto as syngas, derived from coal, petroleum coke, biomass or natural gas intoliquid hydrocarbon products, including ultra high-quality diesel fuel and otherfuel products.

Both the Rentech Process and the fuels it producescarry unique and differentiating characteristics which we believe willfacilitate economic deployment of the Rentech Process in large scale commercialprojects. First, because our process is able to utilize carbon containingsolids such as coal as a principal feedstock, we are able to take advantage ofthe relative stability of coal prices compared to other hydrocarbon-basedfeedstocks such as natural gas. Second, because the fuels derived from ourproprietary process have a long shelf life and can be manufactured usingdomestic resources, they effectively address national security prioritiesframed by foreign control of oil reserves and limited domestic refiningcapacity. And third, because fuel produced by the Rentech Process is a clean-burningfuel which exceeds all current and promulgated environmentalrules applicable to diesel engines and requires no new distributioninfrastructure, we believe there are no restrictions on immediate andwidespread adoption of FT fuels.

Our business has historically focused on research anddevelopment of our FT technology and licensing it to third parties. During2004, we decided to directly deploy our technology in select domestic projectsin order to demonstrate commercial operation of the Rentech Process. We havebegun to implement this strategy by purchasing Royster-ClarkNitrogen, Inc. (“RCN”), which owns and operates a natural gas-fed nitrogenfertilizer production facility in East Dubuque, Illinois. We plan to convertthe existing nitrogen fertilizer complex from natural gas to a coal fedintegrated fertilizer and FT fuels production facility using coal gasification.We believe the acquisition will allow us to commercially deploy the RentechProcess on an accelerated basis by using the existing infrastructure andsystems of the facility.

On April 26, 2006, we completed our acquisitionof RCN through a subsidiary for the purchase price of $50 million, plus anamount equal to net working capital of RCN, which was approximately $20million. We are operating the existing nitrogen fertilizer complex, which iscapable of producing 830 tons per day of ammonia from natural gas under the newname Rentech Energy Midwest Corporation (“REMC”). As a result of theacquisition, our principal revenues and cost of sales are now derived fromoperation of the REMC facility.

We intend to continue to operate REMC’s East Dubuquefacility for the production of nitrogen fertilizer products while we execute aphased conversion to a commercial scale FT fuel production facility. In Phase 1of the conversion, we intend to add a commercially available coal gasificationsystem that converts coal into syngas for use in fertilizer production. DuringPhase 1A of the conversion, we plan to add the Rentech Process to produceliquid hydrocarbon products, such as diesel and jet fuels, from the additionalsyngas produced from the coal gasification process. We estimate we would needapproximately 

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$810 million of additionaldebt and equity financing to finance Phases 1 and 1A of the conversion ofREMC’s nitrogen fertilizer plant (the “East Dubuque Plant”). The plannedconversion of this plant to replace natural gas with coal as its feedstock iscurrently in the engineering stage and investment in new processes and relatedequipment that significantly enlarge the production facility is anticipated tobegin within the next 12 months. Wepresently expect commercial operations of Phases 1 and 1A to commence by 2010.

We are also pursuing the development of otheralternative fuels projects, including one in Natchez, Mississippi that we andpotentially a partner or partners would construct to produce FT liquidhydrocarbon and other products using the Rentech Process (the “NatchezProject”). In April 2006, the State of Mississippi enacted a $15 millionstate funding initiative, included in House Bill 1634, providing for siteimprovements at the location of the Company’s proposed Natchez Project. Suchfunding would be subject to the Company meeting certain financial, employmentand other criteria. If the Company is successful in structuring an agreementfor the land and satisfies the state funding criteria, Adams County,Mississippi will provide the Company with an improved site and port facilitiesnecessary to meet the plant’s needs. TheCompany currently is conducting a feasibility study, negotiating siteagreements and formalizing development plans for the Natchez Project.

In addition, we are discussing proposals with ownersof energy feedstocks for the joint development of alternative fuels projectsand the use of the Rentech Process under selective licensing arrangements. OnJuly 17, 2006, we entered into a Joint Development Agreement with PeabodyEnergy Corporation (“Peabody”), for the co-development of two coal-to-liquids(“CTL”) projects, which will be located on Peabody coal reserves. The projectswill convert coal into ultra-clean transportation fuels using the Company’sproprietary FT CTL process. The companies intend to utilize Peabody’s reservesin Montana and the Midwest and will evaluate a mine-mouth project model tomaximize cost and transportation advantages. One project is targeted forproduction of 10,000 barrels per day of transportation fuels while the other isprojected to produce up to 30,000 barrels per day. The final locations,production volumes, product mixes and environmental considerations, includingbeing “carbon capture” ready for each facility, will be determined during theinitial development phases of the respective projects. Under the terms of theJoint Development Agreement, Peabody and the Company will evaluate the projectsin stages by determining the scope and feasibility of each project first. Aftersuccessful completion of these initial stages, Peabody and the Company expectto establish a project entity and then move forward with the Front EndEngineering and Design (“FEED”) phase for each facility. Initially thecompanies will share the costs of any third party development expenses and haveequal interests in the projects. With the exception of the agreed upon sites,the Joint Development Agreement is non-exclusive and either party may developcoal-to-liquids projects at other sites.

We currently have one active license arrangement. OnJanuary 12, 2006, we entered into a Master License Agreement withDKRW-Advanced Fuels LLC (“DKRW-AF”) for the use of our coal-to-liquidstechnology and a related Site License Agreement with DKRW-AF’s whollyowned-subsidiary, Medicine Bow Fuels & Power, LLC, with respect to itsproposed Medicine Bow Project in Medicine Bow, Wyoming. Pursuant to the Site License Agreement, we will receive license feesbased on plant production capacity, payable in stages as DKRW-AF achievescertain milestones, including receiving a full funding commitment fordeveloping and building such plant and commencing operation, subject toperformance and other obligations on our part. The achievement of thesemilestones is expected to take several years.

On November 15, 2006, in order to continue tofocus our efforts and resources on our long-term business plan to commercializethe Company’s technology to produce clean synthetic fuels, we sold oursubsidiary Petroleum Mud Logging, LLC, which provides well logging services tothe oil and gas industry.

Our executive offices arelocated at 10877 Wilshire Blvd., Suite 710, Los Angeles CA 90024. Ourtelephone number is (310) 571-9800.

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**FinancialInformation About Our Business Segments; Products and Services**

Financial informationabout our business segments is given in Note 17 of our consolidated financialstatements. In the fiscal years ended September 30, 2006, 2005 and 2004,our discontinued oil and gas field services accounted for 16%, 79% and 54% ofour consolidated net revenue, and our discontinued product sales (of paints,sealers and coatings) accounted for 0%, 10% and 26% of our consolidated netrevenue. For the fiscal year ended September 30, 2006, our nitrogenfertilizer products accounted for 84% of our consolidated net revenue.

**Business Strategy**

Our strategic objective is to establish the RentechProcess as the standard technological platform for coal-to-liquids productionin North America. Key elements of our strategy include:

***Accelerate deployment of the Rentech Process by usingexisting infrastructure.******  ***By using theinfrastructure already in place at the East Dubuque facility, we believe we canproduce an FT facility that utilizes the Rentech Process in less time thanwould be required if we constructed an entirely new facility to manufacture asimilar type and quantity of products. We believe the enhanced speed to marketwill provide an opportunity for us to set the standards for manufactured fuelsto be used by end users. We also believe the project will enable us toestablish our technology as an accepted and financeable platform for futurefacilities. We believe the conversion of the East Dubuque facility to use coalas a feedstock and the addition of the Rentech Process to enable the facilityto produce both nitrogen fertilizers and Fischer-Tropsch fuels cansignificantly improve the facility’s economics by:

·  producing additional high-value products,including diesel fuel and other fuel products;

·  reducing the cost of the feedstock used at thefacility, based on current market prices;

·  using the lower cost feedstock in asignificantly more efficient fashion that reduces the amount of energy requiredto manufacture each unit of product;

·  increasing the amount of nitrogen fertilizerthe facility can produce due to efficiencies gained by reducing the amount ofinert gases currently being produced in the facility; and

·  providing the ability to produce sufficientelectrical power to operate the facility and potentially to sell excesselectricity to the market.

We also expect to continue to generate revenues andcash flows from the East Dubuque facility by continuing its current operationswhile the conversion process is underway.

***Strategically buildprojects in the United States utilizing the Rentech Process.******  ***We intend to developgreenfield projects, which involve no existing infrastructure or process plant,where the design is both replicable and scalable. In addition to the EastDubuque and Natchez projects, we plan to focus on greenfield projects located atcoal mines. We believe we will be able to leverage the engineering, design andconstruction associated with each facility, thereby reducing the requiredcapital and technical resources for each subsequent project. We initiated thisstrategy in July of 2006 with our Joint Development Agreement with Peabodyfor the co-development of two CTL projects, which would be located on Peabodycoal reserves. We will target projects where the scale-up opportunities aresuch that, over time, we can achieve production capacity of up to 50,000barrels per day of FT fuels. While our technology would enable us to pursuelarger projects, we believe that small to medium sized projects require lesscapital and development time. For example, we are pursuing a greenfield projectsituated along the Mississippi River at the Port of Natchez. We are presentlyconducting a feasibility study, negotiating site agreements and formalizingdevelopment plans for the Natchez Project. There is no assurance the NatchezProject or our proposed CTL projects with Peabody will proceed as presentlycontemplated.

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***Continue investmentin our research and development program.******  ***We intend to continue toinvest in advancing our technology. We own a development and testing laboratorylocated in Denver, Colorado, which includes a pilot plant consisting of abubble column slurry reactor. The laboratory contains equipment and supportfacilities that provide us with a resource for the continued development andtesting of our Fischer-Tropsch technology. Our laboratory and engineeringstaff currently consists of 33 permanent and contract employees.

Our principal research and development efforts at ourlaboratory are now focused on increasing the efficiency of the catalyst we usein producing FT products and validating our ability to cost-effectively removecatalysts from our wax based on intermediate product streams. We are alsodeveloping additional FT catalysts attempting to further increase theefficiency of converting feedstock into liquid hydrocarbons, and working onother ways of reducing the cost of our process. Our research efforts arefocused on supporting our goal of achieving commercial use of the RentechProcess with as many types of hydrocarbon feedstocks as are available.

Our product development unit, or PDU, currently beingdeveloped on a site we own in Commerce City, Colorado, will serve as a platformto allow us to remain a leader in alternative fuels technology. We arepreparing to build and operate on the site what we believe will be the UnitedStates’ first fully integrated Fischer-Tropsch, coal-to-liquids, productdevelopment unit research facility. We anticipate that our Commerce City sitewill eventually house our existing pilot plant and research and development andengineering teams. This facility would produce ultra-clean diesel fueland other fuel products from various domestic coals, petroleum coke and biomassfeedstocks on a demonstration scale, utilizing coal gasification technologiesfully integrated with the Rentech Process. With the PDU in operation, webelieve we will be able to further optimize the operating conditions of the FTsynthesis and upgrading section for producing different specialized cuts offuels. The products from the facility will be used to supply test quantities ofFT fuels to potential licensees and customers. We expect construction of thePDU to be completed by the third calendar quarter of 2007 and to costapproximately $40 million.

During the fiscal years ended September 30, 2006,2005, and 2004, we spent $12,053,707, $495,919, and $749,230, respectively, onresearch and development activities on the Rentech Process. During each of thesame fiscal years, we received revenues from third parties for research anddevelopment activities related to our technology of $0, $343,027, and $817,279,respectively.

***Extend the reach ofRentech technology through licensing.******  ***We plan tocontinue to market the licensing of our technology for coal and other carbonbearing feedstock to enhance the deployment and acceptance of our technology.We believe that successful commercialization of the Rentech Process willenhance our licensing opportunities, resulting in additional revenue streams.

Under a typical licensing arrangement, we would expectto have the right to receive license fees and ongoing royalties forhydrocarbons produced by process plants that use the Rentech Process. We wouldalso expect to receive fees for providing the FT catalyst and technicalservices to licensees. After we grant a license, our licensees are responsiblefor financing, constructing and operating their own facilities that will usethe licensed technology. They must also acquire their own feedstock and sellthe products that their facilities produce. We generally would expect licenseesto either construct the syngas reactor modules and separator modules under ourdirection and oversight or to contract with us to have fabricators, qualifiedby us, supply these units for purchase or lease.

In January 2006, weentered into a master license agreement with DKRW-AF for the use of the RentechProcess. The master license agreement provides that if DKRW-AF wishes to builda coal to liquids facility in any domestic or international location, they areobligated to use our technology and to enter into a separate site license agreementfor such project. Concurrent with the execution of the master licenseagreement, we entered into a site license agreement with Medicine BowFuel & Power, LLC, or MBF&P, a wholly-owned subsidiary ofDKRW-AF, for the use of our technology in the facility to be 

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constructedby MBF&P in Medicine Bow, Wyoming. The site license agreement provides thatMBF&P shall have the obligation to buy the catalyst developed by us from usor our designated suppliers pursuant to a separate supply agreement to beentered into. Pursuant to the site license agreement, we will receive licensefees based on plant production capacity, payable in stages as DKRW-AF achievescertain milestones, including receiving a full funding commitment fordeveloping and building such plant and commencing operation, subject toperformance and other obligations on our part. The achievement of thesemilestones is expected to take several years.

**Our ProprietaryRentech Process**

Our proprietary Rentech Process is a significantenhancement of the Fischer-Tropsch technology originally developed inGermany in the 1920s. Prior to application of the Rentech Process, hydrocarbonfeedstocks are first reformed by various commercially available processes intosyngas. The syngas is then converted through the Rentech Process intodifferentiated liquid hydrocarbon products in a reactor vessel containingRentech’s patented and proprietary FT catalyst, and then upgraded withcommercially available refining processes. We believe the ability of theRentech Process to efficiently utilize syngas derived from a broad range ofhydrocarbon feedstocks, including coal and other lower priced feedstocks,distinguishes it from competing technologies. In October 2003, we obtaineda United States patent for the efficient integration of the Rentech Processwith nitrogen fertilizer processes.

The Rentech Process can beused with syngas derived from feedstocks such as coal, petroleum coke, naturalgas and biomass. In addition to coal-to-liquids markets, other potentialmarkets for the Rentech Process include unused natural gas supplies associatedwith crude oil fields that are presently being flared, re-injected into thereservoir or merely left in the ground due to the lack of economic or practicalmeans to transport these resources to market. We believe that the RentechProcess can be used for on-site conversion of these resources into liquidhydrocarbon products that are more easily and cost-effectively transported tomarket. Increasing environmental and regulatory pressures to reduce thewasteful flaring of natural gas, the economic attractiveness of monetizingwasted assets, and the growing need for cleaner fuels are driving the growinginterest of owners of these hydrocarbon resources and the energy industry inthis application of the Rentech Process. Our technology could also enablerefineries to more fully utilize heavier crude oil in addition to petroleumcoke to produce an improved slate of higher-value products. Potentialbenefits to the refiner include lower refinery feedstock costs, higher revenueand a reduction in waste disposal costs leading to increased margins. TheRentech Process also has applications in the conversion of existing facilitiesthat produce nitrogen fertilizers, industrial off-gases or petrochemicals.

**Fischer-TropschTechnology**

The Fischer-Tropschprocess that is the basis of our technology is one step in the three stagechemical process by which carbon-bearing materials are converted intosynthetic liquid hydrocarbons. The three stages are described below.

·  In the first stage, commercially availabletechnologies, such as gasification or steam methane reforming, convert carbon-bearingmaterial into syngas, which is a mixture of hydrogen and carbon monoxide.Oxygen is usually added for the efficient conversion of any solid or liquidfeedstock. The addition of oxygen may also be necessary in Fischer-Tropschprocesses that use gaseous feedstocks, depending on the technology selected, toreform the gaseous feedstocks into the desired composition of syngas.

·  In the second stage, the syngas is fed througha Fischer-Tropsch reactor and chemically altered in the presence of acatalyst to form synthetic liquid hydrocarbon products. The catalyst is eitheriron-based, as is the case in the Rentech Process, or cobalt-based. Thisis the stage where the Rentech Process is applied.

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·  In the third stage, the synthetic hydrocarbonproducts are upgraded on site with a commercially available refining technologyby distillation or other conventional processing steps to the specificationsrequired for the target market.

The Fischer-Tropsch process was first used inGermany during World War II in commercial-scale industrial facilitiesconstructed with government funding. These facilities used coal as feedstockfor the syngas and primarily produced diesel fuel. After World War II, others,notably the South African government, the United States Bureau of Mines andseveral companies in the United States, began research and development forimprovements to the Fischer-Tropsch process. South Africa’s effort led tothe Fischer-Tropsch process now owned by South African SyntheticOil, Ltd., or Sasol. Sasol’s process is used at four facilities in SouthAfrica that, according to published reports, produce a total of approximately160,000 barrels per day of liquid hydrocarbons, primarily from coal, using aniron-based catalyst.

The efforts to developadvances in FT technology in the United States were abandoned by the 1960sbecause conventionally refined liquid hydrocarbons were available in the UnitedStates at costs lower than FT synthetic fuels. The OPEC oil embargo of 1973created fuel shortages, especially in the United States, renewing interest byseveral companies in Fischer-Tropsch technology. Several companies,including ours, began work in the 1970s and 1980s to develop proprietary FTprocesses. Other companies that we believe began developing FT processes duringthat time include ExxonMobil, the Royal Dutch/Shell group, Statoil and BP. Webelieve that except for Sasol and us, which use iron-based catalysts in theirFischer-Tropsch processes, the other FT processes developed since WorldWar II use cobalt-based catalysts.

**Development of theRentech Process**

We developed our Fischer-Tropsch technology inthe early 1980s, based on earlier research and development efforts conducted bytwo of our founders, Dr. Charles Benham and Dr. Mark Bohn. Theability of the Rentech Process to convert syngas into valuable liquidhydrocarbons has been demonstrated over the course of our history.

Use of the Rentech Process in a Fischer-Tropschfacility was successfully demonstrated in 1992 and 1993 at the Synhytechfacility located at Pueblo, Colorado. The Synhytech facility was designed toproduce up to 235 barrels of liquid hydrocarbons per day. Our licensee, FuelResources Development Company, or Fuelco, had full control of the supply ofsyngas and the construction and operation of the facility. We designed,fabricated and operated the Fischer-Tropsch reactors and provided ourcatalyst for use in the FT reactors. Fuelco constructed the facility at thePueblo municipal landfill, with the intent of using, at minimal cost, themethane and carbon dioxide in the landfill gas that was generated each day fromthe decomposition of the landfill material. Although the Rentech Processperformed as expected to produce liquid hydrocarbons, Fuelco determined thatthe volume and the energy content of the landfill gas it captured wereinadequate to operate the facility on an economic basis, and thus ceasedoperation of the facility.

We obtained ownership and control of the Synhytechfacility in 1993. In order to further evaluate performance of the RentechProcess, we decided to operate the facility for a short period of time usingnatural gas supplied by pipeline as the feedstock. In July andAugust 1993, we operated the facility continuously for three weeks. Theresults confirmed that the Rentech Process operated successfully and ourability to produce the desired products. We closed the Synhytech facility atthe end of 1993 because no cost-efficient source of natural gas feedstock wasavailable.

Our technology was alsosuccessfully used by Texaco Energy Systems at a facility in Laporte, Texas in2000. Texaco leased the use of this facility from the United States Departmentof Energy on a short-term basis to conduct a joint demonstration with us of theresults of using the Rentech Process with Texaco’s gasification process. TheLaporte facility had the capacity to produce approximately ten barrels ofproduct per day using the Rentech Process.

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**Competition inFischer-Tropsch Technology**

The development of Fischer-Tropsch technologyfor the production of liquid hydrocarbon products like ours is highlycompetitive. Several major integrated oil companies, as well as several smallercompanies, have developed or are developing competing technologies. The UnitedStates Department of Energy has also sponsored a number of research programs inFischer-Tropsch technology. Advances by others in their Fischer Tropschtechnology might lower the cost of processes that compete with the RentechProcess. Our ability to create and maintain technological advantages iscritical to our future success.

Developing commercial FT technology requiressignificant capital and time, which we believe provides a material barrier tocompetitors. The fundamental differences between the various FT technologiesdeveloped by us and our competitors are the FT catalyst, the syngas reactorswhere the syngas reacts with the catalyst, our patented process for separatingiron catalyst from the wax product used in the reaction chamber (which permitsthe catalyst to be re-used), and our focus on small to medium sized facilitieswith a production capacity of up to 50,000 barrels of FT fuel per day. Becauseit uses an iron-based catalyst, the Rentech Process can use syngas derived froma wide range of feedstock to produce the syngas necessary for the FT process.FT technologies that use cobalt-based catalysts can be used to convertsyngas produced from coal and petroleum coke; however, due to their sensitivityto impurities in the syngas stream that coal and petroleum coke gasificationunits may produce, the expensive cobalt catalyst can be damaged. Such afacility requires the addition of expensive equipment that would likely cause reducedproduct yields and increased capital and operating costs. As a result, ourability to compete with FT technologies that use cobalt-based catalystsis, instead, significantly dependant on the relative cost of coal, as comparedto natural gas feedstock.

One of our competitors,Sasol, uses an iron-based catalyst at four facilities in South Africa that,according to published reports, produce a total of approximately 160,000barrels per day of liquid hydrocarbons, primarily from coal. Sasol’s published reportsof its licensing activity suggest to us that its current business strategy isto focus on licensing its cobalt-based technology for use with naturalgas feedstock, and that the use of its iron based catalyst is preferred for usein large-scale facilities (greater than 70,000 barrels per day) wherecoal is to be the feedstock for the facility. In contrast, our focus onfacilities with production capacities of up to 50,000 barrels per day of FTfuels will require less capital and development time.

**Sources ofFeedstocks for the Rentech Process**

Economic use of the Rentech Process requiressubstantial quantities of inexpensive carbon-bearing solids or gassesthat can be economically converted into syngas. We believe that coal, which isavailable in great quantities in the United States, is the best source offeedstock for the Rentech Process in the United States. Based on current marketprices, we believe we can obtain and gasify a wide-variety of coal types toproduce the syngas that we use in the Rentech Process at significantly lowercosts than if we were to use a natural gas feedstock.

In the United States, there are vast deposits of coalestimated at approximately 490 billion tons of demonstrated reserves andapproximately 270 billion tons of recoverable reserves. Coal represents as muchas 95% of the domestic fossil energy reserves on an energy equivalent basisaccording to the United States Department of Energy. The United States producednearly one-fifth of the world’s coal in 2004 and was the second largest coalproducer in the world, exceeded only by China. In 2005, total coal productionin the United States as estimated by the United States Department of Energy wasapproximately 1.1 billion tons. Due to the extensive supply, coal priceshave been historically stable compared to prices for oil and natural gas in theUnited States. Prices for oil reached record levels in 2006 and prices fornatural gas spiked at record levels in 2005 and have come down in 2006.

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The following graph chartsthe relative cost per million British thermal unit, or mmbtu, of coal tonatural gas from January 1996 to September 2006 as reported by theNew York Mercantile Exchange and Bloomberg.

****

Other potential feedstocksfor the Rentech Process include heavy crude oil and heavy, high-sulfur residualmaterials created as a byproduct of the crude oil refining process. Theseresidual materials are commonly referred to as petroleum coke or refinerybottoms. Some petroleum coke, unless treated at considerable expense, must bedisposed of as a hazardous material. If the residues are gasified, ortransformed into syngas for use in the Rentech Process, they could be convertedby our process into higher-value FT products. Natural gas, plant andplant derived materials, commonly referred to as biomass, may also be gasifiedand could serve as potential feedstock for the Rentech Process.

**Products andMarkets for Liquid Hydrocarbon Products**

Facilities using the Rentech Process can be designedand configured to produce a variety of liquid hydrocarbon products. Oursynthetic liquid hydrocarbon products are similar to analogous products derivedfrom crude oil refining, but have environmental benefits that conventionalpetroleum-based refinery products do not possess.

The products we canproduce using the Rentech Process include:

·       clean-burning,premium grade diesel fuel that is valuable as both a stand-alone productand a blending component;

·       clean-burning,manufactured jet fuels;

·       naphthasuseful as a feedstock for chemical processing;

·       specialtyproducts such as waxes useful in hot-melt adhesives, inks and coatings;

·       normalparaffins; and

·       otherwax-based products and a variety of other chemical intermediaries.

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Because of the way theyare produced, our liquid hydrocarbon products are substantially free ofcontaminants usually found in crude oil, such as sulfur, aromatics, nitrogenand heavy metals. Vehicle engine tests of our synthetic diesel conducted byindependent labs have demonstrated that our FT diesel fuel is clean-burningwith excellent combustion qualities, and substantially reduces harmful airemissions from vehicles. Our diesel fuel can be used directly or as a blendingcomponent with conventionally refined petroleum diesel to reduce harmfulemissions. Moreover, we believe our diesel fuel can be used in currentlyavailable diesel engines without requiring any modifications to the engines,and can be delivered to end-users with no modifications to deliveryinfrastructure.

**Clean AirRegulations**

The Clean Air ActAmendments of 1990, or the CAAA, established several programs in order toimprove air quality by, among other things, imposing restrictions on theemissions of hazardous pollutants into the atmosphere. As a means to addresscommon sources of air pollution such as automobiles, trucks and electric powerplants, the CAAA encourages the development and sale of alternative fuels asthe nation attempts to meet national air quality standards. In addition, beginningin June 2006, the United States Environmental Protection Agency started tophase-in a program to reduce the permissible sulfur content in highway dieselfuel from 500 parts per million to 15 parts per million. Furthermore,California has promulgated state-specific standards to reduce the sulfurcontent of diesel fuel. FT diesel fuel produced using the Rentech Process is alow-sulfur, clean-burning fuel, and should therefore be attractive tousers.

**GovernmentIncentives**

In 2000, Congress designated domestically producedFischer-Tropsch fuels made from natural gas as an alternative fuel underthe Energy Policy Act of 1992. This act also designates liquid fuels from coalas an “alternative fuel.”

The Energy Policy Act of 2005, or EPACT 2005, providesfor tax credits, grants, loan guarantees and other incentives to stimulate coalgasification into Fischer-Tropsch fuels and chemicals. EPACT 2005provides a 20% tax credit for qualifying gasification projects, including byentities which produce chemicals, fertilizers, glass, steel, and for forestproducts. In order to qualify for the tax credit, coal must comprise at least90% of fuels required for “production of chemical feedstocks, liquidtransportation fuels or coproduction of electricity.” EPACT 2005 alsoauthorizes grants for gasification and gasification coproduction, whichincludes the production of Fischer-Tropsch fuels, fertilizer andelectricity, as well as comprehensive loan guarantees up to 80% of the projectcost for deployment and commercialization of innovative technologies includinggasification projects and gasifying coal to produce “ultra-clean premiumfuels through Fischer-Tropsch process.” EPACT 2005 incentives may be usedtogether with tax credits provided by the statute. EPACT 2005 also provides atemporary election to expense up to 50% of qualified refinery costs, includingthose for a facility which processes coal via gas into liquid fuel. To qualify,there must be a binding construction contract before January 1, 2008 andthe refinery must be placed in service before January 1, 2012. Weanticipate that our proposed projects may qualify for us to receive grants,loan guarantees and other incentives under EPACT 2005.

EPACT 2005 requires the Secretary of Defense todevelop a strategy to use fuel produced from coal, tar sands and shale andauthorizes the Department of Defense to enter into multi-year procurementcontracts.

The Highway Reauthorization and Excise TaxSimplification Act of 2005 also provides a $0.50 per gallon fuel excisetax credit for “any liquid fuel derived from coal (including peat) through theFischer-Tropsch process.”

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We believe the projects todeploy product developed with the Rentech Process may in appropriatecircumstances be eligible for one of more of the above incentives.

**Acquisition ofRoyster-Clark Nitrogen, Inc.**

On April 26, 2006, we completed our acquisitionof RCN through a subsidiary for the purchase price of $50 million, plus anamount equal to net working capital of RCN, which was approximately $20 million.We are operating the existing nitrogen fertilizer complex, which is capable ofproducing 830 tons per day of ammonia from natural gas under the new nameRentech Energy Midwest Corporation. As a result of the acquisition, ourprincipal revenues and cost of sales are now derived from operation of the REMCfacility.

We intend to continue tooperate REMC’s East Dubuque facility for the production of nitrogen fertilizerproducts while we execute a phased conversion to a commercial scale FT fuelproduction facility. In Phase 1 of the conversion, we intend to add acommercially available coal gasification system that converts coal into syngasfor use in fertilizer production. During Phase 1A of the conversion, we plan toadd the Rentech Process to produce liquid hydrocarbon products, such as dieseland jet fuels, from the additional syngas produced from the coal gasificationprocess. We estimate we would need approximately $810 million of additionaldebt and equity financing to finance Phases 1 and 1A of the conversion of REMC’snitrogen fertilizer plant (the “East Dubuque Plant”).

**Conversion of EastDubuque Facility**

We will convert the facility in phases, theconstruction of which will overlap. In Phase 1 of the conversion, we intend toadd a commercially available clean coal gasification module that converts coalinto syngas for use in fertilizer production. We expect the conversion willallow us to capture the price differential between natural gas and coal andproduce fertilizers more cost effectively. Phase 1 will also include theconstruction of a power plant which will capture the waste heat from the coalgasification process. It is anticipated that the converted Facility will becapable of producing enough power to meet its internal needs and, to the extentit produces any surplus power, could market excess power to the local grid. Byconverting the facility, we expect to improve the economic return from itsoperations. In addition, after conversion the facility is expected to producean additional 170 tons of ammonia per day, which is the building block forvarious nitrogen fertilizer products. After completion of Phase 1, the EastDubuque facility is expected to purchase approximately 1,560 tons of coal perday on a fixed contract basis.

In Phase 1A, we will add a FT plant using the RentechProcess. We expect the addition of the Rentech Process will enable the facilityto produce between 1,500 and 1,800 barrels per day of FT liquid hydrocarbonproducts, primarily ultra-clean diesel fuel, requiring an additional approximately1,040 tons of coal per day.

We expect that the financing for Phase 1 of theproject would be raised at the project level and that the financing for Phase1A would be raised at either the project or at the Rentech level. We presentlyexpect commercial operations of Phases 1 and 1A to commence by 2010.

Following start-up ofcommercial FT production, we anticipate that we will develop Phase 2, whichwill consist of adding additional coal gasification and FT capacity resultingin an increase of approximately 5,000 barrels per day of FT fuel.

**DistributionAgreement**

On April 26, 2006,RDC entered into a Distribution Agreement with Royster-Clark Resources, LLC,who has assigned the agreement to Agrium U.S.A. Inc. (“Agrium”), pursuant towhich Agrium is obligated to use commercially reasonable efforts to promote thesale of, and to solicit and secure orders from its customers for nitrogenfertilizer products comprising anhydrous ammonia, granular urea, UAN solutions 

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andnitric acid and related nitrogen-based products manufactured at the EastDubuque Plant and to purchase from REMC all nitrogen fertilizer productsmanufactured at the facility for prices to be negotiated in good faith fromtime to time. RDC must pay Agrium a commission for these services. RDC’s rightsunder the Distribution Agreement include the right to store specified amountsof its ammonia at Agrium’s ammonia terminal in Niota, Illinois for a monthlyfee.

**Business of RentechEnergy Midwest Corporation.**

The following descriptionrelates to the business of our subsidiary REMC as presently conducted.

***Production Facility***

REMC’s manufacturing facility in East Dubuque,Illinois is designed to produce anhydrous ammonia, nitric acid, ammoniumnitrate solution, liquid and granular urea, nitrogen solutions (urea ammoniumnitrate solution, or UAN) and carbon dioxide using natural gas as a feedstock.East Dubuque is located in the northwest corner of Illinois, and the facilityis located on a 100 foot bluff above the Mississippi River with access to theriver for loading certain products through REMC-owned loading facilities.

The facility operates continuously, except for plannedshutdowns for maintenance and efficiency improvements, and has historicallyoperated at full capacity except for temporary cutbacks or shutdowns formaintenance or extraordinary market conditions. The facility can optimize theproduct mix according to swings in demand and pricing for its various products.In the 12 month period ended September 30, 2006, the facility produced approximately0.9 million tons of these products, compared to approximately1.0 million tons in 12 month period ended September 30, 2005. Someproducts were sold as produced, and others were consumed in the production ofupgraded nitrogen products. Final products shipped from the facility during the12 month period ended September 30, 2006 totaled approximately 415,000tons of ammonia and upgraded nitrogen products, compared to approximately439,000 tons in the 12 month period ended September 30, 2005. Carbondioxide shipments totaled approximately 111,000 tons and 94,000 tons in the 12month periods ended September 30, 2006 and 2005, respectively.

Thefollowing table sets forth the East Dubuque facility’s current rated productioncapacity for the listed nitrogen fertilizer products in tons per day.

| **Plant**               | ** ** | ** ** | ** ** | **Capacity  (tons per day)** | ** ** |
|-------------------------|------------|------------|------------|----------------------------------------|------------|
| Ammonia                 |       |       | 830        |                                   |       |
| UAN Blending            |       |       | 1,100      |                                   |       |
| Ammonium nitrate        |       |       | 600        |                                   |       |
| Urea synthesis          |       |       | 400        |                                   |       |
| Urea granulation        |       |       | 140        |                                   |       |
| Nitric acid (2  plants) |       |       | 380        |                                   |       |
| CO2                     |       |       | 650        |                                   |       |

 

***Products***

REMC’s product sales are heavily weighted towardanhydrous ammonia and UAN, which typically make up over 80% of total revenues.Products sold include anhydrous ammonia, UAN, nitric acid, carbon dioxide andgranular and liquid urea. All of its products are sold through the DistributionAgreement with Agrium with the exception of carbon dioxide which is sold toindustrial customers, generally on a contract basis. Although anhydrous ammoniaand UAN are often interchangeable, each has its own characteristics, andcustomer product preferences vary according to the crop planted, soil andweather conditions, regional 

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farming practices,relative prices and the cost and availability of appropriate storage, handlingand application equipment. A more detailed description of its products followsbelow:

***Anhydrous Ammonia.******  ***REMC produces anhydrousammonia (often referred to simply as “ammonia”), the simplest form of nitrogenfertilizer and the feedstock for the production of other nitrogen fertilizers.Ammonia is produced by reacting natural gas with steam and air at hightemperatures and pressures in the presence of catalysts. The ammonia processingunit has a current rated capacity of 830 tons per day. Ammonia product storageconsists of two 20,000 ton tanks. Ammonia is used in the production of allother products produced by the facility, except for carbon dioxide.

Ammonia contains 82% nitrogen by weight and isgenerally the least expensive form of fertilizer per pound of nitrogen.However, because it is a gas that must be kept under pressure and refrigerated,ammonia is more costly to store, ship and apply than other nitrogen fertilizerproducts and must be applied in the fall during cool weather after harvest, inthe spring just before planting or as side dress after the plant emerges. Whenused as a fertilizer, ammonia must be injected into the soil by specializedequipment, and soil conditions can limit its application.

***UAN.******  ***UAN is produced by combiningurea solution and ammonium nitrate solution. An aqueous solution of ammoniumnitrate, referred to as AN, an intermediate in UAN manufacture, is produced ina separate AN unit by neutralizing nitric acid with ammonia. No solid ammoniumnitrate is produced in the facility. UAN is a liquid fertilizer which has aslight ammonia odor and, unlike ammonia, it does not need to be refrigerated orpressurized when transported or stored. The East Dubuque facility maintains twoUAN storage tanks having a combined storage capacity of 80,000 tons.

As a liquid, UAN has many advantages over solidfertilizers and ammonia. UAN may be applied more uniformly than non-liquidproducts and may be mixed with various crop protection products or other nutrients,permitting the farmer to apply several materials simultaneously, thus reducingenergy and labor costs. In addition, UAN, unlike ammonia, may be applied fromordinary tanks and trucks and can be applied to the soil either throughspraying, injecting or through irrigation systems throughout the growingseason. Moreover, due to its stable nature, UAN can be a preferred fertilizerchoice for crops requiring soil surface applications (such as no-till rowcrops).

***Urea.******  ***Urea product is producedthrough the reaction of ammonia with carbon dioxide at high pressure andtemperatures creating a molten product called Urea solution at a concentrationof approximately 70%. Urea solution can be further processed through the urea granulationplant to create dry granular urea (46% nitrogen concentration) for sale totrade, used for the production of UAN or sold directly to trade customers inits state as a urea solution. The facility has a 12,000 ton capacity bulkwarehouse which may be used for dry bulk granular urea storage.

***Nitric Acid.******  ***REMC produces nitric acidthrough two separate nitric acid plants. Nitric acid is produced through thecatalytic combustion of ammonia vapor in air over a platinum-rhodium(precious metals) catalyst gauze and absorption of the nitric oxide in weakacid. Nitric acid is either sold to third parties or used within the facilityfor the production of ammonium nitrate solution, as an intermediate from whichUAN is produced. Limited storage capacity is currently available at thefacility, but sufficient storage is available for efficient product loading.Storage capacity has not been a limiting factor in the sales of nitric acid.

***Carbon Dioxide.******  ***Carbon dioxide, or CO2, is a co-manufactured gaseous product in themanufacture of ammonia (approximately 1.1 tons of CO2 per ton of ammonia). Most plants vent the gasfrom their ammonia production to the atmosphere. The East Dubuque facility hasdeveloped a market for the CO2 through conversion to a purified food gradeliquid carbon dioxide. The CO2 is purified, compressed and chilled tocondensing conditions. It is stored as a saturated liquid for later sale tovarious industrial customers. The facility is a certified producer of foodgrade liquid CO2 for the soft drink industry. The 

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facility hasstorage capacity of approximately 1,900 tons of CO2. Negotiated contract agreements for CO2 allows for regular shipment of CO2 twelve months a year, so the current storagecapacity is adequate.

***Marketing and Distribution***

REMC sells approximately99% of its final products, with the exception of CO2, to Agrium pursuant to the DistributionAgreement. Agrium sells the products to either wholesale or retail agriculturalcustomers or in the case of industrial nitrogen products, primarily nitricacid, to industrial customers. CO2 is marketed by staff at the facility,generally on a contract basis.

***Seasonality and Volatility***

The fertilizer business is seasonal, based upon theplanting, growing and harvesting cycles. Inventories must be accumulated toallow for uninterrupted customer deliveries, and require significant storagecapacity. The accumulation of inventory to be available for seasonal sales isfinanced though use of REMC’s revolving credit facility and by customerprepayments. This seasonality generally results in higher fertilizer pricesduring peak periods, with prices normally reaching their highest point in thespring, decreasing in the summer, and increasing again in the fall as depletedinventories are restored. Another seasonal factor affecting REMC is the abilityto transport product via barges on the Mississippi River. During the winter,the Mississippi River is closed due to river blockage from ice formations. Theriver closure affects how REMC can transport its products and can impactprofitability due to differences in transportation costs.

Nitrogen fertilizer pricelevels are influenced by world supply and demand for ammonia and nitrogen-basedproducts. Long-term demand is affected by population growth and rising livingstandards that determine food consumption. Shorter-term demand is affected byworld economic conditions and international trade decisions. Supply is affectedby increasing worldwide capacity and the availability of nitrogen productimports from major producing regions such as the former Soviet Union, theMiddle East, South America and Trinidad. During the period 2002-2003,favorable nitrogen prices in the industry spurred capacity additions in theform of new and expanded production facilities. These production changes andescalation of natural gas prices in 2005 negatively impacted profitability ofnitrogen manufacturing and resulted in some curtailments or shutdowns of NorthAmerican nitrogen manufacturing capacity. Many of these shutdowns are expectedto be permanent. Natural gas prices in 2006 have trended down from the recordhighs prices in 2005.

***Raw Materials***

The principal raw material used to producemanufactured nitrogen products is natural gas. REMC has historically purchasednatural gas for use in the facility in the spot market, through the use offorward purchase contracts, or a combination of both. Forward purchasecontracts have historically been used to lock in pricing for a portion of thefacility’s natural gas requirements. These forward purchase contracts aregenerally either fixed-price or index-priced, short term in natureand for a fixed supply quantity. REMC is able to purchase natural gas atcompetitive prices due to its connection to the Northern Illinois Gas Company,or NICOR, distribution system and its proximity to the Northern Natural Gaspipeline. Natural gas purchases used in production were approximately9.9 billion cubic feet and 9.3 billion cubic feet in the 12 month periodsended September 30, 2006 and September 30, 2005, respectively.

For the three years ended December 31,2005, natural gas prices trended up due to various supply factors, includingthe increasing overall demand for natural gas from industrial users, which isaffected, in part, by the general conditions of the United States economy, andother factors. In 2006 natural gas prices have decreased from the record highsof 2005. Seasonal fluctuations exist within each year resulting from varioussupply and demand factors, such as the severity of winters affecting consumers’consumption for 

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heating,and the severity of summers affecting industrial demand by utilities forelectrical generation, among other factors. Volatility is also evidenced byprice swings resulting from recent hurricanes in the Gulf of Mexico wheresignificant production of natural gas exists. REMC does not obtain supplies ofnatural gas from the Gulf of Mexico region; however, changes in levels ofnatural gas prices affected by supply factors related to this region or othersupply factors and market prices of nitrogen products can materially affectREMC’s financial position and results of operations. REMC has not experienceddifficulties in securing supplies of natural gas. Natural gas has beenpurchased at market prices, which are subject to price volatility.

***Transportation***

Natural gas is transportedinto the facility through a connection to the natural gas pipeline from NICOR.Products are shipped by barge, truck and rail. The facility can ship ammoniaand UAN through a barge dock on the Mississippi River. The East Dubuquefacility owns a rail spur that connects to the Burlington Northern Santa FeRailway, or BNSF. The Canadian National Railway Company also services the EastDubuque facility and has rights to travel on the BNSF main line.

***Environmental Matters***

Rentech’s and REMC’s facilities and operations mustcomply with a variety of United States federal, state and local environmentallaws, regulations and ordinances, including those governing and imposingliability for the discharge of pollutants into the air and water, themanagement and on-site and off-site disposal of chemicals, byproducts,including wastewater and spent catalyst, and hazardous wastes, worker healthand safety, the investigation and cleanup of contamination at currently andformerly owned or operated sites, as well as third party sites that may havebeen impacted by Rentech’s or REMC’s operations, and for natural resourcedamages related to any releases of hazardous substances. For example, underCERCLA, we could be held strictly, jointly and severally liable for the removaland remediation of any hazardous substance contamination at our currently orformerly owned or operated facilities, at off-site properties (where migrationof contamination from our facilities occurred) and at third party wastedisposal sites at which our wastes were disposed. Because of Rentech’s and REMC’soperations, the history of industrial or commercial uses at Rentech’s and REMC’scurrently and formerly owned and operated facilities, and the use, production,disposal and possible release of hazardous substances and wastes at or fromthose facilities, we may be subject to liability under environmental laws. Wecould also be subject to liability for personal injury based on human exposureto or natural resource damages from hazardous substances or wastes released ordisposed of at or from Rentech’s or REMC’s currently or formerly owned oroperated facilities.

In addition, some of Rentech’s and REMC’s operationsrequire environmental permits and controls to prevent or limit pollution to theenvironment. We could incur substantial costs, including cleanup costs, civilor criminal fines, penalties or sanctions and third party claims for propertydamage or personal injury as a result of violations of or liabilities underenvironmental laws and regulations or non-compliance with environmentalpermits. The East Dubuque facility has experienced some level of regulatoryscrutiny in the past and may be subject to further regulatory inspections,future requests for investigation relating to, or assertions of liability for,among other things, regulated materials management practices.

Future events, such aschanges in existing laws and regulations or their interpretation, the discoveryof previously unknown environmental conditions or contamination or theimposition of new cleanup requirements, may give rise to additional compliancecosts or liabilities that could have a material adverse effect on our business,financial condition or results of operations. Compliance with more stringentlaws or regulations, as well as stricter or different interpretations ofexisting laws, may require additional expenditures by us that could bematerial.

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***Competition***

REMC competes with anumber of domestic producers of nitrogen fertilizer products, many of which arelarger and have access to lower cost sources of financing and greater resourcesthan it does. Customers for nitrogen fertilizer products make purchasingdecisions principally on the delivered price and availability of the product.We plan to continue to operate the East Dubuque facility with natural gas asthe feedstock until we complete the conversion of the facility to use coal. Tothe extent that prices of natural gas increase, it will be more difficult forus to maintain a competitive price position with respect to our competitors. Inaddition, after we are able to convert the facility to use coal as feedstock,increases in the price of coal could similarly adversely affect our competitiveposition.

**IntellectualProperty and Patents**

We own 21 issued United States utility patentspertaining to the Rentech Process, which includes our Fischer-Tropschprocesses, applications of our processes and the products produced, and thematerials used in the Rentech Process. We also have four issued foreignpatents. Our patents claim the overall Rentech conversion process; a method forcracking produced waxes; a method of making and activating a promoted iron FTcatalyst for use in slurry synthesis reactors; production of a syntheticoxygenated diesel fuel; use of our oxygenated diesel fuel as an additive toconventional diesel fuel; control of the tail gas from our process to maximizeeither the production of electricity from our tail gas, FT products or anear-pure form of carbon dioxide; and integration of the Rentech Process withnitrogen fertilizer facilities to enable them to co-produce nitrogenfertilizers, FT fuels, and electricity.

Use of the Rentech Process requires use of ouriron-based FT catalyst, which we have patented. Two of our patents include keyelements of a process that improves the carbon conversion efficiency of theRentech Process.

We currently have several pending United States andforeign patent applications which claim improvements to certain aspects of theRentech Process. Moreover, we have registered the RENTECH mark with the UnitedStates Patent and Trademark Office, or USPTO, to identify and distinguish ourservices from those of other companies.

The term of a utility patent is generally twenty yearsfrom the date of filing an application with the United States Patent andTrademark Office. If priority of an earlier application or applications isclaimed, the term can end twenty years from the filing date of the earliest ofsuch earlier applications. Patents that are in force on or that will issue onan application that is filed before June 8, 1995 have a term that is thegreater of the “twenty year term” noted above or seventeen years from thepatent grant. Our first patent matured from an application that was filed in1992 and expires seventeen years from grant. Our most recent application wasfiled in 2006.

We also maintain trade secrets and confidentialproprietary information that we use in connection with our trademarked RentechProcess. The life of a trademark is indefinite as long as there is continualuse of the mark. The term of our trade secrets and proprietary information isperpetual as long as we prevent public disclosure by keeping them secret andconfidential and they are not discovered or reverse-engineered by others.

The success of ourbusiness, as well as that of our subsidiaries, depends upon the intellectualproperty that we own and use in the conduct of our business. We believe thatour intellectual property gives us rights to exploit our technologies and toexclude others from making, using, selling or importing certain inventionsthroughout the United States without our consent. If we lost the rights toexploit or exclusively exploit an intellectual property asset, the financialresults of our business and our overall financial results and prospects wouldbe materially harmed.

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**Regulation**

The ownership and operation of nitrogen fertilizer andalternative fuel facilities are subject to extensive United States federal,state and local environmental, health and safety laws and regulations,including those governing and imposing liability for the discharge ofpollutants into the air and water, the management and on-site and off-sitedisposal of chemicals, byproducts, including waste water and spent catalyst,and hazardous wastes, worker health and safety, the investigation and cleanupof contamination at currently and formerly owned or operated sites, as well asthird party sites that may have been impacted by Rentech’s or RCN’s operations,and for natural resource damages related to any releases of hazardoussubstances. For example, under CERCLA, we could be held strictly, jointly andseverally liable for the removal and remediation of any hazardous substancecontamination at our currently or formerly owned or operated facilities, atoff-site properties (where migration of contamination from our facilitiesoccurred) and at third party waste disposal sites at which our wastes weredisposed. Because of Rentech’s and RCN’s operations, the history of industrialor commercial uses at Rentech’s and RCN’s currently and formerly owned andoperated facilities, and the use, production, disposal and possible release ofhazardous substances and wastes at or from those facilities, we may be subjectto liability under environmental laws. We could also be subject to liabilityfor personal injury based on human exposure to or natural resource damages fromhazardous substances or wastes released or disposed of at or from Rentech’s orRCN’s currently or formerly owned or operated facilities.

In addition, some of Rentech’s and RCN’s operationsrequire environmental permits and controls to prevent or limit pollution to theenvironment. Compliance with laws, regulations and requisite permits couldrequire us to curtail our operations or increase costs of designing, installingand operating our nitrogen fertilizer and alternative fuel facilities. Forexample, emissions from those facilities may require the installation of costlypollution control equipment in order to meet applicable environment legal andpermit requirements.

Although we do not believe that compliance withenvironmental and health and safety laws and regulations and applicableenvironmental permit requirements in connection with our current operations orthe operation of RCN’s East Dubuque facility will have a material adverseeffect on us, we cannot predict with certainty the future costs of complyingwith environmental laws, regulations and permit requirements or the costs thatmay be associated with investigation, remediating contamination or monitoring.RCN’s East Dubuque facility has experienced some level of regulatory scrutinyin the past and may be subject to further regulatory inspections, future requestsfor investigation relating to, or assertions of liability for, among otherthings, regulated materials management practices. In the future, we could incurmaterial liabilities or costs related to environmental matters, and theseenvironmental liabilities or costs (including fines or other sanctions) couldhave a material adverse effect on our business, operating results and financialcondition.

In addition, theengineering design and technical services we provide to our licensees aresubject to governmental licensing requirements, which require that suchservices comply with certain professional standards and other requirements. Webelieve we have all required licenses to conduct our operations and are insubstantial compliance with applicable regulatory requirements. However, theloss or revocation of any license or the limitation on any services thereundercould prevent us from conducting such services and could subject us tosubstantial fines. In addition, changes in these requirements could adverselyaffect us.

**Petroleum MudLogging, LLC Divestiture**

In June 1999, weentered into the business of providing well logging services to the oil and gasindustry through our purchase of the assets of two established and relatedcompanies that have been providing services in these fields since 1964. Wecontinued these businesses through our wholly-owned subsidiary, 

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PetroleumMud Logging, LLC, or PML, with headquarters in Oklahoma City, Oklahoma. OnNovember 15, 2006 we sold PML to privately held PML Exploration Services,LLC, for approximately $5.4 million in cash.

**Employees and LaborRelations**

As of December 1,2006, we had approximately 93 non-unionized and salaried employees, andapproximately 84 unionized employees. We believe that we have good relationswith our employees. Our subsidiary REMC has one labor contract in placecovering the 84 unionized employees. This contract was renewed for a six yearterm in October 2006. Neither the Company nor its subsidiary REMC haveexperienced work stoppages in the recent past.

**AvailableInformation**

Our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports are available free of charge as soon asreasonably practical after they are filed or furnished to the Securities andExchange Commission (“SEC”), through our website, www.rentechinc.com. Ourfilings also are available through a database maintained by the SEC atwww.sec.gov.

**ITEM 1A—RISKFACTORS**

Set forth below arecertain risk factors related to the Company’s business. The risk factorsdescribed below may not include all of the risk factors that could affectfuture results. Actual results could differ materially from those anticipatedas a result of these and various other factors, and those set forth in theCompany’s other periodic and current reports filed with the Commission fromtime to time.

**Risks Related toOur Liquidity, Financial Condition, and Results of Operations**

***Our liquidity andcapital resources are limited and we must raise substantial additional capitalto execute our business plan and to fund our operations.***

Our liquidity and capitalresources are limited. At September 30, 2006, as a result of recent equityfinancing transactions, we had working capital (current assets in excess ofcurrent liabilities) of $65,520,862, compared to working capital (currentassets in excess of current liabilities) of $32,031,397 at September 30,2005. We must raise substantial additional capital, not only to execute ourbusiness plan of commercializing and licensing the Rentech Process andconverting the East Dubuque Plant and developing other plants, but also tocontinue our operations after existing funds are exhausted. The level ofcorporate activity required to pursue our business opportunities and objectiveshas resulted in a materially increased cash burn rate. We believe that ourcurrently available cash, cash flows from operations, funds from the potentialsale of assets and other plans, which could include additional debt or equityfinancing, will be sufficient to meet our cash operating needs through thefiscal year ending September 30, 2007. In order to fund our workingcapital requirements and to fund our other plans, we expect to issue additionalshares of common stock, we may issue shares of convertible preferred stock orother securities convertible into or exercisable or exchangeable for commonstock or we may enter into additional debt instruments. Some of the securitiesto be offered will not be registered under the Securities Act of 1933, and maynot be offered or sold in the United States absent an available exemption fromregistration. A substantial increase in indebtedness could result insubstantially increased interest costs and the issuance of additional preferredstock could increase dividend costs, as well as transactional and other costs.

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***We have neveroperated at a profit. If we do not achieve significant amounts of additionalrevenues and become profitable, we may be unable to continue our operations.***

We have a history ofoperating losses and have never operated at a profit. From our inception on December 18,1981 through September 30, 2006, we have incurred losses in the amount of$100,658,612, including an other comprehensive loss of $2,294. During thefiscal year ended September 30, 2006, we had a net loss of $38,647,682. Ifwe do not achieve significant amounts of additional revenues and operate at aprofit in the future, we may be unable to continue our operations at theircurrent level. Ultimately, our ability to remain in business will depend uponearning a profit from commercialization of the Rentech Process. We have notbeen able to achieve sustained commercial use of the technology as of this time.Failure to do so would have a material adverse effect on our financialposition, results of operations and prospects.

***REMC’s operations have not been profitable and requiresubstantial working capital financing.***

From April 26, 2006,the date our acquisition of REMC, through September 30, 2006 REMC operatedat a net loss, but provided positive cash flow from operations. However, REMChas historically sustained cumulative losses and has had cumulative negativecash flows from operations during the fiscal years ended December 31, 2005and 2003. For the fiscal year ended December 31, 2004, RCN operated at aprofit and provided positive cash flows from operations. The losses are theresult, among other things, of very difficult market conditions in itsindustry, and of rapidly rising costs of the natural gas feedstock and energyrequired to produce nitrogen fertilizers. Moreover, REMC’s business isextremely seasonal, with the result that working capital requirements in itsoff season are substantial. If we are not able to operate the East DubuquePlant at a profit, or if we are not able to access a sufficient amount offinancing for working capital, our business, financial condition and results ofoperations would be materially adversely effected.

***We do not expect our historical operating results tobe indicative of future performance.***

Historically, our businessfocused on the development and licensing of our technology, the business of ourformer wholly-owned subsidiary, Petroleum Mud Logging, LLC, which providedwell logging services to the oil and gas industry, and other operations whichhave been discontinued. In the future, we expect to continue to operate andconvert the East Dubuque Plant and develop additional FT fuels productionfacilities using the Rentech Process. We expect to finance a substantial partof the cost of these projects with indebtedness and the sale of equitysecurities. Accordingly, our operating expenses, interest expense, anddepreciation and amortization are all expected to increase materially if wecontinue to develop such projects and affect such financings. As a result, wedo not expect that historical operating results will be indicative of futureperformance.

***We most likely willhave to record higher compensation expense as a result of the implementation ofSFAS 123(R).***

In December 2004, theFASB issued SFAS No. 123(R), Share-Based Payment, which establishesstandards for transactions in which an entity exchanges its equity instrumentsfor goods or services. This standard requires a public entity to measure thecost of employee and director services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. We adoptedSFAS No. 123(R) on October 1, 2005, using the modifiedprospective method for the adoption of its provisions, which results in therecognition of compensation expense for all share-based awards granted after theeffective date and the recognition of compensation expense for all previouslygranted share-based awards that remain unvested at the effective date. However,because we previously accounted for share-based payments to employees anddirectors using the intrinsic value method, our results of operations have notincluded the recognition of compensation expense for the issuance of stockoption awards. As a result 

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ofadopting SFAS 123(R), we recognized $8,899,841 of compensation expense for thefiscal year ended September 30, 2006. We believe that compensation expenserecorded in periods after the implementation of SFAS No. 123(R) maybe significantly higher than the amounts that would have been recorded in yearsprior to its adoption.

***Failure to maintaineffective internal control over financial reporting in accordance with Section 404of the Sarbanes-Oxley Act could have a material adverse effect on the market’s perceptionof our business and our ability to raise capital.***

We have documented andtested our internal control over financial reporting procedures in order tosatisfy the requirements of Section 404 of the Sarbanes-Oxley Act. TheSarbanes-Oxley Act requires management assessment of the effectiveness of ourinternal control over financial reporting and an audit and report of suchinternal control over financial reporting by our independent auditorsaddressing these assessments. This assessment may be complicated by any changesto our business operations and as such standards are modified, supplemented oramended from time to time. If we fail to maintain the adequacy of our internalcontrols, we may not be able to ensure that we can conclude on an ongoing basisthat we have effective internal control over financial reporting in accordancewith Section 404 of the Sarbanes-Oxley Act. We continue to dedicateresources and management time to ensuring that we have effective internalcontrol over financial reporting. However, failure to achieve and maintain aneffective internal control environment could have a material adverse effect onthe market’s perception of our business and our ability to raise capital.

***We need to incursignificant costs and other resources to modify REMC’s financial reportingsystems and to integrate it with our financial reporting systems.***

On April 26, 2006,RDC completed its acquisition of RCN (currently, REMC). Pursuant to SEC rules,acquisitions may be excluded from management’s assessment of the effectivenessof internal control over financial reporting for up to one year from the dateof closing of an acquisition. However, REMC’s current financial reportingsystems are insufficient to meet our specific future needs and need to bereplaced as soon as practicable. In addition, following the completion of theupdate, we intend to integrate REMC’s financial reporting systems into ourfinancial reporting systems. Until the integration has been completed, theoperation of the two separate financial reporting systems could result inadditional costs and difficulties that would not exist if one system were inplace. In addition, while we have based our estimates of the costs and time itwill take to complete the update and integration of such systems on our bestestimates to date, we could encounter difficulties in the replacement orintegration processes and incur significant costs and expend importantresources in excess of our estimates.

**Risks Related to the Rentech Process**

***We and ourlicensees may be unable to successfully implement use of the Rentech Process atcommercial scale Fischer-Tropsch plants, including the East Dubuque Plant.***

A variety ofresults necessary for successful operation of the Rentech Process could fail tooccur at a commercial plant, including the East Dubuque Plant. Results thatcould cause commercial scale Fischer-Tropsch plants to be unsuccessful, andrequire design revisions, include:

·       reactionactivity different than that demonstrated in laboratory and pilot plant operations,which could increase the amount of catalyst or number of reactors required toconvert synthesis gas into liquid hydrocarbons;

·       shorterthan anticipated catalyst life, which would require more frequent catalystregeneration, catalyst purchases, or both;

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·       insufficientcatalyst separation from the crude wax product stream could impair theoperation of the product upgrading unit;

·       productupgrading catalyst sensitivities to impurities in the crude FT products, whichwould impair the efficiency and economics of the product upgrade unit andrequire design revisions; and

·       higherthan anticipated capital and operating costs to design, construct orreconfigure and operate a Fischer-Tropsch plant.

If anyof the foregoing were to occur, our capital and operating costs would increase.In addition, our plants or those of our licensees could experience mechanicaldifficulties, either related or unrelated to elements of the Rentech Process. Ourfailure to construct and operate a commercial scale, Fischer-Tropsch plantbased on the Rentech Process could, and any such failure at the East DubuquePlant would, materially and adversely affect our business, results ofoperation, financial condition and prospects.

***Our receipt ofrevenues from licensees is dependent on their ability to successfully develop,construct and operate Fischer-Tropsch plants using the Rentech Process.***

We have marketed licenses for use of the RentechProcess, and have one active licensee at this time - the Master LicenseAgreement we entered into with DKRW-Advanced Fuels LLC and Site LicenseAgreement with its wholly-owned subsidiary, Medicine Bow Fuels &Power, LLC, in January 2006. Under the license agreements, a licenseewould be responsible for, among other things, obtaining governmental approvalsand permits and sufficient financing for the large capital expendituresrequired. The ability of any licensee to accomplish these requirements, and theefforts, resources and timing schedules to be applied by a licensee, will becontrolled by the licensee. Whether licensees are willing to expend theresources necessary to construct Fischer-Tropsch plant(s) using theRentech Process will depend on a variety of factors outside of our control,including the prevailing price outlook for crude oil, natural gas, coal,petroleum coke and refined products. In addition, our license agreements maygenerally be terminated by the licensee with cause. Furthermore, our potentiallicensees may not be restricted from pursuing alternative Fischer-Tropschtechnologies on their own or in collaboration with others, including ourcompetitors, for projects other than the ones we might license in the future.

If our licensees do notproceed with commercial plants using the Rentech Process or do not successfullyoperate their plants, we will not significantly benefit from the licensing ofour Fischer-Tropsch technology. To date, no licensee of the Rentech Process hasproceeded to construct and operate a plant for which royalties on productionwould be due. If we do not receive payments under our license agreements, ouranticipated revenues will be diminished. This would harm our results ofoperations, financial condition and prospects.

***Plants that woulduse the Rentech Process rely upon complex gas process systems. This creates risksof fire and explosions, which could cause severe damage and injuries, createliabilities for us, and materially and adversely affect our business.***

Plants that use ourFischer-Tropsch technology process carbon-bearing materials, including coal,natural gas and petroleum coke, into synthesis gas. These materials are highlyflammable and explosive. Severe personal injuries and material property damagemay result. If such accidents did occur, we or our licensees could havesubstantial liabilities and costs. We are not currently insured for these risks.Furthermore, accidents of this type would likely adversely affect operation ofexisting as well as proposed plants by increasing costs for safety features andprocedures.

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***We could havepotential indemnification liabilities to licensees relating to the operation ofFischer-Tropsch plants based on the Rentech Process and to intellectualproperty disputes.***

We anticipate thatour license agreements will require us to indemnify the licensee againstspecified losses relating to, among other things:

·       useof patent rights and technical information relating to the Rentech Process; and

·       actsor omissions by us in connection with our preparation of preliminary and finaldesign packages for the licensee’s plant and approval of the licensee’sconstruction plans.

Our indemnificationobligations could result in substantial expenses and liabilities to us ifintellectual property rights claims were to be made against us or ourlicensees, or if Fischer-Tropsch plants based on the Rentech Process were tofail to operate according to the preliminary plans.

***Industry rejectionof our Fischer-Tropsch technology would adversely affect our ability to receivefuture license fees.***

As is typical in the case of new and/or rapidlyevolving technologies, demand and industry acceptance of the Rentech Process ishighly uncertain. Historically, most applications of FT processes have notproduced fuels that were economical compared to the price of conventional fuelsources. Failure by the industry to accept the Rentech Process, whether due tounsuccessful use, results that are not economical, the novelty of ourtechnology, the lower price of alternatively sourced fuels, or for otherreasons, or if acceptance develops more slowly than expected, would materiallyand adversely affect our business, operating results, financial condition andprospects.

If a high profile industryparticipant were to adopt the Rentech Process and fail to achieve success, orif any commercial FT plant based on the Rentech Process were to fail to achievesuccess, other industry participants’ perception of the Rentech Process couldbe adversely affected. That could adversely affect our ability to obtain futurelicense fees and generate other revenue. In addition, some oil companies may bemotivated to seek to prevent industry acceptance of FT technology in general,or the Rentech Process in particular, based on their belief that widespreadadoption of FT technology might negatively impact their competitive position.

***If our competitorsintroduce new technology, new legislation or regulations are adopted, or newindustry standards emerge, our technologies and products could become obsoleteand unmarketable.***

The markets for ourservices and products are characterized by rapidly changing competition, newlegislation and regulations, and evolving industry standards. If we do notanticipate these changes and successfully develop and introduce improvements ona timely basis, our products and services could become obsolete and unmarketable,which would have a material adverse effect on our business, financialcondition, results of operations and prospects.

***Our success dependsin part on the successful and timely completion of our product development unit(“PDU”) and its subsequent operation.***

We expect mechanicalcompletion of our PDU by the third calendar quarter of 2007 at a constructioncost of approximately $40 million. Our success in designing, constructing,developing and operating a PDU on a timely basis is essential to our successfuldeployment of the Rentech FT technology as well as fulfilling our contractualobligations to DKRW Advanced Fuels LLC. Under our agreement with DKRW-AF, weare required to satisfy certain testing procedures for the licensed technologyat the PDU. We must also obtain governmental approvals and permits as well asprocure equipment and materials on a timely basis for the PDU and a delay orfailure in securing such governmental approvals, equipment and/or materials maycause significant harm to the Company. A variety of results necessary forsuccessful operation of our 

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RentechProcess could fail to be demonstrated by the PDU. In addition, our PDU couldexperience mechanical difficulties related or unrelated to the Rentech Process.If we are not able to successfully develop and operate a PDU utilizing theRentech Process, this may cause a delay in our development of projectsutilizing our Rentech Process, which would have a material adverse effect onour business, financial condition, results of operations and prospects andwhich we may mean we are not be able to obtain any further licensing agreementswith third parties.

***Our success dependson the performance of our management team, project development team andtechnology group. The loss of key individuals within these groups would disruptour business operations.***

Our success inimplementing our business plan is substantially dependent upon thecontributions of our management team, project development team and technologygroup. We do not have key man life insurance for any of our officers or keyemployees. Economic success of the Rentech Process depends upon severalfactors, including design of the synthesis gas reactors for the plants andstartup to achieve optimal plant operations, which are highly reliant on the knowledge,skills, and relationships unique to our key personnel. Moreover, tosuccessfully compete, we will be required to engage in continuous research anddevelopment regarding processes, products, markets and costs. Unexpected lossof the services of key employees could have a material adverse effect on ourbusiness, operating results and financial condition.

***Our success dependsin part on our ability to protect our intellectual property rights, whichinvolves complexities and uncertainties.***

We rely on a combination of patents, copyrights,trademarks, trade secrets and contractual restrictions to protect ourproprietary rights. Our business and prospects depend largely upon our abilityto maintain control of rights to exploit our intellectual property. Ourpublished and issued patents both foreign and domestic provide us certainexclusive rights (subject to licenses we have granted to others) to exploit ourFischer-Tropsch process. Our existing patents might be infringed upon,invalidated or circumvented by others. The availability of patents in foreignmarkets, and the nature of any protection against competition that may beafforded by those patents, is often difficult to predict and variessignificantly from country to country. We, or our licensees, may choose not toseek, or may be unable to obtain, patent protection in a country that couldpotentially be an important market for our Fischer-Tropsch technology. Theconfidentiality agreements that are designed to protect our trade secrets couldbe breached, and we might not have adequate remedies for the breach.Additionally, our trade secrets and proprietary know-how might otherwise becomeknown or be independently discovered by others.

We may not become aware ofpatents or rights of others that may have applicability in our Fischer-Tropschtechnology until after we have made a substantial investment in the developmentand commercialization of our technologies. Third parties may claim that we haveinfringed upon past, present or future Fischer-Tropsch technologies. Legalactions could be brought against us, our co-venturers or our licensees claimingdamages and seeking an injunction that would prevent us, our co-venturers orour licensees from testing, marketing or commercializing the affectedtechnologies. If an infringement action were successful, in addition topotential liability for damages by our joint venturers or our licensees, wecould be subject to an injunction or required to obtain a license from a thirdparty in order to continue to test, market or commercialize our affectedtechnologies. Any required license might not be made available or, ifavailable, might not be available on acceptable terms, and we could beprevented entirely from testing, marketing or commercializing the affectedtechnology. We may have to expend substantial resources in litigation, inenforcing our patents or defending against the infringement claims of others,or both. If we are unable to successfully maintain our technology, includingthe Rentech Process, against claims by others, our competitive position wouldbe harmed and our revenues could be substantially reduced, and our business,operating results and financial condition could be materially and adverselyaffected.

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***The Rentech Processmay not compete successfully against Fischer-Tropsch technology developed byour competitors, many of whom have significantly more resources.***

The development ofFischer-Tropsch technology for the production of liquid hydrocarbon productslike ours is highly competitive. The Rentech Process is based onFischer-Tropsch processes that have been known for almost 80 years and used insynthetic fuel projects for almost 50 years. Several major integrated oilcompanies, as well as several smaller companies, have developed or aredeveloping competing technologies that they may offer to license to ourpotential customers or use as the basis for a competing development project.Each of these companies, especially the major oil companies, have significantlymore financial and other resources than we do to spend on developing,promoting, marketing and using their Fischer-Tropsch technology. The UnitedStates Department of Energy has also sponsored a number of research programs inFischer-Tropsch technology. Advances by others in their Fischer-Tropsch technologymight lower the cost of processes that compete with the Rentech Process. As ourcompetitors continue to develop Fischer-Tropsch technologies, some part or allof our current technology could become obsolete. Our ability to create andmaintain technological advantages is critical to our future success. As newtechnologies develop, we may be placed at a competitive disadvantage, andcompetitive pressures may force us to implement new technologies at asubstantial cost. We may not be able to successfully develop or expend thefinancial resources necessary to acquire new technology.

***Our processes(including the Rentech Process) incorporate technologies and processesdeveloped by third parties the failure of which could harm our prospects forsuccess.***

We incorporate processesand technologies developed by third parties into the processes used in ourbusiness, including the Rentech Process. Although we believe the incorporatedprocesses and technologies are reliable, in some cases we have limited or no controlover ensuring that such processes and technologies will perform as expected. Ifone or more of them were to fail, the failure could cause our processes to fallshort of providing the results that we or our licensees desire, which wouldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

***If we have foreign operations, our business therewould be subject to various risks due to unstable conditions.***

We expect that the use ofour Rentech Process may occur in foreign countries. The additional risks offoreign operations include rapid changes in political and economic climates;changes in foreign and domestic taxation; lack of stable systems of law in somecountries; susceptibility to loss of protection of patent rights and otherintellectual property rights; expatriation laws adversely affecting removal offunds; fluctuations of currency exchange rates; nationalization of property;civil disturbances; and war and other disruptions affecting operations.International operations and investments may also be negatively affected bylaws and policies of the United States affecting foreign trade, investment andtaxation. If any one or more of these events occurs, our revenues from overseascustomers could be severely reduced or ended.

**Risks Related to Possible Inability to CompleteProject Developments and the Financing Required for Construction andSubsequent Operation**

***We are pursingalternative fuels projects, including one at Natchez, Mississippi, that willinvolve substantial expense and risk.***

We are pursingopportunities to develop alternative fuels projects, including a proposal togain site control and develop an FT plant in Natchez, Mississippi. We are alsoconsidering other alternative fuels projects, including two potential projectswith Peabody Energy Corporation. We do not have the financing for any of theseprojects, conversions, developments or operations. Moreover, the pursuit ofsuch opportunities requires that we incur material expenses, including forfinancial, legal and other advisors, whether or not our efforts are successful.Our pursuit of any of these alternative fuel projects involves 

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significantrisks, and our failure to successfully develop these projects, or failure tooperate them successfully after we have developed them, could have a materialadverse effect on our financial position and results of operations.

***The conversion ofthe East Dubuque Plant and the development of other alternative fuel projectswill require several years and very substantial further financing, and may notbe successful.***

The engineering, design,procurement of materials, and construction necessary to convert the EastDubuque Plant to use coal as a feedstock and to include the Rentech Process isestimated to take several years and to require****approximately $810 million of additional debt and equity financing. Wecannot make assurances that we will be able to obtain this financing at all, orin the time required, and our failure to do so would prevent us from implementingour business plan as expected. Further, acquisition and development of otheralternative fuels projects could involve comparable or greater time commitmentsof capital, time and other resources. Moreover, we have never undertaken anysuch projects, and the duration, cost, and eventual success of our efforts areall uncertain.

***If we do notreceive funds from additional financing or other sources of working capital forour business activities and future transactions, we will not be able to executeour business plan.***

We need additional financing to maintain ouroperations, and substantially increased financing, revenues and cash flow toaccomplish our goal of developing, converting or building process plants. Wewill continue to expend substantial funds to research and develop ourtechnologies, to market licenses of the Rentech Process, and to convert ordevelop process plants. We intend to finance the conversion and development ofplants primarily through non-recourse debt financing at the project level.Additionally, we might obtain additional funds through joint ventures or othercollaborative arrangements, and through debt and equity financing in thecapital markets.

Financing for our projectsmay not be available when needed or on terms acceptable or favorable to us. Inaddition, we expect that definitive agreements with equity and debtparticipants in our capital projects will include conditions to funding, manyof which could be outside our control. If we cannot obtain sufficient funds, wemay be required to reduce, delay or eliminate expenditures for our businessactivities (including efforts to acquire, convert or develop process plants)and we may not be able to execute our business plan.

***The level ofindebtedness we expect to incur could adversely affect our ability to raiseadditional capital to fund our operations, limit our ability to react tochanges in the economy or our industry and prevent us from meeting ourobligations.***

As of September 30, 2006, our total indebtednesswas $58,031,456 which included $189,710 of indebtedness related to ourdiscontinued operations of PML. The conversion of the East Dubuque Plant willrequire substantial further borrowing in order to raise the approximately $810million of additional capital that we estimate will be necessary to finance theproject. If we undertake additional projects, significant additionalindebtedness may be required.

Our substantialdebt could have important consequences, including:

·       increasingour vulnerability to general economic and industry conditions;

·       requiringa substantial portion of our cash flow from operations to be dedicated to thepayment of principal and interest on our indebtedness, therefore reducing ourability to use our cash flow to fund our operations, capital expenditures andfuture business opportunities;

·       limitingour ability to obtain additional financing for working capital, capitalexpenditures, debt service requirements, acquisitions and general corporate orother purposes; and

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·       limitingour ability to adjust to changing market conditions and placing us at acompetitive disadvantage compared to our competitors who have greater capitalresources.

If our cash flows andcapital resources are insufficient to fund our debt service obligations, we maybe forced to reduce or delay capital expenditures, sell assets, seek additionalcapital or restructure or refinance our indebtedness. These alternativemeasures may not be successful and may not permit us to meet our scheduled debtservice obligations. Failure to pay our indebtedness on time would constitutean event of default under the agreements governing our indebtedness, whichwould give rise to our lenders’ ability to accelerate the obligations and seekother remedies against us.

***The Revolving Credit Facility includes restrictivecovenants that will limit our ability to operate our business.***

Concurrently with the acquisition of RCN, REMC(formerly known as RCN) entered into the Revolving Credit Facility. TheRevolving Credit Facility is secured by a lien on substantially all of REMC’scurrent assets, and imposes various restrictions and covenants on us, whichcould limit our ability to respond to changing business conditions that mayaffect our financial condition. In addition, our failure to comply with therestrictions and covenants would result in an event of default giving rise tothe revolving facility lender’s right to accelerate our obligations under therevolving facility.

The Revolving CreditFacility also imposes various restrictions and covenants on REMC, including,without limitation, limitations on REMC’s ability to incur additional debt,guarantees or liens, ability to make distributions of dividends or payments ofmanagement or similar fees to affiliates, a minimum fixed charge coverage ratioand a minimum tangible net worth covenant.

***The issuance of shares of our common stock couldresult in the loss of our ability to use our net operating losses.***

As of September 30, 2006, we had approximately $78,000,000of tax net operating loss carryforwards. Realization of any benefit from ourtax net operating losses is dependent on: (1) our ability to generatefuture taxable income and (2) the absence of certain future “ownershipchanges” of our common stock. An “ownership change,” as defined in the applicablefederal income tax rules, would place significant limitations, on an annualbasis, on the use of such net operating losses to offset any future taxableincome we may generate. Such limitations, in conjunction with the net operatingloss expiration provisions, could effectively eliminate our ability to use asubstantial portion of our net operating losses to offset any future taxableincome.

It is possible that wehave incurred one or more “ownership changes” in the past, in which case ourability to use our net operating losses would be limited. In addition, theissuance of shares of our common stock could cause an ‘‘ownership change’’which would also limit our ability to use our net operating losses. Otherissuances of shares of our common stock which could cause an ‘‘ownership change’’include the issuance of shares of common stock upon future conversion orexercise of outstanding options and warrants. In this regard, we contemplatethat we would need to issue a substantial amount of additional shares of ourcommon stock (or securities convertible into or exercisable or exchangeable forcommon stock) in connection with our proposed plans to finance thecommercialization of the Rentech Process and the implementation of our businessplan.

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**Risks Related toOur Operations of Plants**

***Miscalculations inour assessment of operating the East Dubuque Plant may lead to us not havingadequately evaluated the operating results and risks associated with the plantand could have a material adverse effect on our business, results of operationsand financial condition.***

Prior to ouracquisition of RCN, we had never owned, converted, or operated a fertilizerplant. The success of our operation of the plant requires us to successfullymanage risks relating to:

·       unanticipatedcosts for the natural gas initially used and the subsequent coal feedstock ateconomical prices;

·       problemsintegrating the purchased operations, personnel or technologies;

·       delayedor defective engineering plans for the conversion of the facility to use coalas a feedstock and the Rentech Process;

·       costoverruns or delays in construction;

·       diversionof resources and management attention from our other efforts;

·       entryinto markets in which we have limited or no experience;

·       potentialenvironmental liabilities, including hazardous waste contamination;

·       potentialgovernmental limitations on application of nitrogen fertilizers;

·       potentiallabor disputes resulting from REMC’s labor contracts;

·       potentialwork stoppages and other labor relations matters; and

·       potentialloss of key employees.

The results of our assessments of operating the plantare necessarily inexact and their accuracy is inherently uncertain. Theseassessments may not have revealed all existing or potential problems, nor havethey necessarily permitted us to become sufficiently familiar with the plant tofully assess its merits and deficiencies. The acquisition of the plant posesnumerous additional risks to our operations and financial results, includingincurring substantial liabilities and lower revenues than we expected. Theserisks include:

·       unanticipatedcosts for the natural gas initially used and the subsequent coal feedstock;

·       problemsintegrating the purchased operations, personnel or technologies;

·       delayedor defective engineering plans for the conversion of the facility to use coalas a feedstock and the Rentech Process;

·       costoverruns or delays in construction;

·       diversionof resources and management attention from our other efforts;

·       entryinto markets in which we have limited or no experience;

·       potentialgovernmental limitations on application of nitrogen fertilizers; and

·       potential loss of keyemployees, particularly those of the acquired organization.

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***Construction ofFischer-Tropsch plants incorporating the Rentech Process, including conversionof the East Dubuque Plant to use coal and our Rentech Process, will be subjectto risks of delay and cost overruns.***

The construction ofFischer-Tropsch plants incorporating the Rentech Process, and our conversion ofan existing plant to use coal and our Rentech Process, will be subject to risksof delay or cost overruns resulting from numerous factors, including thefollowing:

·       inabilityto obtain sufficient financing;

·       inabilityto obtain timely issuance of additional permits, licenses and approvals bygovernmental agencies and third parties;

·       inadequateengineering plans or delays, including those relating to the commissioning ofnewly designed equipment;

·       inabilityto obtain the coal gasification and product upgrading systems for the plant ona timely basis from third parties;

·       unanticipatedchanges in the coal supply and market demand for our products;

·       shortagesof equipment, materials or skilled labor;

·       labordisputes;

·       environmentalconditions and requirements;

·       unforeseenevents, such as explosions, fires and product spills;

·       increasedcosts or delays in manufacturing and delivering critical equipment;

·       resistancein the local community; and

·       unfavorablelocal and general economic conditions.

If the conversion ofan existing plant to the use of coal and our Rentech Process is delayed beyondthe time we estimate, the actual cost of completion may increase beyond theamounts estimated in our capital budget. A delay would also cause a delay inthe receipt of revenues projected from operation of the converted plant, whichmay cause our business, results of operation and financial condition to besubstantially harmed.

***The market fornatural gas has been volatile. If prices for natural gas increasesignificantly, we may not be able to economically operate the East DubuquePlant during the conversion phase while we continue to use natural gas as thefeedstock. Further, once the East Dubuque Plant is converted to using coal,volatility in the price of coal could adversely affect us.***

We plan to continue tooperate the East Dubuque Plant with natural gas as the feedstock until wecomplete the conversion of the plant to use coal to produce the requiredsynthesis gas. That will expose us to market risk due to increases in naturalgas prices. There has been a generally increasing trend in natural gas pricesduring the last three years with prices reaching record highs in 2005 and thenreducing in 2006 due to various supply and demand factors, including theincreasing overall demand for natural gas from industrial users, which isaffected, in part, by the general conditions of the United States economy, andother factors. The profitability of operating the facility is significantlydependant on the cost of natural gas as feedstock and the facility has operatedin the past, and may operate in the future, at a net loss. Since we expect topurchase natural gas for use in the plant on the spot market we remainsusceptible to fluctuations in the price of natural gas. We expect to also useshort-term, fixed supply, fixed price forward purchase contracts to lock inpricing for a portion of our natural gas requirements. These may not protect usfrom increases in the cost of our feedstock. A hypothetical increase of $0.10per MMBTU of natural gas could 

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increasethe cost to produce one ton of ammonia by approximately $3.50. After theconversion is completed, an increase in the price of coal or in othercommodities that we may use as feedstock at other plants we might acquire inthe future could also adversely affect our operating results. The prices ofcoal or other commodities that we might use as feedstock are subject tofluctuations due to a variety of factors that are beyond our control. Higherthan anticipated costs for the catalyst and other materials used in theseplants could also adversely affect operating results. These increased costscould materially and adversely affect our business, results of operations,financial condition and prospects.

***Lower prices fornitrogen fertilizers or downturns in market demands could reduce the revenuesand profitability of the East Dubuque Plant’s nitrogen fertilizer business.***

Nitrogen fertilizer is a globalcommodity that experiences often unpredictable fluctuations in demand and anincreasing supply on the world-wide market. In the recent past, nitrogenfertilizer prices have been volatile, often experiencing price changes from onegrowing season to the next. A downturn in nitrogen prices could have adepressing effect on the prices of most of the fertilizer products that wesell, and might materially and adversely affect our ability to economicallyoperate the East Dubuque Plant.

***Weather conditions may materially impact the demandfor REMC products.***

Weather conditions canhave a significant impact on the farming economy and, consequently, on demandfor the fertilizer products produced by the East Dubuque Plant. For example,adverse weather such as flood, drought or frost can cause a delay in, or eventhe cancellation of, planting, reducing the demand for fertilizer. Adverseweather conditions can also impact the financial position of the farmers whowill buy our nitrogen fertilizer products. This, in turn, may adversely affectthe ability of those farmers to meet their obligations in a timely manner, orat all. Accordingly, the weather can have a material effect on our business,financial condition, results of operations and liquidity.

***The business of the East Dubuque Plant is highlyseasonal.***

Sales of nitrogenfertilizer products from the East Dubuque Plant are seasonal, based upon theplanting, growing and harvesting cycles. Most of the East Dubuque Plant’sannual sales have occurred between March and July of each year due tothe condensed nature of the planting season. Since interim period operatingresults reflect the seasonal nature of our business, they are not indicative ofresults expected for the full fiscal year. In addition, quarterly results canvary significantly from one year to the next due primarily to weather-relatedshifts in planting schedules and purchase patterns. We expect to incursubstantial expenditures for fixed costs for the East Dubuque Plant throughoutthe year and substantial expenditures for inventory in advance of the springplanting season. Seasonality also relates to the limited windows of opportunitythat nitrogen fertilizer customers have to complete required tasks at eachstage of crop cultivation. Should events such as adverse weather ortransportation interruptions occur during these seasonal windows, we would facethe possibility of reduced revenue without the opportunity to recover until thefollowing season. In addition, because of the seasonality of agriculture, we expectto face the risk of significant inventory carrying costs should our customers’activities be curtailed during their normal seasons. The seasonality cannegatively impact accounts receivable collections and bad debt.

***The operations ofthe East Dubuque Plant are subject to risks and hazards that may result inmonetary losses and liabilities.***

The East Dubuque Plant’sbusiness is generally subject to a number of risks and hazards, changes in theregulatory environment, explosions and fires. We are not currently insured forcertain of these risks and insurance may not be available to us at reasonablerates in the future. Any significant interruption in our operations couldadversely affect us.

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***A reduction ingovernment incentives for FT fuels, or the relaxation of clean airrequirements, could materially reduce the demand for FT fuels or the RentechProcess.***

Federal law providesincentives for FT fuels, and technologies that produce the FT fuels, such asthe Rentech Process. For instance, the Energy Policy Act of 2005, or EPACT2005, provides for tax credits, grants, loan guarantees and other incentives tostimulate coal gasification to Fischer-Tropsch fuels and chemicals. The HighwayReauthorization and Excise Tax Simplification Act of 2005, or the Highway Act,also provides a $0.50 per gallon fuel excise tax credit for FT fuels from coal.We anticipate that our proposed projects may qualify for us to receive theincentives under EPACT 2005 and that FT fuels produced with the Rentech Processwould qualify for the Highway Act’s tax credit. In addition, certain federalregulations that restrict air pollution provide an incentive for the use of FTfuels because they comply with the regulations in cases where conventionalfuels might not. Changes in federal law or policy could result in a reductionor elimination in the incentives that apply to us or our ability to takeadvantage of them, or a relaxation of the requirements with respect toairpollutants created by conventional fuels. As a result, the reduction orelimination of government incentives or the relaxation of air pollutionrequirements could have a material adverse effect on our financial condition,results of operations and prospects.

***Changes in existinglaws and regulations, or their interpretation, or the imposition of newrestrictions relating to emissions of carbon dioxide may give rise toadditional compliance costs or liabilities and could materially reduce thedemand for FT fuels or the Rentech Process which could, in turn, have amaterial adverse effect on our business, financial condition or results ofoperations.***

The application of theRentech Process in CTL projects relies on coal gasification technology tocreate the syngas that is used to produce FT fuels and other hydrocarbonproducts. Coal gasification breaks down coal into its components by subjectingit to high temperature and pressure, using steam and measured amounts ofoxygen, which leads to the production gaseous compounds, including carbondioxide. Although the United States does not currently maintain comprehensiveregulation of carbon dioxide emissions, various legislative and regulatorymeasures to address green house gas emissions (such as carbon dioxide) arecurrently in various phases of discussion or implementation. These include theKyoto Protocol as well as proposed federal legislation and state actions todevelop statewide or regional programs, each of which have imposed or wouldimpose reductions in green house gas emissions. Although the United States hasnot ratified the emissions standards called for under the Kyoto Protocol, oradopted other comprehensive regulations for green has gas emissions, the KyotoProtocol’s specific emission targets for the United States would require thereduction of green house gas emissions to 93% of 1990 levels over a five-yearbudget period from 2008 through 2012. Future restrictions on green house gasemissions could result in increased costs or liabilities associated with complyingwith such restrictions, or materially reduce the demand for FT fuels and theRentech Process which, in turn, could have a material adverse effect on ourbusiness, financial condition or results of operations.

***Changes in UnitedStates government regulations and agricultural policy that affect the demandfor products made at the East Dubuque Plant could materially and adverselyaffect its operations.***

Because the application offertilizer has been identified as a significant source of ground waterpollution and can also result in the emissions of nitrogen compounds andparticulate matter into the air, regulations may lead to decreases in thequantity of fertilizer applied to crops. Further, United States governmentalpolicies may directly or indirectly influence factors affecting the EastDubuque Plant’s business, such as the number of acres planted, the mix of cropsplanted, crop prices, the level of grain inventories and the amounts of andlocations where fertilizer may be applied. Changes in government programs thatprovide financial support to farmers could affect demand for the facility’sproducts. The market for our products could also be affected by challengesbrought under the United States Federal 

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EndangeredSpecies Act and changes in regulatory policies affecting biotechnologicallydeveloped seed. We cannot predict the future government policy and regulatoryframework affecting our business.

***We could be subjectto claims and liabilities under environmental, health and safety laws andregulations arising from the production and distribution of nitrogenfertilizers and alternative fuel products at our facilities.***

The production anddistribution of nitrogen fertilizers at the East Dubuque Plant, and alternativefuel products at that and any other alternative fuel facilities we may operatein the future, are subject to compliance with United States federal, state andlocal environmental, health and safety laws and regulations. These regulationsgovern operations and use, storage, handling, discharge and disposal of avariety of substances. For instance, under CERCLA, we could be held jointly andseverally responsible for the removal and remediation of any hazardoussubstance contamination at our facilities, at neighboring properties (wheremigration from our facilities occurred) and at third party waste disposalsites. We could also be held liable for any consequences arising out of humanexposure to these substances or other environmental damage. We may incursubstantial costs to comply with these environmental, health and safety lawrequirements. We may also incur substantial costs for liabilities arising frompast releases of, or exposure to, hazardous substances. In addition, we maydiscover currently unknown environmental problems or conditions. The discoveryof currently unknown environmental problems or conditions, changes inenvironmental, health and safety laws and regulations or other unanticipatedevents could give rise to claims that may involve material expenditures orliabilities for us.

***Acts of terrorismand continued conflict and instability in the Middle East could affect both thesupply and price of various fertilizer materials that we sell.***

Nitrogen-basedagricultural materials such as ammonia, ammonium nitrate and urea have thepotential for misuse by domestic or international terrorists, and thefacilities where these materials are produced or stored and the transportationnetwork through which they are distributed could be targeted. In addition,various crop protection products are hazardous and could be used in terroristacts such as water supply contamination. The East Dubuque plant could betargeted or materials distributed by it misused. Should such events occur, ourbusiness could be adversely affected and the limits of our insurance policiescould be exceeded such that our ability to meet our financial obligations wouldbe impaired. Further, instability in oil producing regions of the world couldhave the effect of driving up energy prices which could, in turn, affectnatural gas prices and the economics of nitrogen-based fertilizers. Mechanizedfarming as currently practiced by our customers is energy intensive and sharpincreases in fuel prices could limit their funds available for other inputs andthus adversely affect the demand for the products that we sell.

***The nitrogenfertilizer industry is very competitive and the actions of our competitorscould materially affect the results of operations and financial position of theCompany.***

REMC operates in a highlycompetitive industry, particularly with respect to price. Its’ principalcompetitors in the distribution of crop production inputs include agriculturalco-operatives (which have the largest market share in many of the locationsthat it serves), national fertilizer producers, major grain companies andindependent distributors and brokers. Some of these competitors have greaterfinancial, marketing and research and development resources than we do, orbetter name recognition, and can better withstand adverse economic or marketconditions. In addition, as a result of increased pricing pressures caused bycompetition, REMC may in the future experience reductions in the profit marginson sales, or may be unable to pass future material price increases on tocustomers.

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***We need to rely onRoyster-Clark as exclusive distributor of the nitrogen fertilizer products wewould produce at the East Dubuque Plant.***

We have a limited salesforce for the distribution of the nitrogen fertilizer products that areproduced at the East Dubuque Plant. As a result, we need to rely onRoyster-Clark as exclusive distributor of such products, pursuant to theDistribution Agreement executed on April 26, 2006. However, to the extentRoyster-Clark and we are not able to reach an agreement with respect to thepurchase and sale of products, we cannot assure that we would be able to findother buyers for them. Our inability to sell the nitrogen fertilizer productsproduced at the East Dubuque Plant could result in significant losses andmaterially and adversely affect our business.

***We may not be able to successfully manage our growingbusiness.***

If we are successful inour plans to commercialize the Rentech Process by acquiring and developingalternative fuel facilities, we would experience a period of rapid growth thatcould place significant additional demands on, and require us to expand, ourmanagement resources and information systems. The management of our growth willrequire, among other things, continued development of our internal controls andinformation systems and the ability to attract and retain qualified personnel.Our failure to manage any such rapid growth effectively could have a materialadverse effect on us and our operating results.

**Risks Related tothe Market for Rentech Common Stock**

***We have a verysubstantial overhang of common stock and future sales of our common stock willcause substantial dilution and may negatively affect the market price of ourshares.***

As of September 30, 2006, there were 141,792,787shares of our common stock outstanding. As of that date, we also had anaggregate of 31,801,700 shares of common stock that may be issued upon exerciseor conversion of outstanding convertible notes, restricted stock units, optionsand warrants. In April 2006, we issued an aggregate of 18,400,000 sharesof our common stock and $57,500,000 in convertible senior notes, which areinitially convertible into up to 14,332,003 shares of our common stock upon thesatisfaction of certain conditions. In addition, we have two shelf registrationstatements; the first covering $29,940,000 aggregate offering price ofsecurities (up to all of which could be issued as shares of common stock) andthe second covering $44,097,200 in shares of our common stock for issuance infuture financing transactions, in each case as of September 30, 2006. Atour annual meeting of shareholders on April 13, 2006, our shareholdersauthorized the Company to issue up to 40,000,000 shares of our common stock (orsecurities convertible into or exercisable or exchangeable common stock) for upto an aggregate of $200,000,000 in gross proceeds, at a discount of up to 30%from the market price at the time of issuance and sale. We expect the sale ofcommon stock and common stock equivalents in material amounts will be necessaryto finance the progress of our business plan and facilitate our licensingbusiness. Certain holders of our securities have, and certain future holdersare expected to be granted, rights to participate in or to require us to fileregistration statements with the SEC for resale of common stock.

We cannot predict theeffect, if any, that future sales of shares of our common stock into themarket, or the availability of shares of common stock for future sale, willhave on the market price of our common stock. Sales of substantial amounts ofcommon stock (including shares issued upon the exercise of stock options andwarrants or conversion of convertible promissory notes), or the perception thatsuch sales could occur, may materially and adversely affect prevailing marketprices for our common stock.

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***Protectionprovisions in our Amended and Restated Articles of Incorporation and ourshareholder rights plan may deter a third party from seeking to acquire controlof us, which may reduce the market price of our stock.***

Our Amended and RestatedArticles of Incorporation include provisions that may make it more difficultfor a third party to acquire control of the Company. These provisions includegrouping of the board of directors into three classes with staggered terms; arequirement that directors may be removed without cause only with the approvalof the holders of 662¤3%of the outstanding voting power of our capital stock; and a requirement thatthe holders of not less than 662¤3%of the voting power of our outstanding capital stock approve certain businesscombinations of the Company with any holder of more than 10% of the votingpower or an affiliate of any such holder unless the transaction is eitherapproved by at least a majority of the uninterested and unaffiliated members ofthe board of directors or unless certain minimum price and proceduralrequirements are met. We also have a shareholder rights plan that authorizesissuance to existing shareholders of substantial numbers of preferred sharerights or shares of common stock in the event a third party seeks to acquirecontrol of a substantial block of our common stock. These provisions coulddeter a third party from tendering for the purchase of some or all of our stockand could have the effect of entrenching management and reducing the marketprice of our common stock.

***The market price of Rentech common stock may decline.***

The market price ofRentech stock may decline for a number of reasons, including if:

·       theconversion of the East Dubuque Plant or other process plants is not completedin a timely and efficient manner;

·       theacquisition and conversion of REMC or construction of other process plants doesnot yield the expected benefits to our revenues as rapidly or to the extentthat may be anticipated by financial or industry analysts, stockholders orother investors;

·       theeffect of the acquisition of REMC or the construction of other process plantson Rentech’s financial statements is not consistent with the expectations ofthe financial or industry analysts, stockholders or other investors;

·       significantshareholders of Rentech decide to dispose of their shares of common stockbecause of any of the above or other reasons; or

·       any of the other risksreferred to in this section materialize.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

Not Applicable.

**ITEM 2.**                PROPERTIES

**Office Lease**

Our executive offices are located in Los Angeles,California, and consist of 7,181 square feet of office space. The lease expiresin June 2010. Total rent was approximately $102,000 during fiscal 2006. Webelieve that our existing space is adequate to meet our current needs and toaccommodate anticipated growth.

Our other principal leasedoffices are located in Denver, Colorado, and consist of 7,885 square feet ofoffice space. The lease expires in October 2009 and includes an option toextend for another five-year term. Total rent was approximately $126,000 duringfiscal 2006.

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**Development AndTesting Laboratory**

We own a development andtesting laboratory located in Denver that we use for our Fischer-Tropsch technologies.The facility consists of an 11,000 square foot laboratory located within our20,000 square foot industrial building. The remainder of the building is rentedto a tenant and constitutes potential expansion space for the laboratory. Werenovated the building, laboratory and lab equipment in fiscal 1999 to providea state-of-the-art laboratory and support facilities for FT technologies. Webelieve that our laboratory is one of the most comprehensive Fischer-Tropschfacilities in the field today.

**Sand Creek Site**

We own the Sand Creek sitelocated in the Denver metropolitan area. The site consists of 17 acres locatedin an industrial area adjacent to a rail line and an interstate highway.Approximately 11 acres of the site are available for other uses. We plan tobuild and operate on the site what we believe will be the firstfully-integrated Fischer-Tropsch coal-to-liquids product development unitresearch facility in the United States.

**Petroleum MudLogging Properties**

As of September 30,2006, our former subsidiary Petroleum Mud Logging, LLC (PML) owned a buildingin Oklahoma City, Oklahoma that contained the PML shop facility and leased anadditional building for its office and training space for approximately $30,000per year. PML and all of its properties were sold to PML Exploration ServicesLLC on November 15, 2006.

**Rentech EnergyMidwest Corporation Properties**

Our subsidiary RentechEnergy Midwest Corporation operates an 830 ton per day ammonia fertilizer plantand related improvements on a 320 acre site in East Dubuque, Illinois adjacentto the Mississippi River. The facility was acquired from Royster-Clark Inc. on April 26,2006 when we purchased all of the issued and outstanding common shares ofRoyster-Clark Nitrogen, Inc. We changed that entity’s legal name toRentech Energy Midwest Corporation. This plant’s principal product is liquidammonia fertilizer but we also manufacture related products including nitricacid, ammonium nitrate and liquid carbon dioxide. All of REMC’s East Dubuquefactory properties and equipment are owned; these include land, roads,buildings, several special purpose structures, equipment, storage tanks, andspecialized truck, rail and river barge loading facilities. Natural gas iscurrently the main raw material used in REMC’s manufacturing process. Theplanned conversion of this plant to replace natural gas with coal as itsfeedstock is currently in the engineering stage and investment in new processesand related equipment that significantly enlarge the production facility isanticipated to begin within the next 12 months. See Item 1—Business—Acquisitionof Royster-Clark Nitrogen, Inc.

**ITEM 3.**                LEGALPROCEEDINGS

In the normal course ofbusiness, we are party to litigation from time to time. We maintain insuranceto cover certain actions and believe that resolution of such litigation willnot have a material adverse effect on us.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES

Ourcommon stock is traded on The American Stock Exchange under the symbol RTK. Thefollowing table sets forth the range of high and low closing prices for thecommon stock as reported by AMEX. The quotations reflect inter-dealer prices,without adjustment for retail mark-ups, mark-downs or commissions and may notnecessarily represent actual transactions.

| **Fiscal Year Ended September 30, 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter,  ended Dec. 31, 2005                               |       | $4.16      |       | $2.33    |       |
| Second Quarter,  ended Mar. 31, 2006                              |       | $5.32      |       | $3.72    |       |
| Third Quarter,  ended Jun. 30, 2006                               |       | $5.07      |       | $3.35    |       |
| Fourth Quarter, ended  Sep. 30, 2006                              |       | $5.24      |       | $4.12    |       |

 

| **Fiscal Year Ended September 30, 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter,  ended Dec. 31, 2004                               |       | $2.59      |       | $0.88    |       |
| Second Quarter,  ended Mar. 31, 2005                              |       | $2.51      |       | $1.19    |       |
| Third Quarter,  ended Jun. 30, 2005                               |       | $1.62      |       | $1.25    |       |
| Fourth Quarter, ended  Sep. 30, 2005                              |       | $3.00      |       | $1.21    |       |

 

The approximate number of shareholders of record ofour common stock as of October 31, 2006 was 535. Based upon the securitiesposition listings maintained for our common stock by registered clearingagencies, we estimate the number of beneficial owners is not less than 8,500.

We have never paid cashdividends on our common stock. We currently expect that we will retain futureearnings for use in the operation and expansion of our business and do notanticipate paying any cash dividends on our common stock in the foreseeablefuture.

**Company Purchasesof Equity Securities**

Thefollowing table provides information about purchases by the Company during thequarter ended September 30, 2006 of equity securities registered by theCompany pursuant to Section 12 of the Exchange Act.

| **Period**                                   | ** ** | ** ** | ** ** | **Total number  of shares (or units)  purchased(1)** | ** ** | **Average price paid per  share (or unit)** | ** ** | **Total number of shares  (or units) purchased as  part of publicly  announced plans or  programs** | ** ** | **Maximum number (or  approximate dollar  value) of shares (or  units) that may yet be  purchased under the  plans or programs** | ** ** |
|----------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1, 2006 -  July 31, 2006                |       |       | 0          |                                                                     |       |                                                                 | 0          |                                                                                                                                                  |       |                                                                                                                                                                                                   | 0          |   |   |   | 0 |   |   |
| August 1, 2006 -  August 31, 2006       |       |       | 0          |                                                                     |       |                                                                 | 0          |                                                                                                                                                  |       |                                                                                                                                                                                                   | 0          |   |   |   | 0 |   |   |
| September 1, 2006  - September 30, 2006 |       |       | 30,000     |                                                                     |       |                                                                 | $          | 1.34                                                                                                                                                  |       |                                                                                                                                                                                                   |       | 0 |   |   |   | 0 |   |   |
| Total                                        |       |       | 30,000     |                                                                     |       |                                                                 | $          | 1.34                                                                                                                                                  |       |                                                                                                                                                                                                   |       | 0 |   |   |   | 0 |   |   |

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(1)          Includes30,000 shares of common stock purchased by the Company in connection with therescission of an option exercise.

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**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing consolidated selected financial data has been derived from thehistorical consolidated financial statements and should be read in conjunctionwith Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” Item 8, “Financial Statements andSupplementary Data,” and our consolidated financial statements and the notesappearing in them, and the risk factors included elsewhere in this report.

**Rentech, Inc. and Subsidiaries**

| ** **                                                | ** ** | **Years Ended September 30** | ** **   |
|-----------------------------------------------------------|------------|---------------------------------------------|--------------|
| ** **                                                | ** ** | **2006**                                    | ** **   | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| CONSOLIDATED  STATEMENT OF OPERATIONS DATA                |       |                                        |         |   |   |   |   |   |   |   |   |
| Revenues                                                  |       | $                                           | 44,516,532   |   | $ | 588,687 |   | $ | 984,492 |   | $ | 915,563 |   | $ | 2,709,787 |   |
| Cost of Sales                                             |       | $                                           | 44,076,514   |   | $ | 616,895 |   | $ | 679,408 |   | $ | 315,645 |   | $ | 719,889 |   |
| Gross Profit                                              |       | $                                           | 440,018      |   | $ | (28,208 | ) | $ | 305,084 |   | $ | 599,918 |   | $ | 1,989,898 |   |
| Loss from  Continuing Operations                          |       | $                                           | (39,911,843  | ) | $ | (15,614,920 | ) | $ | (7,087,316 | ) | $ | (9,026,220 | ) | $ | (4,716,029 | ) |
| Net Loss(2)                                               |       | $                                           | (38,647,682  | ) | $ | (14,358,897 | ) | $ | (7,210,693 | ) | $ | (9,535,405 | ) | $ | (5,332,613 | ) |
| Loss Applicable to  Common Stockholders(3)                |       | $                                           | (38,722,119  | ) | $ | (23,700,372 | ) | $ | (7,210,693 | ) | $ | (9,535,405 | ) | $ | (5,469,545 | ) |
| BASIC AND DILUTED  LOSS PER SHARE(1)                      |       |                                        |         |   |   |   |   |   |   |   |   |
| Loss from  Continuing Operations Per Common Share(2) |       | $                                           | (.314        | ) | $ | (.168 | ) | $ | (.082 | ) | $ | (.122 | ) | $ | (.067 | ) |
| Loss Per Common  Share(3)                                 |       | $                                           | (.304        | ) | $ | (.255 | ) | $ | (.084 | ) | $ | (.129 | ) | $ | (.078 | ) |
| CONSOLIDATED  BALANCE SHEET DATA                          |       |                                        |         |   |   |   |   |   |   |   |   |
| Working Capital                                           |       | $                                           | 65,520,862   |   | $ | 32,031,397 |   | $ | (1,266,653 | ) | $ | (1,571,738 | ) | $ | 775,686 |   |
| Total Assets                                              |       | $                                           | 150,686,177  |   | $ | 43,491,949 |   | $ | 9,379,288 |   | $ | 11,187,114 |   | $ | 16,163,228 |   |
| Total Long-Term  Liabilities                              |       | $                                           | 58,135,446   |   | $ | 2,849,943 |   | $ | 3,018,795 |   | $ | 3,223,994 |   | $ | 3,269,044 |   |
| Total Liabilities                                         |       | $                                           | 74,101,155   |   | $ | 9,220,767 |   | $ | 6,341,424 |   | $ | 8,005,734 |   | $ | 7,422,576 |   |
| Accumulated Deficit(4)                                    |       | $                                           | (101,658,612 | ) | $ | (62,008,636 | ) | $ | (47,649,739 | ) | $ | (40,439,046 | ) | $ | (30,903,641 | ) |

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(1)           The weighted average number of basic and dilutiveshares of common stock outstanding during the years ended September 30,2006, 2005, 2004, 2003 and 2002 were 127,174,204, 92,918,545, 85,932,544,73,907,041 and 69,987,685, respectively.

(2)           Excludes dividends of $74,437, $9,341,475, $0, $0 and$136,932 for years ended September 30, 2006, 2005, 2004, 2003 and 2002,respectively.

(3)           Includes dividends of $74,437, $9,341,475, $0, $0 and$136,932 for years ended September 30, 2006, 2005, 2004, 2003 and 2002,respectively.

(4)           Includes other comprehensive loss of $2,294 for yearended September 30, 2006.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to theinformation provided here in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, we believe that in order to more fullyunderstand our discussion in this section, you should read our consolidatedfinancial statements and the notes thereto and the other disclosures herein,including the discussion of our business and the risk factors.

**OVERVIEW OF OURBUSINESS**

Rentech offers energy independence technologiesutilizing domestic resources to economically produce ultra-clean syntheticfuels. We were incorporated in 1981 to develop technologies that transformunder-utilized energy resources into valuable and clean alternativefuels, chemicals and power. We have developed an advanced derivative of thewell-established Fischer-Tropsch, or FT, process for manufacturing dieselfuel and other fuel products. Our proprietary application of the FT process,which we refer to as the Rentech Process, efficiently converts synthetic gas,referred to as syngas, derived from coal, petroleum coke or natural gas intoliquid hydrocarbon products, including ultra high-quality diesel fuel and otherfuel products.

Our business has historically focused on research anddevelopment of our FT technology and licensing it to third parties. During2004, we decided to directly deploy our technology in select domestic projectsin order to demonstrate commercial operation of the Rentech Process. We havebegun to implement this strategy through the acquisition of Royster-ClarkNitrogen, Inc. on April 26, 2006 for the purchase price of $50million, plus an amount equal to net working capital of RCN, which wasapproximately $20 million. REMC owns and operates a natural gas-fed nitrogenfertilizer production facility in East Dubuque, Illinois. We plan to convertthe existing nitrogen fertilizer complex from natural gas to an integratedfertilizer and FT fuels production facility using coal gasification. We arealso pursuing the development of other alternative fuels projects, includingone in Natchez, Mississippi that we and potentially a partner or partners wouldconstruct to produce FT liquid hydrocarbon and other products using the RentechProcess. In addition, we are discussing proposals with owners of energyfeedstocks for the joint development of alternative fuels projects and the useof the Rentech Process under licensing arrangements. We have entered into aJoint Development Agreement with Peabody Energy Corporation (“Peabody”), forthe co-development of two coal-to-liquids projects, which would be located onPeabody coal reserves. The projects would convert coal into ultra-cleantransportation fuels using the Company’s proprietary FT CTL process. We currentlyhave one active license arrangement with DKRW-AF for the use of ourcoal-to-liquids technology in its proposed Medicine Bow Project in Wyoming.

During fiscal 2005, inorder to intensify our focus on FT technology, we disposed of OKON, Inc.and our 56% interest in REN Testing Corporation. In addition, onNovember 15, 2006, we sold our subsidiary Petroleum Mud Logging, LLC. Forfurther information concerning our company, see Item 1—Business, andItem 1a—Risk Factors.

**OVERVIEW OF OURFINANCIAL CONDITION, LIQUIDITY, AND RESULTS OF OPERATIONS**

At September 30, 2006, we had working capital of$65,520,862. Historically, for working capital we have relied upon sales of ourequity securities and borrowings. We have a history of operating losses, havenever operated at a profit, and for the year ended September 30, 2006, hada net loss of $38,647,682.

In order to achieve our objectives as planned forfiscal 2007, we will need substantial amounts of capital that we do not nowhave for the conversion of REMC’s plant to use coal gasification and theRentech Process, construction of our PDU at Sand Creek, other possibleacquisition and development projects, including the Natchez Project, and otherexpenses of our activities, including research and development. We believe thatour currently available cash, cash flows from operations, funds from the 

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potential sale of assetsand other plans, which could include additional debt or equity financing, willbe sufficient to meet our cash operating needs through the fiscal year endingSeptember 30, 2007.

For further informationconcerning our potential financing needs and related risks, see Item 1—Business,and Item 1a—Risk Factors.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reporting periods. The most significantestimates and assumptions relate to: inventories, the valuation of long-livedassets, intangible assets and goodwill, investment in advanced technologycompanies, accounting for fixed price contracts, stock based compensation andthe realization of deferred income taxes. Actual amounts could differsignificantly from these estimates.

*Inventories.**  *The Company’s inventory is stated at the lower ofcost or estimated net realizable value. The cost of inventories is determinedusing the first-in first-out method. The Company performs a quarterly analysisof its inventory balances to determine if the carrying amount of inventories exceedstheir net realizable value. The analysis of estimated net realizable value isbased on customer orders, market trends and historical pricing. If the carryingamount exceeds the estimated net realizable value, the carrying amount isreduced to the estimated net realizable value. The Company allocates fixedproduction overhead costs based on the normal capacity of its productionfacilities.

*Valuationof Long-Lived Assets, Intangible Assets and Goodwill.*   Wemust assess the realizable value of long-lived assets, intangible assets andgoodwill for potential impairment at least annually or whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. In assessing the recoverability of our goodwill and otherintangibles, we must make assumptions regarding estimated future cash flows andother factors to determine the fair value of the respective assets. Inaddition, we must make assumptions regarding the useful lives of these assets.If these estimates or their related assumptions change in the future, we may berequired to record impairment charges for these assets. EffectiveOctober 1, 2001, we elected early adoption of SFAS No. 142, and wererequired to analyze goodwill for impairment.

*InvestmentIn Advanced Technology Companies.*   The Companyhas an investment in certain advanced technology companies. The investment isstated at the estimated net realizable value and is evaluated periodically forimpairment and is carried at the lower of cost or estimated net realizablevalue. The evaluation that we perform is based upon estimates. The actual valuethat we realize from this investment may be more or less than its carryingvalue. We will recognize gains on these investments, if any, when realized.

*Accountingfor Fixed Price Contracts.*   Our alternative fuelssegment recognizes revenues from fixed price contracts on thepercentage-of-completion method of accounting. Under this method of accounting,the amount of revenue recognized is the percentage of the contract price thatthe costs expended to date bear to the total estimated costs of the contract,based upon current estimates of the costs to complete the contract. Projectmanagers make significant assumptions concerning cost estimates for materialsand labor. Due to the uncertainties inherent in the estimation process, as wellas the potential changes in customer needs as these contracts progress, it isat least reasonably possible that completion costs for uncompleted contractsmay be revised in the future, and that such revisions could be material.

*StockBased Compensation.**  *InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued arevision to Statement of Financial Accounting Standards 123, “Share-BasedPayment” 

38

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(“SFAS 123(R)”). Therevision requires all entities to recognize compensation expense in an amountequal to the fair value of share-based payments granted to employees. SFAS123(R) eliminates the alternative method of accounting for employee share-basedpayments previously available under Accounting Principles Board OpinionNo. 25 (“APB 25”). In April 2005, the FASB delayed the effective dateof SFAS 123(R) to fiscal years beginning after June 15, 2005.Effective October 1, 2005, the Company adopted the provisions of SFAS123(R) using the modified-prospective transition method. Under thistransition method, stock-based compensation expense for the year endedSeptember 30, 2006 includes compensation expense for all stock-basedcompensation awards granted subsequent to September 30, 2005 based ongrant-date fair value estimated in accordance with the provisions of SFAS123(R). Refer to footnote 15 in the Notes to Condensed Consolidated FinancialStatements.

*Deferred Income Taxes.*   Wehave provided a full valuation reserve related to our substantial deferred taxassets. In the future, if sufficient evidence of our ability to generatesufficient future taxable income in certain tax jurisdictions becomes apparent,we may be required to reduce this valuation allowance, resulting in income taxbenefits in our consolidated statement of operations. We evaluate our abilityto utilize the deferred tax assets annually and assess the need for thevaluation allowance.

**RESULTS OFOPERATIONS**

More detailed informationabout our financial statements is provided in the following portions of thissection. On April 26, 2006, we acquired all of the outstanding stock ofRoyster-Clark Nitrogen, Inc., which became Rentech Energy Midwest Corporation(REMC) the owner and operator of a nitrogen fertilizer plant in East Dubuque,Illinois. Accordingly, REMC’s results have been included in Rentech’sconsolidated results since the acquisition date. As a result, the fluctuationsin the operating results of Rentech for the fiscal year ended September 302006, as compared to the fiscal years ended September 30, 2005 and 2004are due in part to the acquisition of REMC. The following discussions should beread in conjunction with our consolidated financial statements and the notesthereto.

**Selected BusinessSegment Information**

The revenue and operating income (loss) amounts inthis report are presented in accordance with accounting principles generallyaccepted in the United States of America. Segment information appearing in Note17 of the Notes to the Consolidated Financial Statements is presented inaccordance with *SFAS 131, Disclosures aboutSegments of an Enterprise and Related Information.*

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Thefollowing table provides revenues, operating income (loss) from operations andnet loss applicable to common stockholders by each of our business segments forthe years ended September 30, 2006, 2005, and 2004.

| ** **                                                    | ** ** | **For the Years Ended September 30,** | ** **  |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                                    | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                               |       | $                                                              | 44,397,519  |   | $ | — |   | $ | — |   |
| Alternative fuels                                             |       | 119,013                                                        |        | 588,687 |   | 984,492 |   |
| Total revenues                                                |       | $                                                              | 44,516,532  |   | $ | 588,687 |   | $ | 984,492 |   |
| Operating Loss:                                               |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                               |       | $                                                              | (1,319,780  | ) | $ | — |   | $ | — |   |
| Alternative fuels                                             |       | (38,099,090                                                    | )           | (11,880,027 | ) | (5,401,029 | ) |
| Total operating loss                                          |       | $                                                              | (39,418,870 | ) | $ | (11,880,027 | ) | $ | (5,401,029 | ) |
| Net loss  applicable to common stockholders:                  |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                               |       | $                                                              | (1,481,669  | ) | $ | — |   | $ | — |   |
| Alternative fuels                                             |       | (38,430,174                                                    | )           | (15,614,920 | ) | (7,087,316 | ) |
| Deemed dividends to preferred stockholders                    |       | (74,437                                                        | )           | (9,000,000 | ) | — |   |
| Cash dividends paid to preferred stockholders                 |       | —                                                         |        | (341,475 | ) | — |   |
| Net income / (loss) from discontinued operations,  net of tax |       | 1,264,161                                                      |        | 799,522 |   | (123,377 | ) |
| Gain on sale of discontinued operations, net of tax           |       | —                                                         |        | 456,501 |   | — |   |
| Total net loss  applicable to common stockholders             |       | $                                                              | (38,722,119 | ) | $ | (23,700,372 | ) | $ | (7,210,693 | ) |

 

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**Comparison ofChanges Between Periods**

Thefollowing table sets forth, for the years ended September 30, 2006, 2005and 2004, a comparison of changes between the periods in the components of ourConsolidated Statements of Operations:

| ** **                                                                                                      | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Gross  Profit by Category as a Percentage of Consolidated Net Sales from Continuing  Operations by Category** | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nitrogen products manufacturing                                                                                 |       | 0.7                                          | %          | — |   | — |   |
| Technical services                                                                                              |       | —                                       |       | (32.6 | )% | 21.7 | % |
| Rental income                                                                                                   |       | 100.0                                        | %          | 100.0 | % | 100.0 | % |
|                                                                                                            |       | 1.0                                          | %          | (4.8 | )% | 31.0 | % |
| **As a  Percentage of Consolidated Net Sales from Continuing Operations**                                       | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Sales by Category**                                                                                       |       |                                         |       |   |   |   |   |
| Nitrogen products manufacturing                                                                                 |       | 99.7                                         | %          | — |   | — |   |
| Technical services                                                                                              |       | —                                       |       | 79.0 | % | 88.1 | % |
| Rental income                                                                                                   |       | 0.3                                          | %          | 21.0 | % | 11.9 | % |
|                                                                                                            |       | 100.0                                        | %          | 100.0 | % | 100.0 | % |
| **Operating expenses**                                                                                          |       |                                         |       |   |   |   |   |
| General and administrative expense                                                                              |       | 61.2                                         | %          | 1860.2 | % | 459.8 | % |
| Depreciation and amortization                                                                                   |       | 1.2                                          | %          | 68.7 | % | 43.7 | % |
| Research and development                                                                                        |       | 27.1                                         | %          | 84.2 | % | 76.1 | % |
|                                                                                                            |       | 89.5                                         | %          | 2013.3 | % | 579.6 | % |
| **Loss from operations**                                                                                        |       | (88.5                                        | )%         | (2018.1 | )% | (548.6 | )% |
| **Other income (expenses)**                                                                                     |       |                                         |       |   |   |   |   |
| Loss on investment                                                                                              |       | —                                       |       | (35.1 | )% | (59.8 | )% |
| Equity in loss of investee                                                                                      |       | —                                       |       | (125.0 | )% | (25.6 | )% |
| Interest income                                                                                                 |       | 4.5                                          | %          | 13.8 | % | 1.5 | % |
| Dividend income                                                                                                 |       | 0.1                                          | %          | — |   | — |   |
| Interest expense                                                                                                |       | (5.4                                         | )%         | (488.3 | )% | (87.0 | )% |
| Gain (loss) on disposal of fixed assets                                                                         |       | (0.5                                         | )%         | 0.1 | % | (0.3 | )% |
| Other income                                                                                                    |       | 0.2                                          | %          | — |   | — |   |
|                                                                                                            |       | (1.1                                         | )%         | (634.4 | )% | (171.3 | )% |
| **Net loss from continuing operations before taxes**                                                            |       | (89.7                                        | )%         | (2652.5 | )% | (719.9 | )% |
| Income tax expense                                                                                              |       | —                                       |       | — |   | — |   |
| **Net loss from continuing operations**                                                                         |       | (89.7                                        | )%         | (2652.5 | )% | (719.9 | )% |
| Dividends on preferred stock                                                                                    |       | (0.2                                         | )%         | (1586.8 | )% | — |   |
| **Loss  applicable to common stock**                                                                            |       | (89.8                                        | )%         | (4266.3 | )% | (719.9 | )% |

 

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**FISCAL YEAR 2006COMPARED TO FISCAL YEAR 2005**

*ContinuingOperations:*

**Revenues**

| ** **                      | ** ** | **For the Years Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Revenues:                       |       |                                                       |       |   |   |
| Nitrogen products manufacturing |       | $                                                          | 44,397,519 |   | $ | — |   |
| Total product revenues          |       | $                                                          | 44,397,519 |   | $ | — |   |
| Technical services              |       | $                                                          | —     |   | $ | 465,265 |   |
| Rental income                   |       | 119,013                                                    |       | 123,422 |   |
| Total services revenues         |       | $                                                          | 119,013    |   | $ | 588,687 |   |
| Total revenues                  |       | $                                                          | 44,516,532 |   | $ | 588,687 |   |

 

*Nitrogenproducts manufacturing.**  *Productsales are provided by our nitrogen products manufacturing segment. Productsales include the sale of various nitrogen fertilizer products manufactured atour East Dubuque Plant, which we acquired on April 26, 2006. The EastDubuque Plant is designed to produce anhydrous ammonia, nitric acid, ammoniumnitrate solutions and carbon dioxide using natural gas as a feedstock. Productsales for the fiscal year ended September 30, 2006 were $44,397,519 whichincluded $726,850 of revenue derived from natural gas sales. We had no suchproduct sales during the fiscal year ended September 30, 2005.

*ServiceRevenues.*   Service revenues are provided by thescientists and technicians who staff our development and testing laboratory inour alternative fuels segment. In addition, the alternative fuels segmentincludes rental income earned by leasing a portion of the development andtesting laboratory building to third parties.

*Ouralternative fuels segment* has historically providedservice revenues, including revenue earned for technical services provided tocertain customers with regard to the Rentech Process. These technical serviceswere performed at our development and testing laboratory. We had no technicalservices revenue during fiscal 2006 as compared to $465,265 during fiscal 2005.During fiscal 2005, we recognized $307,280 of revenue related to our technicalservices agreement with the Wyoming Business Council and $35,747 related to ourtechnical services agreement with RCN. We had no such revenue during fiscal2006 as our engineering and research and development teams continued to focuson the PDU and certain development projects including the conversion of ourEast Dubuque Plant.

*Rental Income*isalso included in our service revenue. We leased part of our development andtesting laboratory building to a tenant. Rental income from this tenantcontributed $119,013 in revenue during fiscal 2006 as compared to $123,422during fiscal 2005. Rental income is included in our alternative fuels segmentbecause the rental income is generated from the laboratory building that housesour development and testing laboratory, which is part of the alternative fuelssegment.

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**Cost of Sales**

| ** **                      | ** ** | **For the Years Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Cost of sales:                  |       |                                                       |       |   |   |
| Nitrogen products manufacturing |       | $                                                          | 44,076,514 |   | $ | — |   |
| Technical services              |       | —                                                     |       | 616,895 |   |
| Total cost of  sales            |       | $                                                          | 44,076,514 |   | $ | 616,895 |   |

 

Our cost of sales includes costs for our nitrogenproducts manufacturing and technical services. During fiscal 2006, the combinedcosts of sales were $44,076,514 compared to $616,895 during fiscal 2005. Theincrease for fiscal 2006 resulted from an increase in cost of sales due to theacquisition of the nitrogen products manufacturing segment in April 2006and was offset by a decrease in technical services cost of sales, which is apart of our alternative fuels segment.

*Costof sales*for nitrogen products manufacturing was$44,076,514 (which includes $661,465 of costs associated with natural gassales) for the fiscal year ended September 30, 2006. Of these productcosts, 71.1% and 8.9% were related to the cost of natural gas, and labor and benefits,respectively, for product produced and sold during the quarter. The Companypurchases natural gas on the open market and through the use of fixed pricedcontracts. The use of fixed price contracts allows the Company to lock in itsgas costs in advance. As the nitrogen products manufacturing segment wasacquired in April 2006, we had no such product costs in the priorcomparison periods.

*Costs of sales fortechnical services*was zero during fiscal 2006, downfrom $616,895 during fiscal 2005. Of the amounts in the fiscal year endedSeptember 30, 2005, $289,452 related to costs incurred under the technicalservices agreement with the Wyoming Business Council and $101,748 related tothe technical services agreement with RCN. There were no such technical servicesagreements in the fiscal year ended September 30, 2006.

**Gross Profit (Loss)**

| ** **                      | ** ** | **For the Years Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Gross Profit (Loss):            |       |                                                       |       |   |   |
| Nitrogen products manufacturing |       | $                                                          | 321,005    |   | $ | — |   |
| Technical services              |       | —                                                     |       | (151,630 | ) |
| Rental income                   |       | 119,013                                                    |       | 123,422 |   |
| Total gross  profit/ (loss)     |       | $                                                          | 440,018    |   | $ | (28,208 | ) |

 

Our gross profit for fiscal 2006 was $440,018, ascompared to gross loss of $28,208 for fiscal 2005. The increase of $468,226, or1660% resulted primarily from inclusion of the nitrogen products manufacturingsegment.

*Grossprofit for nitrogen products manufacturing*was$321,005 (which includes $65,385 of gross profit associated with natural gassales) for the fiscal year ended September 30, 2006. As the nitrogenproducts manufacturing segment was acquired in April 2006, there was nogross profit or loss for this segment in the prior comparison periods. Thegross profit for nitrogen products manufacturing segment resulted from a marketprice decline for nitrogen products and the high cost of purchased inventory(inventory acquired from Royster-Clark, Inc.). The average market value ofour nitrogen products manufactured during our fiscal year endedSeptember 30, 2006 was 15.6% below the purchased inventory value. As a result,while 

43

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products produced and soldduring our ownership of the plant were sold at a gross profit, products soldfrom purchased inventory were sold at a gross loss of $1,560,150. Adverse wetweather conditions in the remaining planting season of late April throughearly June resulted in farmers reducing their fertilizer inputs orchanging to alternative crops that use less fertilizer. These conditions led tolower prices and nitrogen sales as well as increased storage costs.

*Gross profit for technicalservices*was zero during fiscal 2006, up from anegative $151,630 during fiscal year 2005, an increase of $151,630. Thenegative gross profit in fiscal year 2005 was due to the fact that the majorityof revenue was derived from feasibility studies, which do not generatesignificant profit margins.

**Operating Expenses**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Operating expenses:           |       |                                                       |       |   |   |
| General and administrative    |       | $                                                          | 27,289,153 |   | $ | 10,951,590 |   |
| Depreciation and amortization |       | 516,028                                                    |       | 404,310 |   |
| Research and development      |       | 12,053,707                                                 |       | 495,919 |   |
| Total operating  expenses     |       | $                                                          | 39,858,888 |   | $ | 11,851,819 |   |

 

Operating expenses consist of general andadministrative expense, depreciation and amortization and research anddevelopment. Our operating expenses have historically been grouped into severalcategories of major expenses. These include research and development related tothe Rentech Process through operation of pilot plants and the Synhytech plantin Pueblo, Colorado; management time and other costs related to acquiring andfunding the subsidiaries that constitute our other business segments in effortsto bring them to profitable operations; marketing our technology; other generaland administrative expenses; and the costs of financing our operations.

We incur substantial research and development expensesin our testing laboratory where we actively conduct work to further improve ourtechnology and to perform services for our customers. We have had significantgrowth in our general and administrative expenses as our salary expenses andoperating costs have grown.

We expect to experience operating costs on a muchlarger scale than in the past for the East Dubuque nitrogen fertilizer plantthat we acquired on April 26, 2006. We plan to make substantial capitalinvestments to reconfigure the plant to improve its economic results and to useour Fischer-Tropsch technology for additional revenues. If we make substantialcapital investments in plants in the East Dubuque plant, or in plants which wemay acquire an equity interest in, we would incur significant depreciation andamortization expenses in the future.

*Generaland Administrative Expenses.*   General andadministrative expenses were $27,289,153 during the year endedSeptember 30, 2006, up $16,337,563 from fiscal 2005 when these expenseswere $10,951,590. Of the increase during the fiscal year endedSeptember 30, 2006, $11,584,990 was composed of compensation expense underSFAS 123(R) of $8,899,841, marketing expenses of $2,676,602 and consultingexpenses of $8,547 which were recorded during fiscal 2006 related to theCompany’s application of SFAS 123(R) as of October 1, 2005. Refer tofootnote 15 in the Notes to the Consolidated Financial Statements for furtherinformation about the Company’s adoption of SFAS 123(R). During fiscal 2006 werecorded $355,000 of abandoned debt issue costs related to due diligence feespaid to MAG Capital and $1,000,000 related to a break up fee paid to MAGCapital. Excluding the one time charges of compensation and marketing expensesas well as the abandoned debt issue costs which collectively totaled$12,938,893, total general and administrative expenses for fiscal 2006increased over those for fiscal 2005 

44

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by $8,377,472, when suchexpenses were $5,972,788 after deducting one time charges recorded in fiscal2005 of $4,978,802, which was comprised of salaries related to the retirement packagesof our former CEO and COO of $1,894,382 and aborted acquisition, offering anddebt issue cost of $3,084,420. Of the increase from fiscal 2005, $1,640,785related to our nitrogen products manufacturing segment. Of the remainingbalance of $6,736,687, after excluding the general and administrative expensesof our nitrogen products manufacturing segment, salaries and benefits, contractsalaries and consulting charges included in general and administrative expensesincreased by $3,611,381, or by 99%, legal expenses increased by $806,150 or262%, travel and entertainment costs increased by $513,933 or 195%, and publicrelations charges increased by $747,680 or 137%, during the fiscal year endedSeptember 30, 2006 compared to fiscal 2005.

Salaries and benefits, contract salaries andconsulting expenses increased $3,611,381 as a result of hiring new employees toprepare the Company for its acquisition and integration of RCN and for theconstruction of the PDU and other project development, as well as for increasesin executive compensation and bonus accruals. Legal expenses increased by$806,150 during the fiscal year ended September 30, 2006 as we incurredsignificant external legal costs related to the preparation of our Form 10-Kand Proxy as well as project development activities and other general corporatematters in the fiscal year ended September 30, 2006, while the majority oflegal expense incurred in the fiscal year ended September 30, 2005 waswritten off to abandoned acquisition costs. Travel and entertainment costsincreased by $513,933 during the fiscal year ended September 30, 2006. Theincrease in the fiscal year ended September 30, 2006 was due to additionaltravel requirements relating to the RCN acquisition, the potential project inNatchez, Mississippi and the development of other potential projects. Publicrelations charges increased by $747,680 during the fiscal year endedSeptember 30, 2006 due to increased costs for shareholder reporting, andboard expenses. Many other general and administrative expenses experiencedincreases and decreases during the fiscal year ended September 30, 2006,none of which were individually significant.

*Depreciationand Amortization.*   Depreciation and amortizationexpense during fiscal 2006 was $2,951,151, an increase of $2,839,433 comparedto the previous fiscal year ended September 30, 2005 when the totaldepreciation and amortization expense was $444,032. Of these amounts, $2,435,123and $39,722 were included in costs of sales during fiscal year 2006 and 2005,respectively. Of depreciation and amortization expenses amounts incurred duringfiscal 2006, $2,435,123 related to our nitrogen products manufacturing segment.The remaining increases in depreciation expense during the fiscal year endedSeptember 30, 2006 was directly attributable to our alternative fuelssegment. 

*Researchand Development.*   Research and developmentexpenses were $12,053,707 during fiscal 2006. These expenses were all from ouralternative fuels segment. This expense increased by $11,557,788 from fiscal2005, when this expense was $495,919. Of the increase in research anddevelopment expenses 87% is directly attributable to expenses incurred for thedesign and procurement of equipment for the Product Development Unit (“PDU”).The Company is constructing and plans to operate a fully integratedFischer-Tropsch, coal-to-liquids PDU facility at the Sand Creek site. Thisplant would produce fuels and naphtha from various domestic coals, petroleumcoke and biomass feedstocks on a demonstration scale, utilizing Rentech’s FTtechnology. With the PDU in operation, Rentech would be able to demonstrateproduction of hydrocarbon products from various feedstocks. The products fromthe plant would be used to supply test quantities of these fuels to groupswhich have expressed an interest in using the Rentech Process. Also, in fiscal2006, we continued work on advanced catalysts and separation, processoptimization, and product upgrading. 

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*Total Operating Expenses.*   Totaloperating expenses during fiscal 2006 were $39,858,888, as compared to$11,851,819 during fiscal 2005, an increase of $28,007,069. The increase intotal operating expenses for the fiscal year ended September 30, 2006 ascompared to the prior fiscal year is a result of an increase in general andadministrative expenses of $16,337,563, an increase in depreciation andamortization expense of $2,839,433 and an increase in research and developmentexpenses of $11,557,788.

**Loss from Operations**

| ** **                      | ** ** | **For the Years Ended  September 30,** | ** **  |
|---------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                      | ** ** | **2006**                                                   | ** **  | **2005** | ** ** |
| Loss from operations:           |       |                                                       |        |   |   |
| Nitrogen products manufacturing |       | $                                                          | (1,319,780  | ) | $ | — |   |
| Technical services              |       | (38,218,103                                                | )           | (12,003,449 | ) |
| Rental income                   |       | 119,013                                                    |        | 123,422 |   |
| Total loss from  operations     |       | $                                                          | (39,418,870 | ) | $ | (11,880,027 | ) |

 

Loss from operations during fiscal 2006 increased by$27,538,843 to a loss of $39,418,870. This compares to a loss of $11,880,027during fiscal 2005. The increased loss resulted from an increase in totaloperating expenses of $28,007,069 during fiscal 2006 partially offset by anincrease in gross profit of $468,226.

*Lossfrom operations for nitrogen products manufacturing*was$1,319,780 for the fiscal year ended September 30, 2006. As the nitrogenproducts manufacturing segment was acquired in April 2006, there was noincome or loss from operations in the prior comparison periods. The loss fromoperations for the nitrogen products manufacturing segment was due to a market declinefor nitrogen products and to the gross profit loss on the purchased productinventory.

*Loss from operations fortechnical services*was $38,218,103 during fiscal 2006,up from $12,003,449 during fiscal 2005, an increase of $26,214,654. Loss fromoperations was up in fiscal year 2006 due to an increase in operating expensesof $26,366,284 and a lack of any revenue from technical services in this fiscalyear. 

**Other Income (Expense)**

| ** **                              | ** ** | **For the Years Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Other income (expense):                 |       |                                                       |       |   |   |
| Loss on investments                     |       | $                                                          | —     |   | $ | (206,500 | ) |
| Equity in loss of investee              |       | —                                                     |       | (735,815 | ) |
| Interest income                         |       | 1,998,347                                                  |       | 81,360 |   |
| Dividend income                         |       | 28,508                                                     |       | — |   |
| Interest expense                        |       | (2,402,397                                                 | )          | (2,874,661 | ) |
| Gain (loss) on disposal of fixed assets |       | (205,000                                                   | )          | 723 |   |
| Other income                            |       | 87,569                                                     |       | — | ­ |
| Total other income  (expense)           |       | $                                                          | (492,973   | ) | $ | (3,734,893 | ) |

* *

*OtherIncome (Expense).*   Other income (expense)includes impairment of investments, equity in loss of investee, interestincome, dividend income, interest expense, and gain (loss) on disposal of fixedassets and other income.

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*Losson Investments.*   During fiscal year 2006, nolosses on investments were recognized, compared to a loss of $206,500recognized in fiscal 2005. The loss on investments recognized in fiscal 2005was based on our 410,400 shares of common stock of Global Solar Energy, Inc.and our 375,840 shares of common stock of Infinite Power Solutions, Inc.As of September 30, 2005, we assessed the value of our minority ownershipinterests in Global Solar Energy and Infinite Power Solutions based uponcurrently available information. As a result of that assessment, we recorded animpairment of investment of $206,500 in fiscal 2005.

*Equityin Loss of Investee.*   During fiscal 2006, noequity in loss of investee was recognized, as compared to a loss of $735,815recognized during fiscal 2005. In fiscal 2005, $171,202 represented our 50%share of the loss incurred by our former joint venture in Sand Creek Energy LLC.On October 7, 2005, RDC purchased Republic’s 50% ownership interest inSand Creek for a purchase price of $1,400,000 and Sand Creek is now 100% ownedby RDC. 

Also in the fiscal year ended September 30, 2005,we recognized $564,613 in equity in loss of investee from our 50% share of theloss in our joint venture FT Solutions, LLC. This loss represents our share ofresearch and development expenses of FT Solutions incurred in the first twoquarters of fiscal year 2005.

On January 11, 2006, the Company and HeadwatersTechnology Innovation Group, Inc. entered into a termination agreementpursuant to which Rentech and Headwaters agreed to dissolve FT Solutions andterminated all FT Solutions-related agreements between Rentech, Headwaters andFT Solutions. As a result, there was no activity in FT Solutions for the fiscalyear ended September 30, 2006. 

*InterestIncome.*   Interest income during fiscal 2006 was$1,998,347, an increase from $81,360 during fiscal 2005. The increased interestincome was due to having more funds invested in interest-bearing cash accounts andhaving invested in investment-grade marketable securities (in the fourth fiscalquarter of 2006), of which our securities portfolio included government andcommercial bonds, with a fair market value of $30,282,602 at September 30,2006. These funds were primarily generated from our April 2006 concurrentpublic offerings of an aggregate of 18,400,000 shares of common stock at aprice per share of $3.40 and $57,500,000 principal amount of its 4.00%Convertible Senior Notes Due 2013. 

*InterestExpense.*   Interest expense during fiscal 2006 was$2,402,397, decreased from $2,874,661 during fiscal 2005. The $472,264 decreaseduring the fiscal year ended September 30, 2006 resulted from a decreasein non-cash interest charges offset by interest incurred by REMC as well as onthe April 2006 convertible senior notes. Total non-cash interest expenserecognized during the fiscal year ended September 30, 2006 was $1,737,565,compared to $2,493,001 during the fiscal year ended September 30, 2005. Ofthe non-cash interest expense recognized in the fiscal year ended September 30,2006 and 2005, $97,464, or 6% and $1,861,769, or 75% respectively, was due tothe amortization of debt issuance costs related to a line of credit and bridgeloans that were used to provide working capital and fund acquisition costsrelated to the purchase of RCN. Additionally, of the non-cash interest expenserecognized in the fiscal year ended September 30, 2006 of $1,014,262 or58% was due to the accrued interest expense recognized stemming from theCompany’s 4.00% Convertible Senior Notes Due 2013 issued in April 2006.

*Gain(Loss) on Disposal of Fixed Assets.*   Duringfiscal 2006 we had a loss on disposal of fixed assets of $205,000 as comparedto a gain on disposal of fixed assets during fiscal 2005 of $723. The disposalsrepresent the disposal of out-dated equipment.

*DividendIncome.*   During fiscal 2006 we had $28,508 ofdividend income earned from the Company’s investment in marketable equitysecurities. During fiscal year 2005 there was no dividend income earned.

*Otherincome.*   During fiscal 2006 we had $87,569 ofother income earned by REMC which was primarily comprised of non-recurringstorage rental income. During fiscal year 2005 there were no like chargesrecorded as other income.

47

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*Total Other Expenses.*   Totalother expenses decreased to $492,973 during fiscal 2006 from total otherexpenses of $3,734,893 during fiscal 2005. The decrease of $3,241,920 resultedfrom an impairment of investments $206,500during fiscal 2005, while noimpairment of investments were recognized in fiscal 2006; a decrease in equityin loss of investee of $735,815; an increase in interest income of $1,916,987;an decrease in interest expense of $472,264; an increase in dividend income of$28,508; an increase in loss on disposal of fixed assets of $205,723; andincrease in other income $87,569. 

**Net Loss from Continuing Operations**

| ** **                                        | ** ** | **For the Years Ended  September 30,** | ** **  |
|---------------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                        | ** ** | **2006**                                                   | ** **  | **2005** | ** ** |
| Net loss from continuing  operations:             |       |                                                       |        |   |   |
| Nitrogen products manufacturing                   |       | $                                                          | (1,481,669  | ) | $ | — |   |
| Technical services                                |       | (38,549,187                                                | )           | (15,738,342 | ) |
| Rental income                                     |       | 119,013                                                    |        | 123,422 |   |
| Net loss from  continuing operations before taxes |       | $                                                          | (39,911,843 | ) | $ | (15,614,920 | ) |
| Income tax  benefit / (expense)                   |       | —                                                     |        | — |   |
| Net loss from  continuing operations              |       | $                                                          | (39,911,843 | ) | $ | (15,614,920 | ) |

 

The net loss from continuing operations was$39,911,843 or $(0.314) per share during fiscal 2006 and $15,614,920 or$(0.270) per share during fiscal 2005, after considering the effects ofdividends. The increase of $24,296,923 resulted from an increase in loss fromoperations of $27,538,843, offset by a decrease in total other expenses of $3,241,920.

*Netloss from continuing operations for nitrogen products manufacturing*was$1,481,669 for the fiscal year ended September 30, 2006. As the nitrogenproducts manufacturing segment was acquired in April 2006, there was noincome or loss from continuing operations in the prior comparison periods. Thenet loss from continuing operations for the nitrogen products manufacturingsegment was due to a market price decline for nitrogen products and the highcost of purchased inventory. 

*Netloss from continuing operations for technical services*was$38,549,187 during fiscal 2006, up from $15,738,342 during fiscal 2005, anincrease of $22,810,845. Net loss from continuing operations was up in fiscalyear 2006 due to an increase in operating expenses of $26,366,284 and partiallyoffset by a decrease of $3,403,809 in other expense and an increase in grossprofit of $151,630 during the fiscal year ended September 30, 2006.

*Net income from continuingoperations for rental income*was $119,013 and $123,423for the fiscal years ended September 30, 2006 and 2005, respectively; inearned connection with Company’s leasing a portion of its office space to atenant.

**DiscontinuedOperations:**

**Revenues**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Revenues:                     |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | —     |   | $ | 846,141 |   |
| Industrial automation systems |       | —                                                     |       | 364,190 |   |
| Oil and gas field services    |       | 8,291,649                                                  |       | 6,596,798 |   |
| Total revenues                |       | $                                                          | 8,291,649  |   | $ | 7,807,129 |   |

 

48

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*OKON, Inc.*   OKONprovided product sales from sales of water-based stains, sealers and coatings.The revenues from this segment were $846,141 for the 2005 fiscal year. On March 8,2005, we sold our entire interest in OKON, Inc, and hence recognized no revenuein fiscal 2006. 

*RENCorporation*   REN provided service revenues in theamount of $364,190 during fiscal 2005 from contracts for the manufacture ofcomplex microprocessor controlled industrial automation systems. Effective August 1,2005, the Company sold its 56% ownership interest in REN and hence werecognized no revenue in fiscal 2006. 

*Petroleum Mud Logging, LLC**  *PML provided service revenues inthe amount of $8,291,649 derived from contracts for the oil and gas fieldservices in fiscal 2006. Our oil and gas field service revenues for fiscal year2006 increased by $1,694,851, or 26%, from the service revenues of $6,596,798in fiscal 2005. The increase in oil and gas field services revenue was due toan increase in demand for our mud logging services as drilling for new naturalgas wells continued to increase in our service market. The increased revenuewas partially due to a 5% increase in our manned services, although the numberof our manned mud logging vehicles remained constant at 38 for both fiscal 2005and fiscal 2006. Most of revenue growth was due to the increase in our limitedservice vehicles from 16 in fiscal 2005 to 34 in fiscal 2006 that providedapproximately $1,300,000 of our additional revenue recognized in fiscal 2006compared to fiscal 2005. On November 15, 2006, we sold all of our interestin PML to privately held PML Exploration Services LLC. 

**Cost of Sales**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Cost of sales:                |       |                                                       |       |   |   |
| Product costs                 |       | $                                                          | —     |   | $ | 440,467 |   |
| Industrial automation systems |       | —                                                     |       | 278,402 |   |
| Oil and gas field services    |       | 6,004,993                                                  |       | 4,596,197 |   |
| Total cost of  sales          |       | $                                                          | 6,004,993  |   | $ | 5,315,066 |   |

 

Our cost of sales for discontinued operations includescosts for our OKON products, industrial automation system services and oil andgas field services. During the year ended September 30, 2006, the combinedcost of sales was $6,004,993 compared to $5,315,066 during the year ended September 30,2005. The increase for the current fiscal year of $689,927 resulted from anincrease in the cost of sales of $1,408,796 in the former oil and gas fieldservice segment offset by a decrease in cost of sales of $718, 869 for productcosts and industrial automation services caused by the sale in fiscal year 2005of OKON and REN.

*Costsof sales for product sales*are the cost of sales ofour former paint business segment for sales of stains, sealers and coatings. OnMarch 8, 2005, prior to fiscal year 2006, the Company sold its interest inOKON Inc., and hence no cost of sales were recognized in fiscal 2006. Duringfiscal 2005, our costs of sales for the paint segment were $440,467. 

*Costsof sales for the industrial automation systems*segmentwere $278,402 during fiscal 2005. Effective August 1, 2005, prior tofiscal year 2006, the Company sold its 56% ownership interest in REN, and henceno costs of sales were recognized in fiscal 2006.

*Costs of sales for oil andgas field services*increased to $6,004,993 duringfiscal 2006, up from $4,596,197 during fiscal 2005. Of the increase of$1,408,796, 39% was related to field labor and benefits and field livingexpenses.**The increase in oil and gas fieldservices costs of sales was due to a continued high level of demand for our mudlogging services as drilling for new natural gas wells in our service market.The 

49

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increase in thenumber of units in the field and our higher utilization rates directly led tothe increase in field labor and benefits and field living expenses, which makesup the largest percentage of cost of sales. 

**Gross Profit**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Gross Profit:                 |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | —     |   | $ | 405,674 |   |
| Industrial automation systems |       | —                                                     |       | 85,788 |   |
| Oil and gas field services    |       | 2,286,656                                                  |       | 2,000,601 |   |
| Total gross  profit           |       | $                                                          | 2,286,656  |   | $ | 2,492,063 |   |

 

*Grossprofit for product sales*is the gross profit of ourformer paint business segment for sales of stains, sealers and coatings. Duringfiscal 2005, our gross profit for the paint segment was $405,674. On March 8,2005, prior to fiscal year 2006, the Company sold its interest in OKON Inc.,and hence the Company did not realize any gross profit in fiscal 2006 from thissegment.

*Grossprofit for the industrial automation systems*segmentwas $85,788 during fiscal 2005. Effective as of August 1, 2005, prior tofiscal year 2006, the Company sold its 56% ownership interest in REN, and hencethe Company did not realize any gross profit in fiscal 2006 from this segment.

*Gross profit for oil andgas field services*increased to $2,286,656 duringfiscal 2006, up from $2,000,601 during fiscal 2005. The increase of $286,055was due to increases in our number of limited service units in service combinedwith our increase in billing rates. 

**Operating Expenses**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Operating  expenses:          |       |                                                       |       |   |   |
| General and administrative    |       | $                                                          | 882,919    |   | $ | 1,528,372 |   |
| Depreciation and amortization |       | 50,775                                                     |       | 47,463 |   |
| Research and development      |       | —                                                     |       | 10,897 |   |
| Total operating expenses      |       | $                                                          | 933,694    |   | $ | 1,586,732 |   |

 

Operating expenses consist of general andadministrative expense, depreciation and amortization and research anddevelopment.

*Generaland Administrative Expenses.*   General andadministrative expenses were $882, 919 and $1,528,372 during fiscal 2006 and2005, respectively. 

*Depreciationand Amortization.*   Depreciation and amortizationexpenses during fiscal 2006 and 2005 were $50,775 and $224,736. Of these amounts,$0 and $177,273 were included in costs of sales. 

*Researchand Development.*   Research and developmentexpenses were $10,897 during fiscal 2005. These expenses were all from ourformer paint segment. 

*Total Operating Expenses.*   Totaloperating expenses during fiscal 2006 were $933,694, as compared to $1,586,732during fiscal 2005, a decrease of $653,038. Of the $653,038 decrease, $570,391and $336,058 were operating expenses incurred by OKON and REN, respectively infiscal 2005; while no operating expenses were recognized by the Company in 2006since the Company had sold these entities in fiscal 2005. 

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Total operatingexpenses of PML increased by $253,411 to $933,694 in fiscal 2006 from $680,283in fiscal 2005. Of this $253,411 increase, PML’s salaries and benefits chargesincreased $161,295 or by 47% compared to fiscal 2005.

**Gain (Loss) From Operations**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Gain (loss) from  operations: |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | —     |   | $ | (164,717 | ) |
| Industrial automation systems |       | —                                                     |       | (250,270 | ) |
| Oil and gas field services    |       | 1,352,962                                                  |       | 1,320,318 |   |
| Total loss from  operations   |       | $                                                          | 1,352,962  |   | $ | 905,331 |   |

 

*Lossfrom operations for product sales*is the loss fromoperations of our former paint business segment for sales of stains, sealersand coatings. During fiscal 2005, our loss from operations for the paintsegment was $164,717. 

*Lossfrom operations for the industrial automation systems*segmentwas $250,270 during fiscal 2005. 

*Income from operations foroil and gas field services*increased to $1,352,962during fiscal 2006, up from $1,320,318 during fiscal 2005. The increase of$32,644 was due to an increase in the gross profit by $286,055 offset byincreases in operational expenses of $253,411. Of the increases in operationalexpenses, $161,295 was due to an increase in salary and benefit expenses. 

**Other Income(Expense)**

| ** **                       | ** ** | **For the Years Ended  September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Other income  (expense):         |       |                                                       |       |   |   |
| Interest income                  |       | $                                                          | —     |   | $ | 4 |   |
| Interest expense                 |       | (39,801                                                    | )          | (44,869 | ) |
| Gain on disposal of fixed assets |       | —                                                     |       | 484 |   |
| Total other income  (expense)    |       | $                                                          | (39,801    | ) | $ | (44,381 | ) |

* *

*Total Other Income(Expense).*   Total other expenses decreased to$39,801 during fiscal 2006 from total other expenses of $44,381 during fiscal2005. The decrease of $4,580 resulted from a decrease in interest expense of$5,068; offset by interest income and a gain on disposal of fixed assets. 

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**Net Gain (Loss) and Gain on Sale of DiscontinuedOperations**

| ** **                                                                                      | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Discontinued  operations:                                                                       |       |                                                       |       |   |   |
| Net loss from product sales                                                                     |       | $                                                          | —     |   | $ | (164,821 | ) |
| Net loss from industrial automation systems                                                     |       | —                                                     |       | (281,304 | ) |
| Net gain from oil and gas field services, net of tax  of $49,000 (2006) and $61,428 (2005) |       | 1,264,161                                                  |       | 1,245,647 |   |
| Net gain from discontinued operations, net of tax of  $49,000 (2006) and $61,428 (2005)    |       | $                                                          | 1,264,161  |   | $ | 799,522 |   |
| Gain on sale of OKON, net of tax of $0                                                          |       | $                                                          | —     |   | $ | 699,244 |   |
| Loss on sale of REN, net of tax of $6,172                                                       |       | —                                                     |       | (242,743 | ) |
| Net gain on sale of discontinued operations, net of  tax of $0 (2006) and $61,428 (2005)   |       | $                                                          | —     |   | $ | 456,501 |   |
| Total discontinued  operations, net of tax of $49,000 (2006) and $67,000 (2005)                 |       | $                                                          | 1,264,161  |   | $ | 1,256,023 |   |

 

For fiscal 2006, we experienced a net gain fromdiscontinued operations of $1,264,161, or $.010 per share, compared to a netgain from discontinued operations of $1,256,023 or $.015 per share, duringfiscal 2005.

*Netloss from discontinued operations for product sales*isthe net loss from discontinued operations of our paint business for sales ofstains, sealers and coatings. During fiscal 2005, our net loss fromdiscontinued operations for the paint business was $164,821.

*Netloss from discontinued operations for the industrial automation systems segment*was $281,304 during fiscal 2005.

*Netincome from discontinued operations for oil and gas field services*increasedto $1,264,161 during fiscal 2006, up from $1,245,647 during fiscal 2005. Theincrease of $18,514 was due to an increase in the gross profit by $286,055 anda decrease in income tax expense of $12,428 offset by an increase inoperational expense of $253,411 and an increase in other expense of $26,558.

*Gainon sale of discontinued operations.*   The $693,072gain, net of tax, on the sale of OKON, Inc. on March 8, 2005 waspartially offset by a $236,571 loss on the sale of our 56% ownership interestin REN on August 1, 2005. See Item 7—Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Fiscal Year 2005Compared to Fiscal Year 2004—Net Gain(Loss) on Sale of Discontinued Operations, for our calculations of the gain andloss on disposition of OKON and REN.

Subsequent to fiscal 2006, on November 15, 2006,we sold PML to privately held PML Exploration Services, LLC, for approximately$5.5 million in cash. The approximate gain from the sale of this business was$2,721,000, as shown below.

*The approximate gain on the sale of PML was calculatedas follows:*

| Sales Price, net                                         |   | $         | 5,398,000 |   |
|----------------------------------------------------------|--------|-----------|-----------|--------|
| Less transaction  costs                                  |   | (49,000   | )         |
| Net sales price  less transaction costs                  |   | $         | 5,349,000 |   |
| Book value of Rentech’s ownership in PML, Inc. |   | 2,628,000 |      |
| Rentech’s gain on sale  of PML.                     |   | $         | 2,721,000 |   |

 

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**Net Loss Applicable to Common Stockholders**

| ** **                                  | ** ** | **For the Years Ended  September 30,** | ** **  |
|---------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                  | ** ** | **2006**                                                   | ** **  | **2005** | ** ** |
| Net loss                                    |       | $                                                          | (38,647,682 | ) | $ | (14,358,897 | ) |
| Deemed dividend  on preferred stock         |       | —                                                     |        | (9,000,000 | ) |
| Cash dividends  paid on preferred stock     |       | (74,437                                                    | )           | (341,475 | ) |
| Net loss applicable to  common stockholders |       | $                                                          | (38,722,119 | ) | $ | (23,700,372 | ) |

 

For fiscal 2006, weexperienced a net loss applicable to common stockholders of $38,722,119, or$0.304 per share compared to a net loss applicable to common stockholders of$23,700,372, or $0.255 per share during fiscal 2005. Included in net lossapplicable to common stockholders for fiscal 2006 was $74,437 of cash dividendspaid on Series A Preferred Stock. Included in net loss applicable tocommon stockholders for fiscal 2005 was $9,341,475 of dividends on preferredstock, which was comprised of a $9,000,000 deemed dividend related to abeneficial conversion feature and warrants and $341,475 of cash dividends paidon the Series A Preferred Stock.

**FISCAL YEAR 2005COMPARED TO FISCAL YEAR 2004**

*ContinuingOperations:*

**Revenues**

| ** **         | ** ** | **For the Years Ended  September 30,** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Revenues:          |       |                                                       |       |   |   |
| Technical services |       | $                                                          | 465,265    |   | $ | 867,279 |   |
| Rental income      |       | 123,422                                                    |       | 117,213 |   |
| Total revenues     |       | $                                                          | 588,687    |   | $ | 984,492 |   |

 

*ServiceRevenues.*   Service revenues are provided by theRentech Process technical services portion of the alternative fuels segment.The Rentech Process technical services are provided through the scientists andtechnicians who staff our development and testing laboratory. In addition, thealternative fuels segment includes rental income from leases to others ofportions of the development and testing laboratory building.

*Our alternative fuelssegment* provided servicerevenues, including revenue earned for technical services provided to certaincustomers with regard to the Rentech Process. These technical services wereperformed at our development and testing laboratory. Our service revenues forthese technical services were $465,265 during fiscal 2005 as compared to$867,279 during fiscal 2004. Compared to the prior year, our service revenuesfrom these technical services decreased by $402,014, or 46%, during fiscal2005. During the years ended September 30, 2005 and 2004, we recognizedrevenue of $307,280 and $192,720, or 66% and 22% of total technical servicesrevenue, from our contract with the Wyoming Business Council, which began infiscal 2004. In addition, during the years ended September 30, 2005 and2004, we recognized revenue of $35,747 and $439,253, or 8% and 51% of totaltechnical services revenue, from our technical services agreement with RCN,which began in fiscal 2004.

*Rental Income* is alsoincluded in our service revenue. We leased part of our development and testinglaboratory building in Denver, to a tenant. Rental income from this tenantcontributed $123,422 in revenue during fiscal 2005 as compared to $117,213during fiscal 2004. Rental income is included in our alternative 

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*fuelssegment because the rental income is generated from the laboratory buildingthat houses our development and testing laboratory, which is part of thealternative fuels segment.*

**Cost of Sales**

| ** **           | ** ** | **For the Years Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------------|------------|
| ** **           | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Cost of sales:       |       |                                                       |       |   |   |
| Technical services   |       | $                                                          | 616,895    |   | $ | 679,408 |   |
| Total cost of  sales |       | $                                                          | 616,895    |   | $ | 679,408 |   |

 

*Costs of sales for technical services* were $616,895 during fiscal 2005, down from $679,408during fiscal 2004, a decrease of $62,513. Costs incurred under thetechnical services agreement with RCN resulted in costs of sales of $101,748and $369,666 during the years ended September 30, 2005 and 2004. Costsincurred under the technical services agreement with the Wyoming BusinessCouncil resulted in costs of sales of $289,452 and $192,720 during the yearsended September 30, 2005 and 2004, respectively.

**Gross Profit**

| ** **                 | ** ** | **For the Years Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Gross profit (loss):       |       |                                                       |       |   |   |
| Technical services         |       | $                                                          | (151,630   | ) | $ | 187,871 |   |
| Rental income              |       | 123,422                                                    |       | 117,213 |   |
| Total gross  profit (loss) |       | $                                                          | (28,208    | ) | $ | 305,084 |   |

 

Our gross loss for fiscal 2005 was $28,208 as comparedto our gross profit of $305,084 for fiscal 2004. The decrease of $333,292, or109%, resulted from a combination of the contributions from each of ouroperating segments. The gross profit contribution of our technical servicessegment decreased, which was partially offset by increases for the rentalincome segment during fiscal 2005 as compared to fiscal 2004.

*Gross loss for technical services* was $151,630 during fiscal 2005, down from grossprofit of $187,871 during fiscal year 2004, a decrease of $339,501. Grossprofit was down in fiscal year 2005 as the majority of revenue was derived fromfeasibility studies, which do not generate significant profit margins.

**Operating Expenses**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Operating expenses:           |       |                                                       |       |   |   |
| General and administrative    |       | $                                                          | 10,951,590 |   | $ | 4,526,552 |   |
| Depreciation and amortization |       | 404,310                                                    |       | 430,331 |   |
| Research and development      |       | 495,919                                                    |       | 749,230 |   |
| Total operating expenses      |       | $                                                          | 11,851,819 |   | $ | 5,706,113 |   |

 

Operating expenses consist of general andadministrative expense, depreciation and amortization and research anddevelopment. Our operating expenses have historically been grouped into severalcategories of major expenses. These include research and development related tothe Rentech Process through operation of pilot plants and the Synhytechcommercial-scale plant in Pueblo, Colorado; management time 

54

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and other costs related toacquiring and funding the subsidiaries that constitute our other businesssegments in efforts to bring them to profitable operations; marketing ourtechnology; other general and administrative expenses; and the costs offinancing our operations.

We incur substantial research and development expensesin our testing laboratory where we actively conduct work to further improve ourtechnology and to perform services for our customers. We have had significantgrowth in our general and administrative expenses as our salary expenses andoperating costs have grown.

We expect to experience operating costs on a muchlarger scale than in the past for the East Dubuque nitrogen fertilizer plantacquired April 26, 2006. We plan to make substantial capital investmentsto reconfigure the plant to improve its economic results and to use ourFischer-Tropsch technology for additional revenues and other benefits. If wemake substantial capital investments in plants in which we may acquire anequity interest, we would incur significant depreciation and amortizationexpenses in the future.

*Generaland Administrative Expenses.*   General andadministrative expenses were $10,951,590 during the year ended September 30,2005, up $6,425,038 from fiscal 2004 when these expenses were $4,526,552. Ofthe increase during fiscal 2005, $2,893,137 related to one-time write-offs ofexpenses directly related to the acquisition of RCN. These one-time write-offexpenses consisted of: $1,807,057 of abandoned acquisition costs, $901,846 ofabandoned debt issue costs, and $184,234 of aborted offering costs in fiscal2005. In addition, the Company issued 540,000 warrants as a breakup fee toother subscribers whose subscriptions for the purchase of preferred stock werenot accepted by the Company. These warrants resulted in aborted offeringexpense of $375,682. In the fourth quarter of fiscal 2005, we expensed$1,561,822 of salary expenses related to retirement packages issued to the CEOand COO. Not including those charges, general and administrative expensesincreased $1,594,397 during the year ended 2005. The majority of the increasein general and administrative expenses during fiscal 2005 relates to $324,187in costs incurred related to the Company’s implementation of the requirementsof Section 404 of the 2002 Sarbanes-Oxley Act, and $332,500 ofcompensation expense related to a warrant issued to the Company’s currentPresident. In addition, salaries and benefits allocated to general andadministrative expenses rather than to cost of sales increased by $351,815, or17%, during the year ended September 30, 2005. This was primarily due tohiring an in-house legal counsel during the third quarter of fiscal 2004 and acost of living increase received by employees in fiscal year 2005. Contractsalaries and consulting expenses increased by $680,274, or 219% during yearended September 30, 2005. The increase was due to additional consultingcost requirements for the design and engineering phase of the conversion of theRCN ammonia plant to use coal as the feedstock. Insurance expense increased by$133,561, or 59% during the year ended September 30, 2005 as a result ofobtaining additional coverages in the current fiscal year after assessing ourinsurance portfolio. Bad debt expense decreased by $125,755, or 100% during theyear ended September 30, 2005 due to a write-off in fiscal year 2004. Manyother general and administrative expenses experienced increases and decreasesduring year ended September 30, 2005, none of which were individuallysignificant.

*Depreciationand Amortization.*   Depreciation and amortizationexpenses during fiscal 2005 and 2004 were $444,032 and $461,530. Of theseamounts, $39,722 and $31,199 were included in costs of sales.

*Researchand Development.*   Research and developmentexpenses were $495,919 during fiscal 2005. These expenses were all from ouralternative fuels segment. This expense decreased by $253,311 from fiscal 2004,when these expenses were $749,230. The decrease in research and developmentexpenses is due to the fact that the majority of our research and developmentwork during fiscal 2005 was conducted by our joint venture FT Solutions LLC,which we created in June 2004 with Headwaters Technology Innovation Group, Inc.In fiscal 2005, we continued work on advanced catalysts and separation, processoptimization, 

55

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and product upgrading.Flowsheet simulations and feasibility studies also provide input to researchand development direction.

*Total Operating Expenses.*   Totaloperating expenses during fiscal 2005 were $11,851,819, as compared to$5,706,113 during fiscal 2004, an increase of $6,145,706. The increase is aresult of an increase in general and administrative expenses of $6,425,038, adecrease in depreciation and amortization charges included in operatingexpenses of $26,021, and a decrease in research and development expenses of$253,311.

**Loss From Operations**

| ** **                  | ** ** | **For the Years Ended  September 30,** | ** **  |
|-----------------------------|------------|------------------------------------------------------------|-------------|
| ** **                  | ** ** | **2005**                                                   | ** **  | **2004** | ** ** |
| Loss from operations:       |       |                                                       |        |   |   |
| Technical services          |       | $                                                          | (12,003,449 | ) | $ | (5,518,242 | ) |
| Rental income               |       | 123,422                                                    |        | 117,213 |   |
| Total loss from  operations |       | $                                                          | (11,880,027 | ) | $ | (5,401,029 | ) |

 

Loss from operations during fiscal 2005 increased by$6,478,998 to a loss of $11,880,027. This compares to a loss of $5,401,029during fiscal 2004. The increased loss resulted from an increase in totaloperating expenses of $6,145,706 during fiscal 2005 and a decrease in grossprofit of $333,292.

*Loss from operations for technical services* was $12,003,449 during fiscal 2005, up from$5,518,242 during fiscal 2004, an increase of $6,485,207. Loss from operationswas up in fiscal year 2005 as our operating expenses increased by $6,145,706and our gross profit decreased by $339,501.

**Other Income (Expense)**

| ** **                              | ** ** | **For the Years Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Other income (expense):                 |       |                                                       |       |   |   |
| Loss on investments                     |       | $                                                          | (206,500   | ) | $ | (588,500 | ) |
| Equity in loss of investee              |       | (735,815                                                   | )          | (252,415 | ) |
| Interest income                         |       | 81,360                                                     |       | 14,804 |   |
| Interest expense                        |       | (2,874,661                                                 | )          | (856,732 | ) |
| Gain/(loss) on disposal of fixed assets |       | 723                                                        |       | (3,444 | ) |
| Total other income  (expense)           |       | $                                                          | (3,734,893 | ) | $ | (1,686,287 | ) |

 

*OtherIncome (Expenses).*   Other income (expenses)includes loss (i.e., impairment) of investments, equity in loss in investee,interest income, interest expense and gain/(loss) on disposal of fixed assets.

*Losson Investments.*   During fiscal year 2005, werecognized $206,500 as loss on investments, compared to $588,500 in fiscal2004. The decrease in loss on investments related to our 410,400 shares ofcommon stock of Global Solar Energy, Inc. and our 375,840 shares of commonstock of Infinite Power Solutions, Inc. During the fourth quarter offiscal 2004, we assessed the value of our minority ownership interests inGlobal Solar Energy and Infinite Power Solutions based upon currently availableinformation. As a result of that assessment, we recorded an impairment ofinvestment of $588,500 in fiscal 2004. As of September 30, 2005, weassessed the value of our minority ownership interests in Global Solar Energyand Infinite Power Solutions based upon currently available information. As aresult of that assessment, we recorded an impairment of investment of $206,500in fiscal 2005. At September 30, 2005, our investment in the two advancedtechnology companies was recorded at the estimated net realizable value of$405,000. 

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The assessment that weperformed was based upon estimates. The actual value that we realized fromthese investments was $405,000.

*Equityin Loss of Investee.*   During fiscal 2005, werecognized $735,815 in equity in loss of investee, as compared to $252,415during fiscal 2004. In fiscal 2005, $171,202 represented our 50% share of theloss incurred by our joint venture in Sand Creek Energy LLC, as compared to$181,890 in fiscal 2004. The LLC maintained the mothballed Sand Creek methanolplant. In October 2005, we purchased the remaining 50% of the Sand Creekmethanol plant for $1,400,000. The decrease during fiscal 2005 is due to adecrease in insurance and other maintenance costs of the facility. In fiscal2005, we recognized $564,613 in equity in loss of investee from our 50% shareof the loss in our joint venture FT Solutions, LLC, compared to $70,525 infiscal 2004. FT Solutions, LLC was formed in the fourth quarter of fiscal 2004.This loss represents our share of research and development expenses incurred byFT Solutions, LLC.

*InterestIncome.*   Interest income during fiscal 2005 was$81,360, an increase from $14,804 during fiscal 2004. The increased interestincome was due to having more funds invested in interest-bearing cash accountsprimarily from our net cash proceeds of $8,315,000 from our sale of Series APreferred Stock in April 2005.

*InterestExpense.*   Interest expense during fiscal 2005 was$2,874,661, increased from $856,732 during fiscal 2004. Of the increase duringfiscal 2005 of $2,017,929, 97% resulted from the recognition of non-cashinterest expense. Total non-cash interest expense recognized during fiscal 2005was $2,493,001, compared to $419,117 during fiscal 2004. Of the non-cashinterest expense recognized in fiscal 2005, $1,861,769, or 75%, was due to theamortization of debt issuance costs related to a line of credit and bridgeloans used to provide working capital and fund acquisition costs related to theplanned purchase of RCN.

*Gain(Loss) on Disposal of Fixed Assets.*   Duringfiscal 2005 we had a gain on disposal of fixed assets of $723 as compared to aloss on disposal of fixed assets during fiscal 2004 of $3,444. The disposalsrepresent the disposal of out-dated office furniture and equipment, computerequipment and vehicles.

*Total Other Expenses.*   Totalother expenses increased to $3,734,893 during fiscal 2005 from total otherexpenses of $1,686,287 during fiscal 2004. The increase of $2,048,606 resultedfrom a $206,500 impairment of investments during fiscal 2005, as compared to$588,500 during fiscal 2004; an increase in equity in loss of investee of$483,400; an increase in interest income of $66,556; an increase in interestexpense of $2,017,929; and an increase in gain on disposal of fixed assets of$4,167.

**Net Loss from Continuing Operations**

| ** **                                       | ** ** | **For the Years Ended  September 30,** | ** **  |
|--------------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                       | ** ** | **2005**                                                   | ** **  | **2004** | ** ** |
| Net loss from continuing  operations:            |       |                                                       |        |   |   |
| Technical services                               |       | $                                                          | (15,738,342 | ) | $ | (7,204,529 | ) |
| Rental services                                  |       | 123,422                                                    |        | 117,213 |   |
| Net loss from continuing operations before taxes |       | $                                                          | (15,614,920 | ) | $ | (7,087,316 | ) |
| Income tax expense                               |       | —                                                     |        | — |   |
| Net loss from  continuing operations             |       | $                                                          | (15,614,920 | ) | $ | (7,087,316 | ) |

 

The net loss from continuing operations was$15,614,920 or $0.270 per share during fiscal 2005 and $7,087,316 or $0.083 pershare during fiscal 2004. The increase of $8,527,604 resulted from an increasein loss from operations of $6,478,998, and an increase in total other expensesof $2,048,606.

*Net loss from continuing operations for technical services* were $15,738,342 during fiscal 2005, up from$7,204,529 during fiscal 2004, an increase of $8,533,813. Net loss fromcontinuing operations was up in 

57

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*fiscalyear 2005 due to an increase in other expense of $2,048,606, an increase inoperating expenses of $6,145,706 and a decrease in gross profit of $339,501.*

*DiscontinuedOperations:*

**Revenues**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Revenues:                     |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | 846,141    |   | $ | 2,265,567 |   |
| Industrial automation systems |       | 364,190                                                    |       | 801,270 |   |
| Oil and gas field services    |       | 6,596,798                                                  |       | 4,721,788 |   |
| Total revenues                |       | $                                                          | 7,807,129  |   | $ | 7,788,625 |   |

 

*OKON, Inc.*   OKONproduct sales from sales of water-based stains, sealers and coatings. Thesesales produced revenues of $846,141 in fiscal 2005. This compares to revenuesfrom this segment of $2,265,567 for the 2004 fiscal year, a decrease of 63%.The decrease in revenue occurred because we did not obtain as many contractsfor the manufacture of systems as in the previous year. On March 8, 2005,we sold our entire interest in OKON, Inc.

*RENCorporation.*   REN provided service revenues inthe amount of $364,190 during fiscal 2005 and $801,270 during fiscal 2004, adecrease of $437,080. These revenues were derived from contracts for themanufacture of complex microprocessor controlled industrial automation systems.The decrease in revenues was due to decreases in work orders for new equipmentas well as in work completed under test stand servicing arrangements. RENreduced its operating costs during fiscal 2005. Effective August 1, 2005,the Company sold its 56% ownership interest in REN.

*Petroleum Mud Logging, LLC  *PMLprovided service revenues in the amount of $6,596,798 derived from contractsfor the oil and gas field services in fiscal 2005. Our oil and gas fieldservice revenues for fiscal year 2005 increased by $1,875,010, or 40%, from theservice revenues of $4,721,788 in fiscal 2004. The increase in oil and gasfield services revenue was due to an increase in demand for our mud loggingservices as drilling for new natural gas wells has continued to increase in ourservice market. Due to the increased demand, we increased our manned mudlogging vehicles from 35 in fiscal 2004 to 38 in fiscal 2005, plus weincreased our limited service vehicles from 8 in fiscal 2004 to 16 in fiscal2005. The limited service vehicles allow us to perform mud logging servicesfrom a remote computer terminal and do not require a person on-site to performthe mud logging services. We were also able to increase our billing rates forservices as our average daily price increased approximately $40 from the lastmonth of fiscal year 2005 compared with the last month of fiscal year 2004. On November 15, 2006 we sold PML to privatelyheld, PML Exploration Services, LLC.

**Cost of Sales**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Cost of sales:                |       |                                                       |       |   |   |
| Product costs                 |       | $                                                          | 440,467    |   | $ | 1,166,816 |   |
| Industrial automation systems |       | 278,402                                                    |       | 594,541 |   |
| Oil and gas field services    |       | 4,596,197                                                  |       | 3,356,371 |   |
| Total cost of  sales          |       | $                                                          | 5,315,066  |   | $ | 5,117,728 |   |

 

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Our cost of sales for discontinued operations includescosts for our OKON products, industrial automation system services and oil andgas field services. During the year ended September 30, 2005, the combinedcost of sales was $5,315,066 compared to $5,117,728 during the year ended September 30,2004. The increase for fiscal year 2005 of $197,338 resulted from an increasein cost of sales of $1,239,826 experienced by our former oil and gas fieldservices segment offset by a decrease in cost of sales experienced by ourformer OKON product costs and REN industrial automation systems costs of$726,349 and $316,139, respectively.

*Costs of sales for productsales* are the cost of salesof our former paint business segment for sales of stains, sealers and coatings.During fiscal 2005, our costs of sales for the paint segment decreased by$726,349, or 62%, to $440,467, as compared to fiscal 2004.

*Costs of sales for theindustrial automation systems*segment were $278,402 during fiscal 2005 as compared to $594,541 during fiscal2004. The decrease in costs of $316,139 during fiscal 2005 was directly relatedto fewer orders for new equipment, and our inability to bill for servicecontracts until the services are completed.

*Costs of sales for oil and gas field services* increased to $4,596,197 during fiscal 2005, up from$3,356,371 during fiscal 2004. Of the increase of $1,239,826, 63% was relatedto field labor and benefits and field living expenses, while the remainder wasmade up of supplies and other miscellaneous costs. The increase in costs ofsales resulted from the increase in oil and gas field services revenue whichoccurred due to an increase in demand for our mud logging services as drillingfor new natural gas wells has continued to expand in our service market. Theincrease in the number of units in the field directly led to the increase infield labor and benefits and field living expenses, which makes up the largestpercentage of cost of sales.

**Gross Profit**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Gross Profit:                 |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | 405,674    |   | $ | 1,098,751 |   |
| Industrial automation systems |       | 85,788                                                     |       | 206,729 |   |
| Oil and gas field services    |       | 2,000,601                                                  |       | 1,365,417 |   |
| Total gross  profit           |       | $                                                          | 2,492,063  |   | $ | 2,670,897 |   |

 

*Gross profit for productsales* is the gross profit ofour former paint business segment for sales of stains, sealers and coatings.During fiscal 2005, our gross profit for the paint segment decreased by$693,077, or 63%, to $405,674, as compared to fiscal 2004.

*Gross profit for theindustrial automation systems*segment were $85,788 during fiscal 2005 as compared to $206,729 during fiscal2004. The decrease in gross profit of $120,941 during fiscal 2005 was directlyrelated to the 55% decrease in revenues from this segment as compared to fiscal2004. The decrease in revenue occurred because we did not obtain as manycontracts for the manufacture of systems as in the previous year.

*Grossprofit for oil and gas field services* increased to $2,000,601during fiscal 2005, up from $1,365,417 during fiscal 2004. The increase of$635,184 was due to increases in our number of units in service combined withour increase in billing rates.

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**Operating Expenses**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Operating expenses:           |       |                                                       |       |   |   |
| General and administrative    |       | $                                                          | 1,528,372  |   | $ | 2,452,073 |   |
| Depreciation and amortization |       | 47,463                                                     |       | 111,654 |   |
| Research and development      |       | 10,897                                                     |       | 23,123 |   |
| Total operating expenses      |       | $                                                          | 1,586,732  |   | $ | 2,586,850 |   |

 

Operating expenses consist of general andadministrative expense, depreciation and amortization and research anddevelopment. Our operating expenses have historically been grouped into severalcategories of major expenses.

*Generaland Administrative Expenses.*   General andadministrative expenses were $1,528,372 during fiscal 2005, down $923,701 fromfiscal 2004 when these expenses were $2,452,073. Salaries and benefits expensesdecreased $566,566, or 42% during the year ended September 30, 2005 due tothe sale of OKON in March 2005 and REN in August 2005. Commissionsexpense decreased by $109,510, or 72% during the year ended September 30,2005. This was caused by the decrease in the number of systems manufactured andsold by our former industrial automation systems subsidiary and the sale ofboth subsidiaries during fiscal 2005. Travel and entertainment decreased by$56,232, or 41% during the year ended September 30, 2005. This was theresult of reductions in travel at both subsidiaries as well as the sale of bothsubsidiaries during fiscal 2005. Many other general and administrative expensesexperienced increases and decreases during the year ended September 30,2005, none of which were individually significant.

*Depreciationand Amortization.*   Depreciation and amortizationexpenses during fiscal 2005 and 2004 were $224,736 and $286,973. Of theseamounts, $177,273 and $175,319 were included in costs of sales.

*Researchand Development.*   Research and developmentexpenses were $10,897 during fiscal 2005. These expenses were all from ourformer paint segment. This expense decreased by $12,226 from fiscal 2004,when these expenses were $23,123. The expense for 2004 included $17,187 fromour former paint segment and $5,936 from our former industrial automationsystems segment.

*Total Operating Expenses.*   Totaloperating expenses during fiscal 2005 were $1,586,732, as compared to$2,586,850 during fiscal 2004, a decrease of $1,000,118. The decrease is aresult of a reduction in general and administrative expenses of $923,701, adecrease in depreciation and amortization charges included in operatingexpenses of $64,191, and a decrease in research and development expenses of$12,226.

**Gain (Loss) From Operations**

| ** **                    | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Gain (loss) from  operations: |       |                                                       |       |   |   |
| Product sales                 |       | $                                                          | (164,717   | ) | $ | (95,560 | ) |
| Industrial automation systems |       | (250,270                                                   | )          | (427,235 | ) |
| Oil and gas field services    |       | 1,320,318                                                  |       | 606,842 |   |
| Total loss from  operations   |       | $                                                          | 905,331    |   | $ | 84,047 |   |

 

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*Loss from operations forproduct sales* is the lossfrom operations of our former paint business segment for sales of stains,sealers and coatings. During fiscal 2005, our loss from operations for thepaint segment increased by $69,157, or 72%, to $164,717, as compared to fiscal2004. The decrease in loss from operations was due to a decrease of $693,077 ingross profit partially offset by a decrease in operating expenses of $623,920.

*Loss from operations forthe industrial automation systems* segment were $250,270 during fiscal 2005 as compared to $427,235during fiscal 2004. The decrease in loss from operations of $176,965 duringfiscal 2005 was directly related to the decrease of 55% in revenues fromthis segment as compared to fiscal 2004. The decrease in revenue occurredbecause we did not obtain as many contracts for the manufacture of systems asin the previous year.

*Income from operations for oil and gas field services* increased to $1,320,318 during fiscal 2005, up from$606,842 during fiscal 2004. The increase of $713,476 was due to increases inour number of units in service combined with our increase in billing rates.

**Other Income (Expense)**

| ** **                              | ** ** | **For the Years Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Other income (expense):                 |       |                                                       |       |   |   |
| Loss on investments                     |       | $                                                          | —     |   | $ | (57,867 | ) |
| Interest income                         |       | 4                                                          |       | 38 |   |
| Interest expense                        |       | (44,869                                                    | )          | (54,915 | ) |
| Gain (loss) on disposal of fixed assets |       | 484                                                        |       | (248,949 | ) |
| Total other income  (expense)           |       | $                                                          | (44,381    | ) | $ | (361,693 | ) |

 

*OtherIncome (Expenses).*   Other income (expense)includes: loss (i.e., impairment) of investments, interest income, interestexpense and gain (loss) on disposal of fixed assets.

*Losson Investments.*   During fiscal year 2005, werecognized no loss on investments, compared to $57,867 in fiscal 2004 relatedto our write-off of a non-compete agreement at REN.

*InterestExpense.*   Interest expense during fiscal 2005 was$44,869, down from $54,915 during fiscal 2004. The decrease in interest expensefor the year ended September 30, 2005 is due to interest accrued on aninsurance loan in the former industrial automation segment in fiscal year 2004that did not exist in fiscal year 2005.

*Gain(Loss) on Disposal of Fixed Assets.*   Duringfiscal 2005 we had $484 gain on disposal of fixed assets as compared to a losson disposal of fixed assets during fiscal 2004 of $248,949. $224,826, or 90% ofthe disposals in fiscal 2004 related to the impairment of the Case machineowned by REN. We impaired the value of the Case machine, as managementconcluded that REN did not have the resources to proceed with its plan toprovide testing services to customers using the machine. The remaining value ofthe Case machine was reclassified to component inventory during the fourthquarter of fiscal 2004. The remaining disposals represent the disposal ofout-dated office furniture and equipment, computer equipment and vehicles.

*Total Other Expenses.*   Totalother expenses decreased to $44,381 during fiscal 2005 from total otherexpenses of $361,693 during fiscal 2004. The decrease of $317,312 resulted froman impairment of investments during fiscal 2004 of $57,867; a decrease ininterest income of $34; a decrease in interest expense of $10,046; and anincrease in gain on disposal of fixed assets of $249,433.

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**Minority Interest in Subsidiary’s Net Loss**

| ** **                                       | ** ** | **For the Years Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Minority interest in  subsidiary’s net loss |       | $                                                          | —     |   | $ | 154,269 |   |
|                                                  |            |                                                            |            |  |  |  |  |

 

*Minority Interest inSubsidiary’s Net Loss.*   The minority interest insubsidiary’s net loss of $0 during fiscal 2005, as compared to $154,269 duringfiscal 2004, resulted from the continued operating loss of REN. Minorityinterests in the net loss of a subsidiary are reflected as an addition to consolidatednet loss, reduced by the excess of any losses applicable to the minorityinterest in a subsidiary that exceed the minority interest in the equitycapital of the subsidiary. The Company accounts for the excess loss inaccordance with Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements” as the minority interest shareholders have no obligationto fund such losses. As of September 30, 2005, the Company had acumulative minority interest excess loss of $255,527, including $120,608 in theyear ended September 30, 2005 and $134,919 for the year ended September 30,2004, which was charged against the majority interest on the ConsolidatedStatement of Operations as part of discontinued operations, reducing the totalminority interest to $0 and $154,269 for the years ended September 30,2005 and 2004.

**Net Gain (Loss) and Gain on Sale of DiscontinuedOperations**

| ** **                                                                                      | ** ** | **For the Years Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Discontinued  operations:                                                                       |       |                                                       |       |   |   |
| Net loss from product sales                                                                     |       | $                                                          | (164,821   | ) | $ | (109,832 | ) |
| Net loss from industrial automation systems                                                     |       | (281,304                                                   | )          | (608,303 | ) |
| Net gain from oil and gas field services, net of tax  of $61,428 (2005) and $0 (2004) |       | 1,245,647                                                  |       | 594,758 |   |
| Net gain (loss) from discontinued operations, net of  tax of $61,428 (2005) and $0 (2004)  |       | $                                                          | 799,522    |   | $ | (123,377 | ) |
| Gain on sale of OKON, net of tax of $0                                                          |       | 699,244                                                    |       | — |   |
| Loss on sale of REN, net of tax of $6,172                                                       |       | (242,743                                                   | )          | — |   |
| Net gain on sale of discontinued operations, net of  tax of $61,428 (2005) and $0 (2004)        |       | $                                                          | 456,501    |   | $ | — |   |
| Total  discontinued operations                                                                  |       | $                                                          | 1,256,023  |   | $ | (123,377 | ) |

 

For fiscal 2005, we experienced a net gain fromdiscontinued operations of $1,256,023, or $.015 per share, compared to a netloss from discontinued operations of $123,377, or $.001 per share, duringfiscal 2004.

*Netloss from discontinued operations for product sales*isthe net loss from discontinued operations of our paint business for sales ofstains, sealers and coatings. During fiscal 2005, our net loss from discontinuedoperations for the paint business was $164,821, as compared to fiscal 2004 whenwe experienced a net loss from discontinued operations of $109,832. Inaddition, in fiscal 2005, after the sale of OKON, Inc., we accrued $75,000for potential product liability claims that would be owed to Zinsser, the buyerof OKON, Inc., for product liability claims that occurred prior to thesale date but were not quantified until after the sale date. The $75,000 isincluded in net loss from product sales for the year ended September 30,2005.

*Netloss from discontinued operations for the industrial automation systems segment*was $281,304 during fiscal 2005 as compared to$608,303 during fiscal 2004. The decrease in net loss from discontinued 

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operations of $326,999during fiscal 2005 were the result of decreases in gross profit of $120,941,partially offset by a decrease in operating expenses of $297,906, which weredue to certain cost cutting measures at REN as a result of their lack of newcontracts.

*Netincome from discontinued operations for oil and gas field services*increasedto $1,307,075 during fiscal 2005, up from $594,758 during fiscal 2004. Theincrease of $712,317 was due to increases in our number of units in servicecombined with our increase in billing rates.

*Gain on sale ofdiscontinued operations*is the gain on the sale ofOKON, Inc. on March 8, 2005 partially offset by a loss on the sale ofour 56% ownership in REN on August 1, 2005, net of tax of $6,172.

*The gain on the sale of OKON was calculated asfollows:*

| Sales Price                                               |   | $         | 2,000,000 |   |
|-----------------------------------------------------------|--------|-----------|-----------|--------|
| Less transaction  costs                                   |   | (135,000  | )         |
| Other transaction costs,  non-cash                        |   |      |      |
| Extension of employee options                             |   | (73,919   | )         |
| 20,000 options issued to employees                        |   | (20,503   | )         |
| Net sales price  less transaction costs                   |   | $         | 1,770,578 |   |
| Book value of Rentech’s ownership in OKON, Inc. |   | 1,071,334 |      |
| Rentech’s gain on sale  of OKON, Inc.           |   | $         | 699,244   |   |

 

*The loss on the sale of REN was calculated as follows:*

| Sales Price                                                     |   | $          | 1,175,000 |   |
|-----------------------------------------------------------------|--------|------------|-----------|--------|
| Less transaction  costs                                         |   | (6,304     | )         |
| Net sales price  to Rentech, Inc., after transaction costs |   | $          | 1,168,696 |   |
| Consisting of:                                                  |   |       |      |
| Earn-Out  receivable                                            |   | $          | 1,175,000 |   |
| Legal fees                                                      |   | (6,304     | )         |
| Net sales price  to Rentech, Inc., after transaction costs |   | $          | 1,168,696 |   |
| Less reserve on Earn-Out                                        |   | (1,000,000 | )         |
| Net sales price  after transaction costs and reserve            |   | $          | 168,696   |   |
| Book value of Rentech’s ownership in REN                   |   | 405,267    |      |
| Rentech’s loss on sale  of REN prior to taxes of $6,172    |   | $          | (236,571  | )      |

 

**Net Loss Applicable to Common Stockholders**

| ** **                                  | ** ** | **For the Years Ended  September 30,** | ** **  |
|---------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                  | ** ** | **2005**                                                   | ** **  | **2004** | ** ** |
| Net loss                                    |       | $                                                          | (14,358,897 | ) | $ | (7,210,693 | ) |
| Deemed dividend on preferred stock          |       | (9,000,000                                                 | )           | — |   |
| Cash dividends  paid on preferred stock     |       | (341,475                                                   | )           | — |   |
| Net loss applicable to  common stockholders |       | $                                                          | (23,700,372 | ) | $ | (7,210,693 | ) |

 

For fiscal 2005, weexperienced a net loss applicable to common stockholders of $23,700,372, or$0.255 per share compared to a net loss applicable to common stockholders of$7,210,693, or $0.084 per share during fiscal 2004. Included in net lossapplicable to common stockholders for fiscal 2005 was 

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$9,341,475of dividends on Series A Preferred Stock, which is comprised of a$9,000,000 deemed dividend related to a beneficial conversion feature andwarrants and $341,475 of cash dividends paid on the Series A PreferredStock.

**Inflation**

Inflation has and isexpected to have only a minor effect on the Company’s results of operations andsources of liquidity.

**ANALYSIS OF CASHFLOWS**

Thefollowing table summarizes our Consolidated Statements of Cash Flows:

| ** **                       | ** ** | **For the Years Ended  September 30,** | ** **   |
|----------------------------------|------------|------------------------------------------------------------|--------------|
| ** **                       | ** ** | **2006**                                                   | ** **   | **2005** | ** ** |
| Net Cash (Used in)  Provided by: |       |                                                       |         |   |   |
| Operating activities             |       | $                                                          | (15,611,888  | ) | $ | (4,297,136 | ) |
| Investing activities             |       | $                                                          | (107,525,621 | ) | $ | (532,774 | ) |
| Financing  activities            |       | $                                                          | 124,983,252  |   | $ | 29,295,206 |   |

 

**Cash Flows FromOperating Activities**

*NetLoss.*   Operating activities produced net lossesof $38,647,682 during fiscal 2006, as compared to $14,358,897 during fiscal2005. The cash flows used in operations during these periods resulted from thefollowing operating activities.

*Depreciation.*   Depreciationis a non-cash expense. This expense increased during fiscal 2006 by $3,299,779,as compared to fiscal 2005. Of the increase $3,197,256 or 97% was due to theacquisition of the nitrogen fertilizer plant in East Dubuque.

*Amortization.*   Amortizationis also a non-cash expense. This expense did not change during fiscal 2006 ascompared to fiscal 2005.

*Gain/ Loss on Disposal of Fixed Assets.*   Duringfiscal 2006, we recorded a loss on the disposal of fixed assets of $84,484.During fiscal 2005, we recorded a gain on the disposal of fixed assets of$1,207.

*Non-CashInterest Expense.**  *Totalnon-cash interest expense recognized during the fiscal year ended September 30,2006 was $936,910, compared to $2,386,749 during the fiscal year ended September 30,2005. The non-cash interest expense recognized in the fiscal year ended September 30,2006 was due to the amortization of bond issue costs and beneficial conversionfeature expenses of our convertible notes. Most of the non-cash interestexpense recognized in the fiscal year ended September 30, 2005 was due tothe amortization of debt issuance costs related to a line of credit and bridgeloans used to provide working capital and fund acquisition costs related to thepurchase of RCN.

*Equityin Loss of Investee.**  *Duringfiscal 2006, we recognized $0 in equity in loss of investee, as compared to$735,815 during fiscal 2005. In fiscal 2005, $171,202 represents our 50% shareof the loss incurred by our joint venture in Sand Creek Energy LLC. In October 2005,we purchased the remaining 50% of the Sand Creek methanol plant for $1,400,000.The decrease during fiscal 2005 is due to a decrease in insurance and othermaintenance costs of the facility. In fiscal 2005, we recognized $564,613 inequity in loss of investee from our 50% share of the loss in our joint ventureFT Solutions, LLC.

*Write-offof Acquisition Costs, Debt Issue Costs and Offering Costs.*   Infiscal 2006, we wrote-off $355,000 of abandoned debt issue costs. In fiscal2005, we wrote-off $1,807,057 of abandoned acquisition 

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costs, $901,846 ofabandoned debt issue costs and $184,234 of abandoned offering costs in fiscal2005 related to the acquisition of RCN.

*AccruedInterest Expense.**  *Totalaccrued interest expense recognized during the fiscal year ended September 30,2006 was $1,061,880, compared to $147,690 during the fiscal year ended September 30, 2005.

*CommonStock Issued for Services.*   During fiscal 2006,we issued $1,602,980 in common stock in lieu of cash compensation to outsidedirectors and employees of the Company for their services. During fiscal 2005,we issued $9,759 in common stock in lieu of cash for such services*.*

*Gain onsale of subsidiaries.**  *Duringfiscal 2005, we sold two subsidiaries, OKON, Inc, which was wholly-owned, andREN, of which we owned 56%. We recorded a gain of $699,244 on the sale of OKON,and a $236,571 loss on the sale of our 56% ownership in REN Corporation.

*Loss ofInvestments.*   During fiscal 2006, we wrote downour investment in an advanced technology company by $305,000. During fiscal2005, we wrote down our investment in advanced technology companies by$206,500.

*StockOptions and Warrants Issued for Services.*   During fiscal 2006, 2,100,000 warrants issued forservices vested. The Company valued the shares underlying the warrants usingthe Black-Scholes option-pricing model which resulted in a charge tocompensation expense of $5,728,494. In addition, we issued a warrant topurchase 53,150 shares of the Company’s common stock to a consultant forreaching an incentive in a consulting contract which resulted in $7,451 ofconsulting expense in the fiscal year ended September 30, 2006. Also, theCompany issued a warrant to purchase 1,000,000 shares of the Company’s commonstock at $2.4138 per share to DKRW Advanced Fuels LLC which resulted in acharge to marketing expense of $2,676,602. During the year ended September 30,2006, the Company recorded $1,569,462 of related stock-based compensationexpense to recognize the cost of vested options.

*Changesin Operating Assets and Liabilities.*   The changesin operating assets and liabilities, net of business combination, result fromthe following factors.

*AccountsReceivable.*   Accounts receivable increased by$5,074,723 during fiscal 2006, as compared to an increase of $100,811 in fiscal2005. The fiscal 2006, $4,605,153 or 89% of increase in accounts receivable wasdue to the acquisition of the nitrogen products manufacturing segment. Thefiscal 2005 increase in accounts receivable was due to increases in sales bythe oil and gas field services segment of 40%.

*OtherReceivables and Receivable from Related Party.*   Duringfiscal 2006, other receivables and receivable from related party decreased by$254,335 primarily due to cash collected related to earn-out receivables. Duringfiscal 2005, other receivables and receivable from related party increased by$106,583 due to timing of payments on other receivables and the earn-outreceivables due related to the sale of OKON, Inc. and REN.

*Inventories.*   Thefair value of inventories when the Company acquired REMC in April 2006 was$15,632,290. During the remainder of fiscal year 2006 the balance ofinventories decreased by $789,489 to $14,842,801.

*PrepaidExpenses and Other Current Assets.*   Prepaidexpenses and other current assets increased during fiscal 2006 by $700,472. Thedecrease reflects the timing of payment on certain annual insurance premiums,net of the amortization of such premiums.

*AccountsPayable.*   Accounts payable increased by$3,726,178 during fiscal 2006. Of this increase $3,419,416 or 92% was due to theincrease in the accounts payable balance in our alternative fuels segment.During fiscal 2005, accounts payable decreased by $206,076 which resulted fromthe timing of receiving and paying trade payables.

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*AccruedRetirement Payable.**  *Accruedretirement payable decreased by $905,701 as a result of cash payments maderelated to the retirement payable of our former CEO and COO during the fiscalyear ended September 30, 2006.

*AccruedLiabilities, Accrued Payroll and Other.*   Accruedliabilities, accrued payroll and other increased $6,646,098 during fiscal 2006as a result of the timing of payment of certain accruals. Of this increase$4,440,327 or 67% was deferred revenue related to our nitrogen productsmanufacturing segment.

*Net Cash (Used) inOperating Activities.*   The total net cash used inoperations increased to $15,611,888 during fiscal 2006, as compared to$4,297,136 during fiscal 2005.

**Cash Flows FromInvesting Activities**

*Purchaseof Marketable Securities.*   During fiscal 2006, weinvested $30,284,896 into investment-grade marketable securities that arecomprised of U.S. government and municipal notes and bonds, corporate bonds,asset-backed securities, commercial paper, special auction variable ratesecurities and other investment-grade marketable debt and equity securities. Thesesecurities are available for sale to fund the Company’s future operationalneeds.

*Purchaseof Property and Equipment.*   During fiscal 2006,we purchased $5,197,654 of property and equipment. Of the property andequipment purchased with cash, 74% was attributable to the front-end,engineering and design activities related to the conversion of our East Dubuqueplant to use coal as a feedstock rather thannatural gas and to enable the facility to produce both nitrogen fertilizers andFischer-Tropsch fuels, while the remainder was primarilyattributable to computer equipment and office furniture.

*Proceedfrom Sale of Investments.*   During fiscal 2006, wecollected $100,000 on our sale of investment in advance technology companies.

*Proceedsfrom Earn-out Receivables.*   During fiscal 2006,we collected $180,014 on the long-term receivable balance due from RENCorporation and OKON in which the amount due is based on the earnings of thesecompanies that stemmed from the Company’s divestiture of these formersubsidiaries.

*Increasein Restricted Cash.*   During fiscal 2006, wepledged $204,908 of cash as collateral on an outstanding letter of credit thatis being used to lease office space.

*Acquisitions,Net of Cash Received.**  *Weused $70,772,611 to purchase the nitrogen products manufacturing facilities inEast Dubuque during the fiscal year ended September 30, 2006. We used$1,345,378, net of cash received, to purchase the remaining 50% share of SandCreek Energy, LLC during the fiscal year ended September 30, 2006.

*Depositsand Other Assets.**  *Duringthe fiscal year ended September 30, 2006, deposits and other assetsdecreased by $188 on our Consolidated Statements of Cash Flows.

*Net Cash (Used) inInvesting Activities.*   The total net cash used ininvesting activities increased to $107,525,621 during fiscal 2006 as comparedto $532,774 during fiscal 2005. The increase was primarily a result of the $72,117,989of acquisition costs paid during fiscal 2006, and the $5,197,654 in purchasesof property and equipment, and our $30,284,896 investment in marketablesecurities.

**Cash Flows FromFinancing Activities**

*Proceedsfrom Issuance of Common Stock.*   During fiscal2006, we received $62,560,000 in net cash proceeds from the issuance of commonstock compared to $21,113,474 during fiscal 2005.

*Paymentof Offering Costs.**  *Duringthe fiscal year ended September 30, 2006, we paid $4,371,832 in offeringcosts as compared to $169,618 during fiscal 2005.

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*Paymentof Financial Advisory Fees.**  *Duringthe fiscal year ended September 30, 2006, we paid $1,750,000 for advisoryfees to Credit Suisse to act as our exclusive financial advisor with respect tothe development, financing and review of certain financing matters inconnection with the East Dubuque and Natchez projects.

*Proceedsfrom Options and Warrants Exercised.**  *During the fiscal year ended September 30, 2006,we received $7,021,225 from the exercise of options and warrants.

*Paymentof Dividends on Preferred Stock.*   During fiscal2006, we paid $74,437 in dividends on preferred stock compared to $341,475 infiscal 2005.

*Proceedsfrom Subscription Receivable.**  *Duringthe fiscal year ended September 30, 2006, we received $12,255,550 from asubscription receivable as a result of a Securities Purchase Agreement betweenthe Company and Wellington Management Company whereby a group of purchasers ledby Wellington purchased 13,436,000 shares of Company common stock at a price of$2.30 per share.

*Proceedsfrom Convertible Debt, Long-Term Debt and Notes Payable.*   Duringthe fiscal year ended September 30, 2006, we received $57,500,000 from theissuance of convertible senior notes, compared to $2,850,000 received from theissuance of long-term convertible debt during the fiscal year ended September 30,2005.

*Paymentof Debt Issuance Costs.*   During fiscal 2006, wepaid $4,370,284 in debt issue costs as compared to $991,177 during fiscal 2005.Of the debt issuance costs paid in the current fiscal year, $355,000 waspaid to M.A.G. Capital as a due diligence fee in relation to the CommitmentLetter signed November 15, 2005.

*Paymentson Line of Credit, Net.*   During fiscal 2006, wemade net payments on our lines of credit of $499,217 from our lines of credit,as compared to net payments on our lines of credit of $643,388 during fiscal2005. During fiscal 2006, the borrowing on the line of credit was used to fundthe working capital needs of REMC.

*Paymentson Long-Term Debt and Long-Term Convertible Debt.*   Duringfiscal 2006, we repaid $3,287,159 on our debt obligations as compared to$837,610 during fiscal 2005. Payments in the fiscal year ended September 30,2006 reflect payments on notes payable and long-term convertible debt.

*NetCash Provided by Financing Activities.*   The netcash provided by financing activities during fiscal 2006 was $124,983,252,compared to $29,295,206 in cash provided by financing activities during fiscal2005.

*Cash and Cash Equivalents*increasedduring fiscal 2006 by $1,845,743 compared to an increase of $24,465,296 duringfiscal 2005. These changes increased the ending cash balance at September 30,2006 to $26,566,456 and increased the ending cash balance at September 30,2005 to $24,720,713.

**LIQUIDITY ANDCAPITAL RESOURCES**

At September 30, 2006, the Company had workingcapital of $65,520,862, as compared to working capital of $32,031,397 at September 30,2005. Our current assets totaled $81,486,571, including net accounts receivableof $5,207,883, and our current liabilities were $15,965,709. We had long-termliabilities of $58,135,446, of which most related to our long-term convertibledebt as well as the mortgage on our development and testing laboratory. Fromour inception on December 18, 1981 through September 30, 2006, wehave incurred losses in the amount of $100,658,612, including accumulated othercomprehensive loss of $2,294. For the fiscal year ended September 30,2006, we recognized a $38,647,682 net loss, and negative cash flow fromoperations of $15,611,888. If the Company does not operate at a profit in thefuture, it may be unable to continue its operations at the present level or atall.

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Historically, we have relied for working capital uponprivate placements and public offerings of our common stock, which have beensold at a discount from the market price. We have also previously soldconvertible preferred stock and convertible promissory notes bearing interestin private placements and public offerings. Our shareholders approved anamendment to our Restated Articles of Incorporation to increase the number ofauthorized shares of common stock from 150,000,000 to 250,000,000. For theyears ended September 30, 2006, 2005 and 2004, we received cash proceedsfrom the issuance of common stock of $81,836,775 (including $62,560,000 fromthe issuance of common stock, $12,255,550 from the receipt of a subscriptionreceivable and $7,021,225 from the exercise of stock options and warrants),$21,113,474, and $4,706,951. In addition, we received cash proceeds fromlong-term debt and long-term convertible debt to stockholders of $57,500,000,2,850,000, and $565,000 for each of the three fiscal years, respectively, aswell as $0, $8,315,000, and $0 from the issuance of convertible preferredstock.

On April 18, 2006, the Company closed itsconcurrent public offerings of 16,000,000 shares of common stock at a price pershare of $3.40 and $50,000,000 principal amount of its 4.00% Convertible SeniorNotes Due 2013. The Notes bear interest at the rate of 4.00% per year on theprincipal amount of the Notes, payable in cash semi-annually in arrears on April 15and October 15 of each year, beginning October 15, 2006. Holders mayconvert their Notes into shares of Rentech’s common stock (or cash or acombination of cash and shares of common stock, if Rentech so elects) at aninitial conversion rate of 249.2522 shares of Rentech’s common stock per $1,000principal amount of Notes (which represents a conversion price of approximately$4.0120 per share of common stock), under the circumstances described in theNotes. On April 24, 2006, the underwriters of the Company’s concurrentpublic offerings of 16,000,000 shares of common stock priced at $3.40 per shareand $50 million aggregate principal amount of its 4.0% convertible senior notesdue 2013 exercised in full their over-allotment options by purchasing an additional2,400,000 shares of common stock and $7,500,000 of convertible senior notes. Includingthe over-allotment purchases, the Company’s offerings totaled 18,400,000 sharesof common stock at a price to the public of $3.40 per share and $57,500,000 inconvertible senior notes, resulting in net proceeds to Rentech of approximately$113,000,000 after deducting the underwriting discounts, commissions, and fees.

Our principal needs for liquidity in the past havebeen to fund working capital, pay for research and development of the RentechProcess, pay the costs of acquiring and funding our paint, oil and gas fieldservices and industrial automation segments, invest in advanced technologycompanies, pay dividends on preferred stock and to pay acquisition costs associatedwith our East Dubuque plant. Our business historically has focused on theresearch and development of our Fisher-Tropsch technology, and licensing it tothird parties.

More recently we have begun to directly deploy ourRentech Process in selected domestic projects. We initially implemented thisstrategy by purchasing RCN on April 26, 2006, which owns a nitrogenfertilizer production plant in East Dubuque, Illinois. The purchase price ofthe acquisition was $50,000,000, plus an amount equal to net working capital ofRCN at closing, which was approximately $20,000,000. We funded the acquisitionof RCN using approximately $70,000,000 of the proceeds of our concurrent publicofferings of common stock and convertible senior notes. In connection with the closingof the acquisition, RCN was re-named Rentech Energy Midwest Corporation,referred to herein as REMC. The business of REMC is highly seasonal andrequires substantial working capital to operate during the period when nitrogenfertilizer sales are slow and to build inventory in anticipation of theplanting season. In order to meet the working capital needs of REMC, we haveobtained a revolving credit facility. The revolving credit facility has amaximum availability of $30,000,000, subject to borrowing base limitations andother covenants. As of September 30, 2006, REMC had no aggregateborrowings under the Revolving Credit Facility. We plan to convert the REMCfacility in phases. In Phase 1 of the conversion, we intend to add acommercially available coal gasification system that converts coal into syngasfor use in fertilizer production. During Phase 1A of the conversion, we plan toadd the Rentech Process to produce liquid hydrocarbon products, such as dieseland jet fuels, from the additional syngas produced from the coal 

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gasification process. Weestimate we would need approximately $810 million of additional debt and equityfinancing to finance Phases 1 and 1A of the conversion and that commercial operation of Phases 1 and 1A wouldcommence by 2010.

In addition to the conversion of our East Dubuqueplant, we are also pursuing the development of other alternative fuelsprojects, including one in Natchez, Mississippi that we and potentially apartner or partners would construct to produce FT liquid hydrocarbon and otherproducts using the Rentech Process. In addition, we are discussing proposalswith owners of energy feedstocks for the joint development of alternative fuelsprojects and the use of the Rentech Process under licensing arrangements. Wehave entered into a Joint Development Agreement with Peabody, for theco-development of two coal-to-liquids projects, which would be located onPeabody coal reserves. The projects would convert coal into ultra-cleantransportation fuels using the Company’s proprietary FT CTL process. Wecurrently have one active license arrangement with DKRW-AF for the use of ourcoal-to-liquids technology in its proposed Medicine Bow Project in Wyoming.

In October 2005, we paid $1,400,000 to acquirethe 50% equity interest in Sand Creek Energy, LLC that we did not already own.We are preparing to construct and plan to operate on the site what we believewill be the United States’ first fully integrated Fischer-Tropsch,coal-to-liquids, product development unit (“PDU”) research facility. This plantis expected to produce ultra-clean diesel and aviation fuels and naphtha fromvarious domestic coals, petroleum coke and biomass feedstocks on ademonstration scale, utilizing coal gasification technology and the RentechProcess. With the PDU in operation, we expect to be able to optimize theoperating conditions of the FT synthesis and upgrading section for producingdifferent specialized cuts of fuels. The products from the facility will beused to supply test quantities of these ultra-clean fuels to potential licensesand customers. We expect construction of thePDU to be completed by the third calendar quarter of 2007 and to costapproximately $40 million.

To achieve our objectivesas planned for fiscal 2007, we will need substantial amounts of capital that wedo not now have to fund the conversion of the East Dubuque Plant to use theRentech process, construction of the PDU, and development projects such as theNatchez Project and the potential projects with Peabody. In order to fund theseprojects and to meet our other working capital requirements, we expect to raisecapital at the project level through both debt and equity sources, as well asat the Rentech level where we may issue additional shares of our common stockand other equity or debt securities. We have two shelf registration statements;the first covering $29,940,000 aggregate offering price of securities and thesecond covering $44,097,200 in shares of our common stock for issuance infuture financing transactions, in each case as of September 30, 2006. Someof the securities to be offered will not be registered under the Securities Actof 1933, and may not be offered or sold in the United States absent anavailable exemption from registration. The success of any given project will bebased, in part, on the success of the related project level financing. In orderto fund our working capital requirements and to fund our other plans, we mayalso issue shares of convertible preferred stock or other securitiesconvertible into common stock or we may enter into additional debt instruments.A substantial increase in indebtedness could result in substantially increasedinterest costs and the issuance of additional preferred stock could increasedividend costs, as well as transactional and other costs. Moreover, the levelof corporate activity required to pursue the opportunities and objectivesoutlined above, and described under Item 1—Business, has resulted in amaterially increased cash burn rate, including costs for consultants,attorneys, accountants, financial advisors, and other service providers, aswell as the need for additional personnel, systems, and expense for theCompany. These costs are expected to continue and to rise. As relates to thecapital requirements of the PDU and the Company’s working capital requirementsas projected for fiscal 2007, we believe that our currently available cash,cash flows from operations, funds from the potential sale of assets and otherplans, which could include additional debt or equity financing, will besufficient to meet our cash operating needs through the fiscal year ending September 30,2007.

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**CONTRACTUALOBLIGATIONS**

Inaddition to the lines of credit and long-term convertible debt previouslydescribed, we have entered into various other contractual obligations. Thefollowing table lists our significant contractual obligations at September 30,2006:

| **Contractual Obligations**  | ** ** | ** ** | ** ** | **Total**  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ***Continuing  Operations***      |       |       |       |       |       |                            |       |               |       |               |       |
| Notes payable to  related parties |       | $          | 169,482    |       | $          | —                          |       | $                  | 169,482    |               | $          | —                           |       | $ | — |   |
| Lines of credit(3)                |       | —     |       | —     |       | —                          |       | —             |       | —             |       |
| Long-term debt                    |       | 992,980    |       | 19,952     |       | 43,869                          |       | 50,224             |       | 878,935            |       |
| Long-term  convertible debt(2)    |       | 57,500,000 |       | —     |       | —                          |       | —             |       | 57,500,000         |       |
| Operating leases(1)               |       | 1,762,887  |       | 475,445    |       | 1,025,877                       |       | 261,565            |       | —             |       |
| Interest payments  on debt        |       | 15,982,279 |       | 2,375,930  |       | 4,735,584                       |       | 4,720,023          |       | 4,150,742          |       |
| Purchase  obligations(4)          |       | 11,526,285 |       | 11,526,285 |       | —                          |       | —             |       | —             |       |
| Retirement  payables              |       | 656,121    |       | 530,893    |       | 125,228                         |       | —             |       | —             |       |
|                              |       | $          | 88,590,034 |       | $          | 14,928,505                      |       | $6,100,040         |       | $                  | 5,031,812  |                             | $          | 62,529,677 |   |
| ***Discontinued Operations***     |       |       |       |       |       |                            |       |               |       |               |       |
| Long-term debt                    |       | $          | 189,710    |       | $          | 71,351                          |       | $                  | 100,052    |               | $          | 18,307                           |       | $ | — |   |
| Operating leases                  |       | 162,725    |       | 108,681    |       | 54,044                          |       | —             |       | —             |       |
| Interest payments  on debt        |       | 21,577     |       | 11,081     |       | 9,851                           |       | 645                |       | —             |       |
|                              |       | $          | 374,012    |       | $          | 191,113                         |       | $                  | 163,947    |               | $          | 18,952                           |       | $ | — |   |
| ***Combined  Operations***        |       |       |       |       |       |                            |       |               |       |               |       |
| Notes payable to  related parties |       | $          | 169,482    |       | $          | —                          |       | $                  | 169,482    |               | $          | —                           |       | $ | — |   |
| Lines of credit(3)                |       | —     |       | —     |       | —                          |       | —             |       | —             |       |
| Long-term debt                    |       | 1,182,690  |       | 91,303     |       | 143,921                         |       | 68,531             |       | 878,935            |       |
| Long-term  convertible debt(2)    |       | 57,500,000 |       | —     |       | —                          |       | —             |       | 57,500,000         |       |
| Operating leases(1)               |       | 1,925,612  |       | 584,126    |       | 1,079,921                       |       | 261,565            |       | —             |       |
| Interest payments  on debt        |       | 16,003,856 |       | 2,387,011  |       | 4,745,435                       |       | 4,720,668          |       | 4,150,742          |       |
| Purchase  obligations(4)          |       | 11,526,285 |       | 11,526,285 |       | —                          |       | —             |       | —             |       |
| Retirement  payables              |       | 656,121    |       | 530,893    |       | 125,228                         |       | —             |       | —             |       |
|                              |       | $          | 88,964,046 |       | $          | 15,119,618                      |       | $                  | 6,263,987  |               | $          | 5,050,764                        |       | $ | 62,529,677 |   |

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(1)          We have leased officespace under two non-cancelable operating leases, one of which expires October 31,2009, the other expires in June 2010. The first lease has a renewal optionfor an additional five years. PML (our discontinued affiliate that was sold on November 15,2006) has also leased additional office space under an operating lease, whichexpires June 2008. In addition we have entered into various otheroperating leases, which expire through January 2011.

(2)          On April 18, 2006,the Company closed a public offering that included $50,000,000 principal amountof Convertible Senior Notes Due 2013. The Notes bear interest at the rate of4.00% per year on the principal amount of the Notes, payable in cashsemi-annually in arrears on April 15 and October 15 of each year,beginning October 15, 2006. Holders may convert their Notes into shares ofthe Company’s common stock (or cash or a combination of cash and shares ofcommon stock, if we so elect) at an initial conversion rate of 249.2522 sharesof the Company’s common stock per $1,000 principal amount of Notes (whichrepresents a conversion price of approximately $4.0120 per share of commonstock), under the circumstances described in the Notes. On April 24, 2006,the Company’s underwriters exercised their over-allotment option and purchasedan additional $7,500,000of convertible senior notes. Including theover-allotment, the Company offered a total of $57,500,000 in convertiblesenior notes. On the balance sheet these notes are shown net of $820,716 ofdeferred 

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financing charges relatedto the beneficial conversion feature for a total of $56,679,284 on September 30,2006.

(3)          On April 26, 2006,REMC entered into a Financing Agreement (the “Revolving Credit Facility”) withThe CIT Group/Business Credit, Inc. to support the working capital needsof REMC’s East Dubuque, Illinois nitrogen fertilizer plant. The RevolvingCredit Facility has a maximum availability of $30,000.000, subject to borrowingbase limitations, and bears interest at the Chase Bank Rate plus 0.25% forChase Bank Rate Loans and LIBOR rate plus 2.50% for LIBOR Loans. Subject to theconditions and limitations stipulated in the agreement, we may elect that suchprincipal debt will be Chase Bank Rate Loans, LIBOR Loan, or a combination ofboth. The interest rate at September 30, 2006 was 8.25%. The RevolvingCredit Facility is guaranteed by RDC, and is secured by a first prioritysecurity interest in all of REMC’s current assets, including, withoutlimitation, all receivables, accounts, inventories and general intangibles. TheRevolving Credit Facility also imposes various restrictions and covenants onREMC, including, without limitation, limitations on REMC’s ability to incuradditional debt, guarantees or liens, ability to make distributions ordividends or payments of management or similar fees to affiliates, a minimumfixed charge coverage ratio and a minimum tangible net worth covenant. Inaddition, the facility provides for a letter of credit guarantee by CIT whichwould be deducted from the $30,000,000 maximum availability. As of September 30,2006, REMC had aggregate borrowings under the Revolving Credit Facility of $0and letter of credit guarantees under the facility of $0.

(4)          The amount presentedrepresents certain open purchases orders with our vendors. Not all of our openpurchase orders are purchase obligations, since some of the orders are notenforceable or legally binding on the Company until the goods are received.

Inaddition to the contractual obligations previously described, we have enteredinto various employment agreements with certain of our executive officers. Thefollowing table lists the commitments under the employment agreements at September 30,2006:

| ** **                                 | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Other Commercial Commitments** | ** ** | ** **                                                              | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
| Employment  agreements(1)                  |       | $                                                                       | 1,602,513  |   | $ | 2,066,478 |   |   | $ | — |   |   |   | $ | — |   |   | $ | 3,668,991 |   |
|                                       |       | $                                                                       | 1,602,513  |   | $ | 2,066,478 |   |   | $ | — |   |   |   | $ | — |   |   | $ | 3,668,991 |   |
|                                            |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Wehave entered into various employment agreements with officers of the Companywhich extend to May 15, 2009. These agreements describe annualcompensation as well as the compensation that we must pay upon termination ofemployment.

**OFF-BALANCE SHEETARRANGEMENTS**

The Company has nooff-balance sheet arrangements.

**Recent AccountingPronouncements From Financial Statement Disclosures**

In March 2006, the FASB issued FIN No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”,which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes.” This Interpretation prescribes a threshold forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also provides guidanceon de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition. The effective date of thisinterpretation is the first fiscal year that begins after December 15,2006. Management is currently evaluating the impact FIN 48 will have on 

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the Company’s financialstatements. In September 2006, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards No. 157, “ FairValue Measurements ” (SFAS No. 157). This standard clarifies the principlethat fair value should be based on the assumptions that market participantswould use when pricing an asset or liability. Additionally, it establishes afair value hierarchy that prioritizes the information used to develop thoseassumptions. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007. Management does not expectSFAS No. 157 to have a material impact on the Company’s financialcondition or results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87,88, 106, and 132(R) ” (SFAS No. 158). This standard requiresemployers to recognize the underfunded or overfunded status of a definedbenefit postretirement plan as an asset or liability in its statement offinancial position and to recognize changes in the funded status in the year inwhich the changes occur through accumulated other comprehensive income.Additionally, SFAS No. 158 requires employers to measure the funded statusof a plan as of the date of its year-end statement of financial position. Thenew reporting requirements and related new footnote disclosure rules ofSFAS No. 158 are effective for fiscal years ending after December 15,2006. The new measurement date requirement applies for fiscal years endingafter December 15, 2008. Management does not expect SFAS No.158 to have amaterial impact on the Company’s financial condition or results of operations.

In September 2006,the SEC issued SAB No. 108 regarding the process of quantifying financialstatement misstatements. SAB No. 108 states that registrants should useboth a balance sheet approach and an income statement approach when quantifyingand evaluating the materiality of a misstatement. The interpretations in SAB No. 108contain guidance on correcting errors under the dual approach as well as providetransition guidance for correcting errors. This interpretation does not changethe requirements within SFAS No. 154, “Accounting Changes and ErrorCorrections- a replacement of APB No. 20 and Financial AccountingStandards Board (“FASB”) Statement No. 3,” for the correction of an erroron financial statements. SAB No. 108 is effective for annual financialstatements covering the first fiscal years ending after November 15, 2006.We will be required to adopt this interpretation by September 30, 2007. Weare currently evaluating the requirements of SAB No. 108 and the impactthis interpretation may have on our financial statements.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

**InterestRate Risk.****  **Weare exposed to the impact of interest rate changes related to our investment ofcurrent cash and cash equivalents and marketable securities. These funds aregenerally highly liquid with short-term maturities, and the related market riskfor cash and cash equivalents and marketable securities is not consideredmaterial. In addition to market risk related to marketable securities, our debtis at fixed rates and at variable interest rates. A hypothetical increase ordecrease in interest rates by 1% would have changed annual interest expense on thevariable rate loan by approximately $1,850 for the year ended September 30,2006. We believe that fluctuations in interest rates in the near term will notmaterially affect our consolidated operating results, financial position orcash flow.

**CommodityPrice Risk.**   Due to our acquisition of RCN, weare exposed to market risk due to changes in natural gas prices. Natural gas isa raw material used in the production of various nitrogen-based products thatare manufactured at the East Dubuque Plant. Market prices of nitrogen-basedproducts are affected by changes in natural gas prices as well as supply anddemand and other factors. As a normal course of business, REMC currentlyproduces nitrogen-based fertilizer products throughout the year to supply itsneeds during the high sales volume spring season. Nitrogen-based inventoryremaining at the end of the spring season will be subject to market risk due tochanges in natural gas prices and supply and demand. Currently, REMC purchasesnatural gas for use in its East Dubuque Plant on the spot 

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market, and throughshort-term, fixed-supply, fixed-price and index-price purchase contracts whichwill lock in pricing for a portion of its natural gas requirements through thewinter months which have demonstrated the highest degree of volatility. In thepast, REMC has also purchased natural gas through short-term, fixed-supply,fixed-priced contracts. Notwithstanding these purchase contracts, REMC remainsexposed to significant market risk. There has been a generally increasing trendin natural gas prices during the last three years with prices reaching recordhighs in 2005 and then reducing in 2006 due to various supply and demandfactors, including the increasing overall demand for natural gas fromindustrial users, which is affected, in part, by the general conditions of theUnited States economy, and other factors. Seasonal fluctuations exist withineach year resulting from various supply and demand factors, such as theseverity of winters affecting consumer consumption for heating, summersaffecting industrial demand by utilities for electrical generation, among otherfactors. Changes in levels of natural gas prices and market prices ofnitrogen-based products can materially affect REMC’s financial position andresults of operations. A hypothetical increase of $0.10 per MMBTU of naturalgas could increase the cost to produce one ton of ammonia by approximately$3.50. REMC has experienced no difficulties in securing supplies of naturalgas, however, natural gas is purchased at market prices and such purchases aresubject to price volatility.

Upon conversion of the East Dubuque Plant to use coalas feedstock, we similarly would be subject to market risk due to changes incoal prices. An increase in the price of coal, after the conversion iscompleted, or in other commodities that we may use as feedstock at other plantswe might acquire in the future could also adversely affect our operatingresults. We intend to enter into long-term coal contracts with establishedprices that are subject to escalators based on certain routine metrics. Weexpect that the term of the contracts would vary between 5 and 10 years. Coaldemand in the domestic market is currently at a high level, and coal pricinghas increased year-over-year in nearly every significant domestic market. It isnot practicable at this time to quantify the impact of a change in coal pricingas relates to the conversion of the East Dubuque Plant as the coal contractsand final engineering of the project have not yet been completed.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**Quarterly Results.**   Thefollowing table presents unaudited consolidated operating results for eachquarter within the two most recent fiscal years. We believe that all necessaryadjustments, consisting only of normal recurring adjustments, have beenincluded in the amounts stated below to present fairly the following quarterlyresults when read in conjunction with our consolidated financial statementsincluded elsewhere in this report. Results of operations for any particularquarter are not necessarily indicative of results of operations for a fullfiscal year.

| ** **                                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** **  |
|---------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|-------------|
| Fiscal Year 2006                                                    |       |               |       |                |       |               |       |                |        |
| Revenues                                                            |       | $                  | 40,586     |                | $          | 25,786             |       | $                   | 17,672,173  |   | $ | 26,777,987 |   |
| Gross profit /  (loss)                                              |       | $                  | 40,586     |                | $          | 25,786             |       | $                   | (804,309    | ) | $ | 1,177,955 |   |
| Loss from  operations                                               |       | $                  | (5,948,393 | )                   | $          | (12,795,327        | )          | $                   | (11,949,297 | ) | $ | (8,725,853 | ) |
| Net loss from  continuing operations                                |       | $                  | 5,955,095  | )                   | $          | (12,819,453        | )          | $                   | (12,266,416 | ) | $ | (8,870,879 | ) |
| Net income from  discontinued operations, net of tax(1)   |       | $                  | 326,635    |                | $          | 283,096            |       | $                   | 234,859     |   | $ | 419,571 |   |
| Net loss                                                            |       | $                  | (5,628,460 | )                   | $          | (12,536,357        | )          | $                   | (12,031,557 | ) | $ | (8,451,308 | ) |
| Dividends                                                           |       | $                  | (74,437    | )                   | $          | —             |       | $                   | —      |   | $ | — |   |
| Loss applicable  to common Stock                                    |       | $                  | (5,702,897 | )                   | $          | (12,536,357        | )          | $                   | (12,031,557 | ) | $ | (8,451,308 | ) |
| Loss from  continuing operations per share                          |       | $                  | (.052      | )                   | $          | (.108              | )          | $                   | (.091       | ) | $ | (.063 | ) |
| Loss from  discontinued operations per share                        |       | $                  | .003       |                | $          | .002               |       | $                   | .002        |   | $ | .003 |   |
| Loss per common  share                                              |       | $                  | (.050      | )                   | $          | (.106              | )          | $                   | (.089       | ) | $ | (.060 | ) |
| Fiscal Year 2005                                                    |       |               |       |                |       |               |       |                |        |
| Revenues                                                            |       | $                  | 319,692    |                | $          | 118,647            |       | $                   | 101,856     |   | $ | 48,492 |   |
| Gross profit /  (loss)                                              |       | $                  | (69,008    | )                   | $          | (13,870            | )          | $                   | 3,616       |   | $ | 51,054 |   |
| Loss from  operations                                               |       | $                  | (1,466,537 | )                   | $          | (4,239,758         | )          | $                   | (2,180,196  | ) | $ | (3,993,536 | ) |
| Net loss from  continuing operations                                |       | $                  | (2,402,900 | )                   | $          | (5,419,974         | )          | $                   | (2,806,722  | ) | $ | (4,985,324 | ) |
| Net income (loss)  from discontinued operations, net of tax(1) |       | $                  | 151,335    |                | $          | 763,237            |       | $                   | 343,979     |   | $ | (2,528 | ) |
| Net loss                                                            |       | $                  | (2,251,565 | )                   | $          | (4,656,737         | )          | $                   | (2,462,743  | ) | $ | (4,987,852 | ) |
| Dividends                                                           |       | $                  | —     |                | $          | —             |       | $                   | (8,558,631  | ) | $ | (782,844 | ) |
| Loss applicable  to common stock                                    |       | $                  | (2,251,565 | )                   | $          | (4,656,737         | )          | $                   | (11,021,374 | ) | $ | (5,770,696 | ) |
| Loss from  continuing operations per share                          |       | $                  | (.027      | )                   | $          | (.058              | )          | $                   | (.122       | ) | $ | (.063 | ) |
| Loss from  discontinued operations per share                        |       | $                  | .002       |                | $          | .008               |       | $                   | .004        |   | $ | .001 |   |
| Loss per common share                                               |       | $                  | (.025      | )                   | $          | (.050              | )          | $                   | (.118       | ) | $ | (.062 | ) |

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(1)          Forthe fiscal year ended September 30, 2006 the Company deemed its subsidiaryPetroleum Mud Logging, LLC (PML) to be a discontinued operation, and PML’sresults of operations were segregated from continuing operations for all yearspresented. In addition, the PML assets and liabilities were segregated ascurrent and non-current held for sale assets and liabilities on our balancesheet for all periods presented. On March 8, 2005, the Company sold all ofits interest in OKON, Inc., and on August 1, 2005 the Companydisposed of its remaining interest in REN Holding Corporation (RHC). TheCompany considered these two entities to be discontinued operations for thefiscal year ended September 30, 2005, and their results of operations weresegregated from continuing operation for all periods presented. Since theCompany had completed its the sale of these two entities before September 30,2005, these entities’ assets and liabilities are not shown on our balancesheets as of September 30, 2006 and 2005.

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As a result of the Company’s application of SFAS 123(R) commencingon October 1, 2005, we expensed $11,584,990 related to the issuance ofstock options, warrants and restricted stock units. Of that amount, $8,899,841was charged to compensation expense, $2,676,602 was charged to marketingexpense and $8,547 was charged to consulting expense during fiscal 2006. Referto footnote 15 in Notes to the Consolidated Financial Statements for furtherinformation about the Company’s adoption of SFAS 123(R). Also, during fiscal2006 we recorded $355,000 of abandoned debt issue costs related to duediligence fees paid to MAG Capital and $1,000,000 related to a break up feepaid to MAG Capital.

The increased net loss of during the second quarter offiscal 2005 resulted from $2,559,457 of one-time write-offs of expensesdirectly related to the acquisition of REMC. We expensed $1,657,611 ofabandoned acquisition costs and $901,846 of abandoned debt issue costs in thethree months ended March 31, 2005. The increased loss applicable to commonstock in the third quarter of fiscal 2005 resulted from an $8,558,631 deemeddividend related to a beneficial conversion feature and warrants issued inconjunction with Series A Preferred Stock. The warrants were charged todeemed dividend upon issuance and the beneficial conversion feature wasamortized to deemed dividends over 90 days, which was the earliest period thepreferred shares could be converted into our common stock. In the fourthquarter of fiscal 2005, we expensed $1,561,822 of salary expenses related toretirement packages issued to the CEO and COO, we also expensed $332,500 ofcompensation expense related to a warrant issued to an entity controlled by theCompany’s current President, and we recorded an impairment of $206,500 on ourinvestment in Global Solar Energy.

The financial statementsidentified in Item 15 are filed as part of this Annual Report on Form 10-K.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We have not had a changeof independent auditors during our two most recent fiscal years or subsequentinterim period.

**ITEM 9A.**        CONTROLSAND PROCEDURES

***Disclosure Controlsand Procedures.***   As of the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) or 15d-15(e) of theExchange Act). Based upon that evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures are effective to provide reasonableassurance that information is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and thatsuch information is accumulated and communicated to the Company’s management,including the Chief Executive Officer and the Chief Financial Officer asappropriate, to allow timely decisions regarding required disclosure.

***Management’s Reporton Internal Control Over Financial Reporting.******  ***Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) or 15(d)-15(f) ofthe Exchange Act). Under the supervision and with the participation of theCompany’s management, including the Chief Executive Officer and the ChiefFinancial Officer, the Company conducted an evaluation of the effectiveness ofits internal control over financial reporting based upon the framework in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on that evaluation, the Company’s management concluded that its internalcontrol over financial reporting was effective as of September 30, 2006.

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Management’s assessment of the effectiveness of theCompany’s internal control over financial reporting as of September 30,2006, has been audited by Ehrhardt Keefe Steiner & Hottman and theyhave issued an attestation report on the management’s assessment of internalcontrol over financial reporting.

***Changes in Internal Control over Financial Reporting.******  ***There has beenno change in the Company’s internal control over financial reporting during theCompany’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information requiredby Item 10 regarding our directors, executive officers and audit committeeis incorporated by reference from the information under the caption “Electionof Directors” in our definitive proxy statement for our 2007 annual meeting ofshareholders (the “Proxy Statement”) which we intend to file with theSecurities and Exchange Commission within 120 days after the end of the fiscalyear covered by this report.

**Code of Ethics**

The Company has adopted a Code of Ethics applicable toits principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions. ThisCode of Ethics is posted on our Website. The Internet address for our Websiteis www.rentechinc.com, and the Code of Ethics is provided under the sectioncalled Corporate Governance.

We intend to satisfy thedisclosure requirement under Item 5.05 of Form 8-K regarding anamendment to (other than technical, administrative or non-substantiveamendments), or waiver from, a provision of our Code of Ethics by posting suchinformation on our Website, at the address and general location specified inthe previous paragraph.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby Item 11 of Form 10-K is incorporated by reference to theinformation contained in the section captioned “Executive Compensation” in theProxy Statement.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Information with respectto this item is incorporated herein by reference from the section entitled “SecurityOwnership of Certain Beneficial Owners and Management” in the Proxy Statement.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Information with respectto this item is incorporated herein by reference from the section entitled “CertainRelationships and Related Transactions” in the Proxy Statement.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information requiredby this item is included under the caption “Principal Accountant Fees andServices” in the Proxy Statement.

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

(a)           Financial Statements.See Index to Financial Statements and Schedule at page F-1.

(b)          Exhibits Required byItem 601 of Regulation S-K. See Index to Exhibits.

(c)           Financial StatementSchedules. See Index to Financial Statements and Schedules at page F-1.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                              | RENTECH,  INC.                                             |
|------------------------------|------------------------------------------------------------|
|                         | /s/ D. HUNT RAMSBOTTOM                                     |
| Date: December 14, 2006 | D. Hunt Ramsbottom,*Chief Executive Officer and President* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                              | /s/ D. HUNT  RAMSBOTTOM                                                                                |
|------------------------------|--------------------------------------------------------------------------------------------------------|
| Date: December 14, 2006 | D. Hunt Ramsbottom, *Chief  Executive Officer, President and Director (principal executive officer)*   |
|                         | /s/ I. MERRICK KERR                                                                                    |
| Date: December 14, 2006 | I. Merrick Kerr, *Executive Vice President  and Chief Financial Officer (principal financial officer)* |
|                         | /s/ GEOFFREY S. FLAGG                                                                                  |
| Date: December 14, 2006 | Geoffrey S. Flagg, *Chief  Accounting Officer  (principal accounting officer)*                         |
|                         | /s/ DENNIS L. YAKOBSON                                                                                 |
| Date: December 14, 2006 | Dennis L. Yakobson, *Chairman  and Director*                                                           |
|                         | /s/ RONALD C. BUTZ                                                                                     |
| Date: December 14, 2006 | Ronald C. Butz, *Director*                                                                             |
|                         | /s/ THOMAS L. BURY                                                                                     |
| Date: December 14, 2006 | Thomas L. Bury, *Director*                                                                             |
|                         | /s/ MICHAEL F. RAY                                                                                     |
| Date: December 14, 2006 | Michael F. Ray, *Director*                                                                             |
|                         | /s/ ERICH W. TIEPEL                                                                                    |
| Date: December 14, 2006 | Erich W. Tiepel, *Director*                                                                            |
|                         | /s/ HALBERT S. WASHBURN                                                                                |
| Date: December 14, 2006 | Halbert S. Washburn, *Director*                                                                        |

 

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**RENTECH, INC. ANDSUBSIDIARIES**

**Tableof Contents**

|                                                                              | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|
|                                                                         |       |     |       |
| Report of Independent  Registered Public Accounting Firm                     |       | F-2      |       |
| Consolidated Financial  Statements:                                          |       |     |       |
| Consolidated Balance Sheets                                                  |       | F-4      |       |
| Consolidated Statements of Operations                                        |       | F-6      |       |
| Consolidated Statements of Stockholders’ Equity  and Comprehensive Loss |       | F-7      |       |
| Consolidated Statements of Cash Flows                                        |       | F-10     |       |
| Notes to Consolidated  Financial Statements                                  |       | F-12     |       |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Stockholders and Board of DirectorsRentech, Inc.

We have audited the accompanying consolidated balancesheets of Rentech Inc. and Subsidiaries (the “Company”) as ofSeptember 30, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive loss and cash flows for eachof the years in the three-year period ended September 30, 2006. We alsohave audited management’s assessment, included in the accompanying Management’sReport on Internal Control over Financial Reporting included in Item 9A,that the Company maintained effective internal control over financial reportingas of September 30, 2006, based on criteria established in *Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). TheCompany’s management is responsible for these consolidated financialstatements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on theseconsolidated financial statements, an opinion on management’s assessment, andan opinion on the effectiveness of the Company’s internal control overfinancial reporting based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of consolidatedfinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. Our audit ofinternal control over financial reporting included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company as ofSeptember 30, 2006 and 2005, and the results of its operations and itscash flows for each of the years in the three-year period endedSeptember 30, 2006 in conformity with accounting principles generallyaccepted in the United States of America. Also in our 

F-2

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opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as ofSeptember 30, 2006, is fairly stated, in all material respects, based on criteriaestablished in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”). Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as ofSeptember 30, 2006, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).
| /s/ EHRHARDT KEEFE STEINER & HOTTMAN PC |   |
|--------------------------------------------------|--------|
| December 13,  2006                          |
| Denver, Colorado                                 |

 

F-3

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**RENTECH, INC. Consolidated Balance Sheets**

| ** **                                                                                                                                 | ** ** | **As of September 30,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                                                                 | ** ** | **2006**                               | ** **  | **2005** | ** ** |
| **Assets**                                                                                                                                 |       |                                   |        |   |   |
| **Current assets**                                                                                                                         |       |                                   |        |   |   |
| Cash and cash equivalents                                                                                                                  |       | $                                      | 26,566,456  |   | $ | 24,720,713 |   |
| Restricted cash                                                                                                                            |       | 204,908                                |        | — |   |
| Marketable securities                                                                                                                      |       | 30,282,602                             |        | — |   |
| Accounts receivable, net of $125,775 (2006) and  (2005) allowance for doubtful accounts (Note 2 and 18)                                    |       | 5,207,883                              |        | 5,067 |   |
| Subscription receivable (Note 14)                                                                                                          |       | —                                 |        | 12,255,550 |   |
| Inventories (Note 5)                                                                                                                       |       | 14,842,801                             |        | — |   |
| Other receivables, net                                                                                                                     |       | 110,614                                |        | 382,820 |   |
| Receivable from related party (Note 19)                                                                                                    |       | —                                 |        | 22,154 |   |
| Prepaid expenses and other current assets                                                                                                  |       | 2,747,644                              |        | 16,574 |   |
| Assets held for sale, current (Note 4)                                                                                                     |       | 1,523,663                              |        | 999,343 |   |
| **Total current assets**                                                                                                                   |       | 81,486,571                             |        | 38,402,221 |   |
| **Property and equipment****,** net of accumulated depreciation and  amortization of $4,853,133 (2006) and $1,393,810 (2005) (Note 6) |       | 61,404,888                             |        | 1,933,474 |   |
| **Other  assets**                                                                                                                          |       |                                   |        |   |   |
| Licensed technology, net of accumulated amortization  of $2,992,651 (2006) and $2,763,870 (2005) (Note 7)                             |       | 438,497                                |        | 667,278 |   |
| Investment in advanced technology company (Note 8)                                                                                         |       | —                                 |        | 405,000 |   |
| Technology rights, net of accumulated amortization of  $258,972 (2006) and $230,197 (2005) (Note 7)                              |       | 28,775                                 |        | 57,549 |   |
| Deposits and other assets (Note 10)                                                                                                        |       | 5,647,408                              |        | 392,977 |   |
| Assets held for sale, non-current (Note 4)                                                                                                 |       | 1,680,038                              |        | 1,633,450 |   |
| **Total other assets**                                                                                                                     |       | 7,794,718                              |        | 3,156,254 |   |
| **Total assets**                                                                                                                           |       | $                                      | 150,686,177 |   | $ | 43,491,949 |   |

 

(Continued on following page)

See Notes to Consolidated Financial Statements.

F-4

----

**RENTECH, INC. Consolidated Balance Sheets**

(Continued from previouspage)

| ** **                                                                                                                                                                                                                                                                                 | ** ** | **As of September 30,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2006**                               | ** **  | **2005** | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                             |       |                                   |        |   |   |
| **Current liabilities**                                                                                                                                                                                                                                                                    |       |                                   |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                           |       | $                                      | 4,686,687   |   | $ | 535,660 |   |
| Accrued payroll and benefits                                                                                                                                                                                                                                                               |       | 3,020,015                              |        | 127,508 |   |
| Deferred compensation (Note 20)                                                                                                                                                                                                                                                            |       | —                                 |        | 326,508 |   |
| Accrued liabilities (Note 2)                                                                                                                                                                                                                                                               |       | 6,149,065                              |        | 713,592 |   |
| Accrued interest                                                                                                                                                                                                                                                                           |       | 1,053,339                              |        | — |   |
| Accrued retirement payable (Note 13)                                                                                                                                                                                                                                                       |       | 530,893                                |        | 905,683 |   |
| Short-term debt (Note 9)                                                                                                                                                                                                                                                                   |       | —                                 |        | 876,972 |   |
| Current portion of long-term debt (Note 9)                                                                                                                                                                                                                                                 |       | 19,952                                 |        | 184,621 |   |
| Short-term convertible debt (Note 10)                                                                                                                                                                                                                                                      |       | —                                 |        | 1,020,862 |   |
| Current portion of long-term convertible debt to stockholders  (Note 10)                                                                                                                                                                                                              |       | —                                 |        | 729,406 |   |
| Liabilities held for sale, current (Note 4)                                                                                                                                                                                                                                                |       | 505,758                                |        | 950,012 |   |
| Total current liabilities                                                                                                                                                                                                                                                                  |       | 15,965,709                             |        | 6,370,824 |   |
| **Long-term  liabilities**                                                                                                                                                                                                                                                                 |       |                                   |        |   |   |
| Long-term debt, net of current portion (Note 9)                                                                                                                                                                                                                                            |       | 973,028                                |        | 1,176,648 |   |
| Long-term convertible debt to stockholders, net of  current portion (Note 10)                                                                                                                                                                                                         |       | 56,679,284                             |        | 643,958 |   |
| Convertible notes payable to related parties (Note  20)                                                                                                                                                                                                                                    |       | 169,482                                |        | 199,109 |   |
| Accrued retirement payable (Note 13)                                                                                                                                                                                                                                                       |       | 125,228                                |        | 656,139 |   |
| Investment in Sand Creek Energy, LLC (Note 12)                                                                                                                                                                                                                                             |       | —                                 |        | 19,278 |   |
| Other long-term liabilities                                                                                                                                                                                                                                                                |       | 70,065                                 |        | 7,485 |   |
| Liabilities held for sale, non-current (Note 4)                                                                                                                                                                                                                                            |       | 118,359                                |        | 147,326 |   |
| **Total long-term liabilities**                                                                                                                                                                                                                                                            |       | 58,135,446                             |        | 2,849,943 |   |
| **Total liabilities**                                                                                                                                                                                                                                                                      |       | 74,101,155                             |        | 9,220,767 |   |
| **Commitments  and contingencies**(Notes  2, 11 and 13)                                                                                                                                                                                                                                    |       |                                   |        |   |   |
| **Stockholders’  equity** (Note 14)                                                                                                                                                                                                                                                   |       |                                   |        |   |   |
| Preferred stock—$10 par value; 1,000,000 shares  authorized; 90,000 series A convertible preferred shares authorized and  issued and zero (2006) and 59,000 (2005) series A convertible preferred  shares outstanding, liquidation preference of $0 (2006) and $5,900,000 (2005) |       | —                                 |        | 590,000 |   |
| Series C participating cumulative preferred  stock—$10 par value; 500,000 shares authorized; no shares issued and  outstanding                                                                                                                                                   |       | —                                 |        | — |   |
| Common stock—$.01 par value; 250,000,000 shares  authorized; 141,792,787 (2006) and 110,120,500 (2005) shares issued and outstanding                                                                                                                                             |       | 1,417,928                              |        | 1,101,205 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                 |       | 175,825,706                            |        | 94,588,613 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                        |       | (100,656,318                           | )           | (62,008,636 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                       |       | (2,294                                 | )           | — |   |
| **Total stockholders’ equity**                                                                                                                                                                                                                                                        |       | 76,585,022                             |        | 34,271,182 |   |
| **Total  liabilities and stockholders’ equity**                                                                                                                                                                                                                                       |       | $                                      | 150,686,177 |   | $ | 43,491,949 |   |

 

See Notes to Consolidated Financial Statements.

F-5

----

**RENTECH, INC.Consolidated Statements of Operations**

| ** **                                                                                                  | ** ** | **For the Years Ended September 30,** | ** **  |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                                                                                  | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Revenues****(Notes 17)**                                                                                  |       |                                                           |        |   |   |   |   |
| Product sales                                                                                               |       | $                                                              | 44,397,519  |   | $ | — |   | $ | — |   |
| Service revenues                                                                                            |       | 119,013                                                        |        | 588,687 |   | 984,492 |   |
| Total revenues                                                                                              |       | 44,516,532                                                     |        | 588,687 |   | 984,492 |   |
| **Cost of sales**                                                                                           |       |                                                           |        |   |   |   |   |
| Product sales                                                                                               |       | 44,076,514                                                     |        | — |   | — |   |
| Service revenues                                                                                            |       | —                                                         |        | 616,895 |   | 679,408 |   |
| Total cost of sales                                                                                         |       | 44,076,514                                                     |        | 616,895 |   | 679,408 |   |
| **Gross profit (loss)**                                                                                     |       | 440,018                                                        |        | (28,208 | ) | 305,084 |   |
| **Operating expenses**                                                                                      |       |                                                           |        |   |   |   |   |
| General and  administrative expense                                                                         |       | 27,289,153                                                     |        | 10,951,590 |   | 4,526,552 |   |
| Depreciation and  amortization                                                                              |       | 516,028                                                        |        | 404,310 |   | 430,331 |   |
| Research and development                                                                                    |       | 12,053,707                                                     |        | 495,919 |   | 749,230 |   |
| Total operating expenses                                                                                    |       | 39,858,888                                                     |        | 11,851,819 |   | 5,706,113 |   |
| **Operating Loss**                                                                                          |       | (39,418,870                                                    | )           | (11,880,027 | ) | (5,401,029 | ) |
| **Other income (expenses)**                                                                                 |       |                                                           |        |   |   |   |   |
| Loss on investments  (Notes 8)                                                                              |       | —                                                         |        | (206,500 | ) | (588,500 | ) |
| Equity in loss of  investee (Notes 12)                                                                      |       | —                                                         |        | (735,815 | ) | (252,415 | ) |
| Interest income                                                                                             |       | 1,998,347                                                      |        | 81,360 |   | 14,804 |   |
| Dividend income                                                                                             |       | 28,508                                                         |        | — |   | — |   |
| Interest expense                                                                                            |       | (2,402,397                                                     | )           | (2,874,661 | ) | (856,732 | ) |
| Gain (loss) on disposal  of fixed assets                                                                    |       | (205,000                                                       | )           | 723 |   | (3,444 | ) |
| Other income                                                                                                |       | 87,569                                                         |        | — |   | — |   |
| Total other income  (expense)                                                                               |       | (492,973                                                       | )           | (3,734,893 | ) | (1,686,287 | ) |
| Net loss from continuing  operations before income taxes                                                    |       | (39,911,843                                                    | )           | (15,614,920 | ) | (7,087,316 | ) |
| Income tax benefit  (expense) (Note 16)                                                                     |       | —                                                         |        | — |   | — |   |
| **Net loss from continuing  operations**                                                                    |       | (39,911,843                                                    | )           | (15,614,920 | ) | (7,087,316 | ) |
| Discontinued operations  (Note 4):                                                                          |       |                                                           |        |   |   |   |   |
| Net income (loss) from  discontinued operations net of tax of $49,000 (2006), $61,428 (2005) and $0  (2004) |       | 1,264,161                                                      |        | 799,522 |   | (123,377 | ) |
| Gain on sale of  discontinued operations, net of tax of $0 (2006), $6,172 (2005) and $0  (2004)        |       | —                                                         |        | 456,501 |   | — |   |
|                                                                                                        |       | 1,264,161                                                      |        | 1,256,023 |   | (123,377 | ) |
| **Net loss**                                                                                                |       | $                                                              | (38,647,682 | ) | $ | (14,358,897 | ) | $ | (7,210,693 | ) |
| Cash dividends paid to  preferred stockholders                                                              |       | (74,437                                                        | )           | (341,475 | ) | — |   |
| Deemed dividend related  to beneficial conversion feature and warrants (Note 14)                            |       | —                                                         |        | (9,000,000 | ) | — |   |
| **Net loss applicable to common  stockholders**                                                             |       | $                                                              | (38,722,119 | ) | $ | (23,700,372 | ) | $ | (7,210,693 | ) |
| Basic and diluted loss  per common share:                                                                   |       |                                                           |        |   |   |   |   |
| Continuing operations,  including dividends                                                                 |       | $                                                              | (.314       | ) | $ | (.270 | ) | $ | (.083 | ) |
| Discontinued operations                                                                                     |       | .010                                                           |        | .015 |   | (.001 | ) |
| Basic and diluted loss  per common share                                                                    |       | $                                                              | (.304       | ) | $ | (.255 | ) | $ | (.084 | ) |
| Basic and diluted weighted-average number of common  shares outstanding                                     |       | 127,174,204                                                    |        | 92,918,545 |   | 85,932,544 |   |

 

See Notes to Consolidated Financial Statements.

F-6

----

**RENTECH, INC. Consolidated Statements of Stockholders’ Equity**

| ** **                                                                                                | ** ** | **Convertible Preferred Stock** | ** ** | ** **        | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                                                | ** ** | **Series A**                         | ** ** | **Series B** | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                | ** ** | **Shares**                                | ** ** | **Amount**        | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Shares**      | ** ** | **Amount**             | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balance, September 30, 2003                                                                               |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | 79,336,585 |   | $ | 793,366 |   | $ | 42,672,791 |   |   | $ | (40,439,046 | ) |   |   | $ | 3,027,111 |   |   |
| Common stock issued for cash, net of offering  costs of $95,600 (Note 14)                       |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | 986,665 |   | 9,867 |   | 338,533 |   |   | — |   |   |   | 348,400 |   |   |
| Common stock issued for options and warrants exercised,  net of offering costs of $155,595 (Note 14) |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | 5,736,687 |   | 57,367 |   | 4,049,990 |   |   | — |   |   |   | 4,107,357 |   |   |
| Common stock issued for conversion of convertible  notes (Note 14)                                   |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | 3,569,835 |   | 35,698 |   | 1,647,218 |   |   | — |   |   |   | 1,682,916 |   |   |
| Stock options granted for services (Note 14)                                                              |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   |   |   |   |   | 28,522 |   |   | — |   |   |   | 28,522 |   |   |
| Stock options granted for stand-still agreement  (Note 14)                                           |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   |   |   |   |   | 117,235 |   |   | — |   |   |   | 117,235 |   |   |
| Warrants granted for services (Note 14)                                                              |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   |   |   |   |   | 44,588 |   |   | — |   |   |   | 44,588 |   |   |
| Warrants issued in conjunction with line of  credit (Notes 10 and 11)                           |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   |   |   |   |   | 511,962 |   |   | — |   |   |   | 511,962 |   |   |
| Common stock issued for services (Note 14)                                                           |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | 78,737 |   | 787 |   | 72,679 |   |   | — |   |   |   | 73,466 |   |   |
| Offering costs of convertible notes (Note 14)                                                        |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | — |   | — |   | 307,000 |   |   | — |   |   |   | 307,000 |   |   |
| Net loss                                                                                                  |       |                                      | —     |              |       |                  | —     |           |       |            | —     |                   |       |   | — |   |   | — |   | — |   | — |   |   | (7,210,693 | ) |   |   | (7,210,693 | ) |   |
|                                                                                                           |            |                                           |            |                   |            |                       |            |                |            |                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Balance, September 30, 2004 |   |   | — |   |   |   | $ | — |   |   |   | — |   |   |   | $ | — |   |   | 89,708,509 |   | $ | 897,085 |   | $ | 49,790,518 |   |   | $ | (47,649,739 | ) |   |   | $ | 3,037,864 |   |   |
|-----------------------------|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|------------|--------|---|---------|--------|---|------------|--------|--------|---|-------------|---|--------|--------|---|-----------|--------|--------|

 

(Continued on the following page)

See Notes to Consolidated Financial Statements.

F-7

----

**RENTECH, INC. Consolidated Statements of Stockholders’ Equity**

(Continued from previouspage)

| ** **                                                                                                  | ** ** | **Convertible Preferred Stock** | ** ** | ** **        | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **Series A**                         | ** ** | **Series C** | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                  | ** ** | **Shares**                                | ** ** | **Amount**        | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Shares**      | ** ** | **Amount**             | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Common stock issued for cash and subscription  receivable, net of offering costs of $40,465  (Note 14) |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | 13,436,000 |   | 134,360 |   | 30,727,975 |   |   | — |   |   |   | 30,862,335 |   |   |
| Common stock issued for options and warrants  exercised (Note 14)                                 |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | 2,475,249 |   | 24,752 |   | 2,481,937 |   |   | — |   |   |   | 2,506,689 |   |   |
| Common stock issued for conversion of convertible  notes (Note 10 and 14)                    |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | 2,256,219 |   | 22,562 |   | 1,105,547 |   |   | — |   |   |   | 1,128,109 |   |   |
| Stock options and warrants granted for services (Note  14)                                                  |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 592,846 |   |   | — |   |   |   | 592,846 |   |   |
| Stock options granted for stand-still agreement (Note 14)                                              |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 178,766 |   |   | — |   |   |   | 178,766 |   |   |
| Warrants issued in conjunction with break-up fees  (Note 14)                                                |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 501,901 |   |   | — |   |   |   | 501,901 |   |   |
| Warrants issued in conjunction with bridge loans  (Notes 10 and 14)                                    |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 1,141,126 |   |   | — |   |   |   | 1,141,126 |   |   |
| Common stock issued for services (Note 14)                                                             |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | 6,579 |   | 66 |   | 9,693 |   |   | — |   |   |   | 9,759 |   |   |
| Preferred stock issued, net of offering  costs (Note 14)                                     |       | 90,000                                    |       | 900,000           |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 7,415,000 |   |   | — |   |   |   | 8,315,000 |   |   |
| Cash dividend paid on preferred stock (Note 14)                                                        |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | (341,475 | ) |   | — |   |   |   | (341,475 | ) |   |
| Preferred stock converted into common stock (Note 14)                                                       |       | (31,000                                   | )          | (310,000          | )          |                  | —     |           |       |            | —     |                   |       | 2,237,944 |   | 22,380 |   | 287,620 |   |   | — |   |   |   | — |   |   |
| Offering costs of convertible notes (Note 14)                                                     |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | 697,159 |   |   | — |   |   |   | 697,159 |   |   |
| Net loss                                                                                                    |       | —                                    |       | —            |       |                  | —     |           |       |            | —     |                   |       | — |   | — |   | — |   |   | (14,358,897 | ) |   |   | (14,358,897 | ) |   |
| Balance, September  30, 2005                                                                                |       | 59,000                                    |       | $                 | 590,000    |                  |       | —         |       |            |       | $                      | —     |   |   | 110,120,500 |   | $ | 1,101,205 |   | $ | 94,588,613 |   |   | $ | (62,008,636 | ) |   |   | $ | 34,271,182 |   |   |
|                                                                                                             |            |                                           |            |                   |            |                       |            |                |            |                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(Continued on the following page)

See Notes to Consolidated Financial Statements.

F-8

----

**RENTECH, INC.Consolidated Statements of Stockholders’ Equity and Comprehensive Loss**

(Continuedfrom previous page)

| ** **                                                                                                   | ** ** | ** **                                | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **             | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------------------|------------|-------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                                                   | ** ** | **Convertible Preferred Stock** | ** ** | ** **        | ** ** | ** **            | ** ** | **Additional**    | ** ** | ** **            | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                                                                                   | ** ** | **Series A**                         | ** ** | **Series B** | ** ** | **Common Stock** | ** ** | **Paid-in ** | ** ** | **Accumulated ** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                   | ** ** | **Shares**                                | ** ** | **Amount**        | ** ** | **Shares**            | ** ** | **Amount**        | ** ** | **Shares**            | ** ** | **Amount**        | ** ** | **Capital**            | ** ** | **Deficit** | ** ** | **Loss**        | ** ** | **Equity**  | ** ** |
| Common stock issued for cash net of offering  costs of $4,371,832 (Note 14)                        |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | 18,400,000             |       | 184,000     |       | 58,004,168      |       | —      |       |   | — |   |   |   | 58,188,168 |   |   |
| Common stock issued for cash on options and  warrants exercised (Note 14)                          |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | 5,394,129              |       | 53,941      |       | 6,967,284       |       | —      |       |   | — |   |   |   | 7,021,225 |   |   |
| Common stock issued for conversion of convertible  notes (Note 10 and 14)                                    |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | 3,156,576              |       | 31,566      |       | 2,944,430       |       | —      |       |   | — |   |   |   | 2,975,996 |   |   |
| Beneficial conversion feature of convertible  notes (Note 14)                                      |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | —                 |       | —      |       | 874,875         |       | —      |       |   | — |   |   |   | 874,875 |   |   |
| Common stock issued for options exercised using  deferred compensation and retirement payable (Note 14) |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | 426,269                |       | 4,263       |       | 388,736         |       | —      |       |   | — |   |   |   | 392,999 |   |   |
| Stock based compensation issued for services  (Note 14)                                                      |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | 36,000                 |       | 360         |       | 11,584,630      |       | —      |       |   | — |   |   |   | 11,584,990 |   |   |
| Preferred stock converted into common stock  (Note 14)                                             |       | (59,000                                   | )          | (590,000          | )          |                  | —     |              |       |                  | —     |              |       | 4,259,313              |       | 42,593      |       | 547,407         |       | —      |       |   | — |   |   |   | — |   |   |
| Cash dividends paid on preferred stock (Note 14)                                                             |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | —                 |       | —      |       | (74,437         | )          | —      |       |   | — |   |   |   | (74,437 | ) |   |
| Comprehensive loss:                                                                                          |       |                                      |       |              |       |                  |       |              |       |                  |       |              |       |                   |       |        |       |            |       |        |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                     |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | —                 |       | —      |       | —          |       | (38,647,682 | )          |   | — |   |   |   | (38,647,682 | ) |   |
| Other comprehensive loss:                                                                                    |       |                                      |       |              |       |                  |       |              |       |                  |       |              |       |                   |       |        |       |            |       |        |       |   |   |   |   |   |   |   |   |
| Unrealized loss on marketable securities, net of tax                                          |       | —                                    |       | —            |       |                  | —     |              |       |                  | —     |              |       | —                 |       | —      |       | —          |       | —      |       |   | (2,294 | ) |   |   | (2,294 | ) |   |
| Balance,  September 30, 2006                                                                            |       | —                                    |       | $                 | —     |                  |       | —            |       |                  |       | $                 | —     |                   |       | 141,792,787 |       | $               | 1,417,928  |        | $          | 175,825,706 |   | $ | (100,656,318 | ) |   | $ | (2,294 | ) |   |   | $ | 76,585,022 |   |   |
|                                                                                                              |            |                                           |            |                   |            |                       |            |                   |            |                       |            |                   |            |                        |            |             |            |                 |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements.

# F-9

----

**RENTECH, INC. Consolidated Statements of Cash Flows**

| ** **                                                                  | ** ** | **For the Years Ended September 30,** | ** **  |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                                                  | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating activities**                                    |       |                                                           |        |   |   |   |   |
| Net loss                                                                    |       | $                                                              | (38,647,682 | ) | $ | (14,358,897 | ) | $ | (7,210,693 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities |       |                                                           |        |   |   |   |   |
| Depreciation                                                                |       | 3,710,989                                                      |        | 411,210 |   | 425,854 |   |
| Amortization                                                                |       | 257,556                                                        |        | 257,556 |   | 322,649 |   |
| (Gain)/Loss on  disposal of fixed assets                                    |       | 84,484                                                         |        | (1,207 | ) | 252,393 |   |
| Non-cash interest  expense                                                  |       | 936,910                                                        |        | 2,386,749 |   | 432,415 |   |
| Non-cash lease  commission expense                                          |       | 3,782                                                          |        | 3,782 |   | 3,782 |   |
| Equity in loss of  investee                                                 |       | —                                                         |        | 735,815 |   | 252,415 |   |
| Write-off of  acquisition costs                                             |       | —                                                         |        | 1,807,057 |   | — |   |
| Write-off of debt  issue costs                                              |       | 355,000                                                        |        | 901,846 |   | — |   |
| Write-off of  offering costs                                                |       | —                                                         |        | 184,234 |   | — |   |
| Accrued interest  expense                                                   |       | 1,061,880                                                      |        | 147,690 |   | 43,655 |   |
| Common stock  issued for services                                           |       | 1,602,980                                                      |        | 9,759 |   | 73,466 |   |
| Gain on sale of  subsidiaries                                               |       | —                                                         |        | (462,673 | ) | — |   |
| Loss on  investments                                                        |       | 305,000                                                        |        | 206,500 |   | 646,367 |   |
| Stock options and  warrants issued for services                             |       | 9,982,009                                                      |        | 873,941 |   | 73,110 |   |
| Salaries expense  paid through debt                                         |       | —                                                         |        | — |   | 357,878 |   |
| Bad debt expense                                                            |       | —                                                         |        | — |   | 125,755 |   |
| Minority interest  in net loss of subsidiary                                |       | —                                                         |        | — |   | (154,269 | ) |
| Changes in operating  assets and liabilities                                |       |                                                           |        |   |   |   |   |
| Accounts  receivable                                                        |       | (5,074,723                                                     | )           | (100,811 | ) | (154,082 | ) |
| Costs and  estimated earnings in excess of billings                         |       | —                                                         |        | 176,928 |   | 305,060 |   |
| Other receivables  and receivable from related party                        |       | 254,335                                                        |        | (106,583 | ) | (43,147 | ) |
| Inventories                                                                 |       | 789,489                                                        |        | (64,645 | ) | 129,890 |   |
| Prepaid expenses  and other current assets                                  |       | (700,472                                                       | )           | 586,398 |   | 389,912 |   |
| Accounts payable                                                            |       | 3,726,178                                                      |        | 206,076 |   | (352,416 | ) |
| Billings in excess  of costs and estimated earnings                         |       | —                                                         |        | (22,815 | ) | 108,780 |   |
| Accrued retirement  payable                                                 |       | (905,701                                                       | )           | 1,561,822 |   | — |   |
| Accrued  liabilities, accrued payroll and other                             |       | 6,646,098                                                      |        | 363,132 |   | (414,599 | ) |
| Net cash used in  operating activities                                      |       | (15,611,888                                                    | )           | (4,297,136 | ) | (4,385,825 | ) |
| **Cash flows from investing activities**                                    |       |                                                           |        |   |   |   |   |
| Purchase of  marketable securities                                          |       | (30,284,896                                                    | )           | — |   | — |   |
| Purchase of  property and equipment                                         |       | (5,197,654                                                     | )           | (214,805 | ) | (183,988 | ) |
| Proceeds from  disposal of fixed assets                                     |       | —                                                         |        | 8,219 |   | 5,600 |   |
| Proceeds from sale  of investment                                           |       | 100,000                                                        |        | — |   | — |   |
| Proceeds from  earn-out receivables                                         |       | 180,014                                                        |        | — |   | — |   |
| Increase in  restricted cash                                                |       | (204,908                                                       | )           | — |   | — |   |
| Proceeds from sale  of subsidiary                                           |       | —                                                         |        | 1,644,547 |   | — |   |
| Acquisition of  REMC, net of cash received (Note 3)                         |       | (70,772,611                                                    | )           | — |   | — |   |
| Acquisition, of  Sand Creek net of cash received (Note 12)                  |       | (1,345,378                                                     | )           | — |   | — |   |
| Payment of  acquisition costs                                               |       | —                                                         |        | (1,150,101 | ) | (234,571 | ) |
| Deposits and other  assets                                                  |       | (188                                                           | )           | (14,661 | ) | 15,657 |   |
| Purchase of  investments                                                    |       | —                                                         |        | (805,973 | ) | (178,049 | ) |
| Net cash used in  investing activities                                      |       | (107,525,621                                                   | )           | (532,774 | ) | (575,351 | ) |
| **Cash flows from financing activities**                                    |       |                                                           |        |   |   |   |   |
| Proceeds from issuance  of common stock                                     |       | 62,560,000                                                     |        | 18,606,785 |   | 599,594 |   |
| Payments of  offering costs                                                 |       | (4,371,832                                                     | )           | (169,618 | ) | (269,261 | ) |
| Payments of  financial advisory fees                                        |       | (1,750,000                                                     | )           | — |   | — |   |
| Proceeds from  options and warrants exercised                               |       | 7,021,225                                                      |        | 2,506,689 |   | 4,107,357 |   |
| Proceeds from  issuance of convertible preferred stock, net                 |       | —                                                         |        | 8,315,000 |   | — |   |
| Payment of  dividends on preferred stock                                    |       | (74,437                                                        | )           | (341,475 | ) | — |   |
| Receipt of stock  subscription receivable                                   |       | 12,255,550                                                     |        | — |   | — |   |
| Proceeds from  issuance of convertible debt                                 |       | 57,500,000                                                     |        | — |   | — |   |
| Proceeds from  long-term debt and notes payable                             |       | —                                                         |        | 2,850,000 |   | 565,000 |   |
| Payment of debt  issuance costs                                             |       | (4,370,878                                                     | )           | (991,177 | ) | (270,982 | ) |
| (Payments)/proceeds  on/from line of credit, net                            |       | (499,217                                                       | )           | (643,388 | ) | 714,533 |   |
| Payments on  long-term debt and notes payable                               |       | (3,287,159                                                     | )           | (837,610 | ) | (545,411 | ) |
| Net cash provided  by financing activities                                  |       | 124,983,252                                                    |        | 29,295,206 |   | 4,900,830 |   |
| Increase  (decrease) in cash                                                |       | 1,845,743                                                      |        | 24,465,296 |   | (60,346 | ) |
| Cash and cash  equivalents, beginning of year                               |       | 24,720,713                                                     |        | 255,417 |   | 315,763 |   |
| Cash and cash  equivalents, end of year                                     |       | 26,566,456                                                     |        | 24,720,713 |   | 255,417 |   |
|                                                                             |            |                                                                |             |  |  |  |  |  |  |  |

 

(Continued on the following page)

See Notes to Consolidated Financial Statements.

F-10

----

**RENTECH, INC. Consolidated Statements of Cash Flows**

 

(Continued from previous page)

Forthe fiscal years ended September 30, 2006, 2005 and 2004, the Company madecash interest payments as follows:

| ** **                        | ** ** | **For the Years Ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Continuing  operations            |       | $                                                              | 625,304    |   | $ | 340,222 |   | $ | 382,974 |   |
| Discontinued  operations          |       | 39,036                                                         |       | 44,765 |   | 54,641 |   |
| Total cash  payments for interest |       | $                                                              | 664,340    |   | $ | 384,987 |   | $ | 437,615 |   |

 

Excludedfrom the statements of cash flows were the effects of certain non-cashinvesting and financing activities as follows:

| ** **                                                                                         | ** ** | **For the Years Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Purchase of  annual insurance financed with a note payable                                         |       | $                                                              | 1,927,890  |   | $ | 587,919 |   | $ | 244,848 |   |
| Issuance of  common stock for conversion of convertible notes payable                              |       | $                                                              | 2,975,996  |   | $ | 1,128,109 |   | $ | 1,682,916 |   |
| Beneficial  conversion feature                                                                     |       | $                                                              | 874,875    |   | $ | — |   | $ | — |   |
| Warrants issued  in conjunction with bridge loans                                                  |       | $                                                              | —     |   | $ | 1,141,126 |   | $ | — |   |
| Deferred  financing charges for convertible promissory notes                                       |       | $                                                              | —     |   | $ | 315,685 |   | $ | 307,000 |   |
| Warrants issued  in conjunction with convertible notes                                             |       | $                                                              | —     |   | $ | 381,474 |   | $ | — |   |
| Warrants issued  in conjunction with preferred stock                                               |       | $                                                              | —     |   | $ | 3,513,009 |   | $ | — |   |
| Issuance of  common stock from conversion of preferred stock                                       |       | $                                                              | 5,900,000  |   | $ | 3,100,000 |   | $ | — |   |
| Acquisition costs  written off that were included in accounts payable                              |       | $                                                              | —     |   | $ | 3,540 |   | $ | 62,138 |   |
| Deferred offering  costs included in accounts payable                                              |       | $                                                              | —     |   | $ | — |   | $ | 30,019 |   |
| Purchase of  property and equipment financed with a note payable                                   |       | $                                                              | 52,095     |   | $ | 205,869 |   | $ | 102,014 |   |
| Issuance of  common stock for option exercised using deferred compensation and retirement  payable |       | $                                                              | 392,999    |   | $ | — |   | $ | — |   |
| Stock options and  warrants issued as acquisition costs                                            |       | $                                                              | —     |   | $ | 305,150 |   | $ | — |   |
| Warrants issued  in conjunction with line of credit                                                |       | $                                                              | —     |   | $ | — |   | $ | 511,962 |   |
| Reclassification  of line of credit to long-term debt                                              |       | $                                                              | —     |   | $ | 500,000 |   | $ | — |   |
| Issuance of  common stock for stock subscription receivable                                        |       | $                                                              | —     |   | $ | 12,255,550 |   | $ | — |   |
| Deemed dividend  related to beneficial conversion feature and warrants                             |       | $                                                              | —     |   | $ | 9,000,000 |   | $ | — |   |
| Reclassification  of property and equipment to inventory                                           |       | $                                                              | —     |   | $ | — |   | $ | 100,026 |   |
| Stock options issued for  stand-still agreement                                                    |       | $                                                              | —     |   | $ | — |   | $ | 117,235 |   |

 

See Notes to Consolidated Financial Statements.

F-11

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 1—Description ofBusiness**

**Description ofBusiness**

Rentech, Inc. (“Rentech”, “we”, or “the Company”)offers energy independence technologies utilizing domestic resources toeconomically produce ultra-clean synthetic fuels. We were incorporated in 1981to develop technologies that transform under-utilized energy resourcesinto valuable and clean alternative fuels, chemicals and power. We havedeveloped an advanced derivative of the well-established Fischer-Tropsch,or FT, process for manufacturing diesel fuel and other fuel products. The FTprocess was originally developed in Germany in the 1920s. Our proprietaryapplication of the FT process, which we refer to as the Rentech Process,efficiently converts synthetic gas, referred to as syngas, derived from coal,petroleum coke or natural gas into liquid hydrocarbon products, including ultrahigh-quality diesel fuel and other fuel products.

Both the Rentech Process and the fuels it producescarry unique and differentiating characteristics which we believe willfacilitate economic deployment of the Rentech Process in large scale commercialprojects. First, since our process is able to utilize solids such as coal as aprincipal feedstock, we are able to take advantage of the relative stability ofcoal prices compared to other hydrocarbon-based feedstocks such asnatural gas. Second, because the fuels derived from our proprietary processhave a long shelf life and can be manufactured using domestic resources, theyeffectively address national security priorities framed by foreign control ofoil reserves and limited domestic refining capacity. And third, because fuelproduced by the Rentech Process is a clean-burning fuel which exceeds allcurrent and promulgated environmental rules applicable to diesel enginesand requires no new distribution infrastructure, we believe there are norestrictions on immediate and widespread adoption of FT fuels.

Our business has historically focused on research anddevelopment of our FT technology and licensing it to third parties. During2004, we decided to directly deploy our technology in select domestic projectsin order to demonstrate commercial operation of the Rentech Process. We havebegun to implement this strategy by purchasing Royster-Clark Nitrogen, Inc.(“RCN”), which own and operates a natural gas-fed nitrogen fertilizerproduction facility in East Dubuque, Illinois. We plan to convert the existingnitrogen fertilizer complex from natural gas to an integrated fertilizer and FTfuels production facility using coal gasification. We believe the acquisitionwill allow us to commercially deploy the Rentech Process on an acceleratedbasis by using the existing infrastructure and systems of the facility.

On April 26, 2006, we completed our acquisitionof RCN through a subsidiary for the purchase price of $50,000,000, plus anamount equal to net working capital of RCN, which was approximately $20,000,000.We are operating the existing nitrogen fertilizer complex, which is capable ofproducing 830 tons per day of ammonia from natural gas under the new nameRentech Energy Midwest Corporation (“REMC”). As a result of the acquisition,our principal revenues and cost of sales are now derived from operation of theREMC facility.

We intend to continue to operate REMC’s East Dubuquefacility for the production of nitrogen fertilizer products while we execute aphased conversion to a commercial scale FT fuel production facility. In Phase 1of the conversion, we intend to add a commercially available coal gasificationsystem that converts coal into syngas for use in fertilizer production. DuringPhase 1A of the conversion, we plan to add the Rentech Process to produceliquid hydrocarbon products, such as diesel and jet fuels, from the additionalsyngas produced from the coal gasification process. We estimate we would needapproximately $810,000,000 of additional debt and equity financing to financePhases 1 and 1A of the conversion of REMC’s nitrogen fertilizer plant (the “EastDubuque Plant”). The planned conversion of this plant to 

F-12

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note1—Description of Business (continued)**

replace natural gas withcoal as its feedstock is currently in the engineering stage and investment innew processes and related equipment that significantly enlarge the productionfacility is anticipated to begin within the next 12 months. We presently expect commercial operations ofPhases 1 and 1A to commence by 2010.

We are also pursuing the development of otheralternative fuels projects, including one in Natchez, Mississippi that we andpotentially a partner or partners would construct to produce FT liquidhydrocarbon and other products using the Rentech Process (the “Natchez Project”).In April 2006, the State of Mississippi enacted a $15,000,000 statefunding initiative, included in House Bill 1634, providing for siteimprovements at the location of the Company’s proposed Natchez Project. Suchfunding would be subject to the Company meeting certain financial, employmentand other criteria. If the Company is successful in structuring an agreementfor the land and satisfies the state funding criteria, Adams County,Mississippi will provide the Company with an improved site and port facilitiesnecessary to meet the plant’s needs. TheCompany currently is conducting a feasibility study, negotiating siteagreements and formalizing development plans for the Natchez Project.

In addition, we are discussing proposals with ownersof energy feedstocks for the joint development of alternative fuels projectsand the use of the Rentech Process under licensing arrangements. On July 17,2006, we entered into a Joint Development Agreement with Peabody EnergyCorporation (“Peabody”), for the co-development of two coal-to-liquids (“CTL”)projects, which will be located on Peabody coal reserves. The projects willconvert coal into ultra-clean transportation fuels using the Company’sproprietary FT CTL process. The companies intend to utilize Peabody’s reservesin Montana and the Midwest and will evaluate a mine-mouth project model to maximizecost and transportation advantages. One project is targeted for production of10,000 barrels per day of transportation fuels while the other is projected toproduce up to 30,000 barrels per day. The final locations, production volumes,product mixes and environmental considerations, including being “carbon capture”ready for each facility, will be determined during the initial developmentphases of the respective projects. Under the terms of the Joint DevelopmentAgreement, Peabody and the Company will evaluate the projects in stages bydetermining the scope and feasibility of each project first. After successfulcompletion of these initial stages, Peabody and the Company expect to establisha project entity and then move forward with the Front End Engineering andDesign (“FEED”) phase for each facility. Initially the companies will share thecosts of any third party development expenses and have equal interests in theprojects. With the exception of the agreed upon sites, the Joint DevelopmentAgreement is non-exclusive and either party may develop coal-to-liquidsprojects at other sites.

We currently have one active license arrangement. On January 12,2006, we entered into a Master License Agreement with DKRW-Advanced Fuels LLC (“DKRW-AF”)for the use of our coal-to-liquids technology and a related Site LicenseAgreement with DKRW-AF’s wholly owned-subsidiary, Medicine Bow Fuels &Power, LLC, with respect to its proposed Medicine Bow Project in Medicine Bow,Wyoming. Pursuant to the Site License Agreement,we will receive license fees based on plant production capacity, payable instages as DKRW-AF achieves certain milestones, including receiving a fullfunding commitment for developing and building such plant and commencingoperation, subject to performance and other obligations on our part. Theachievement of these milestones is expected to take several years.

# F-13

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note1—Description of Business (continued)**

On November 15, 2006,in order to continue to focus our efforts and resources on our long-termbusiness plan to commercialize the Company’s technology to produce cleansynthetic fuels, we sold our subsidiary Petroleum Mud Logging, LLC, whichprovides well logging services to the oil and gas industry.

**Principles ofConsolidation**

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned and majority owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

**Reclassifications**

Certain prior periodamounts have been reclassified to conform to the fiscal year 2006 presentation.

**Note 2—Summary of CertainSignificant Accounting Policies**

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Concentration ofCredit Risk**

The Company maintains a portion of its cash with amajor financial institution located in the United States. These balances areinsured by the Federal Deposit Insurance Corporation up to $100,000 per legalentity. Throughout the year the Company maintained balances in excess offederally insured limits. At September 30, 2006, the Company hadapproximately $25,852,800 in excess of FDIC insured limits. The Company has notexperienced any losses in such accounts.

The company also invests a portion of its cash ininvestment-grade marketable securities which are subject to market fluctuations.These investments are custodied with major financial institutions and arecomprised of U.S. government, agency and municipal notes and bonds, corporatebonds, asset-backed securities, commercial paper, special auction variable ratesecurities and other investment-grade marketable debt and equity securities.

The Company encounters a certain amount of risk as aresult of a concentration of revenue from a few significant customers. Creditis extended to customers based on an evaluation of their financial condition.The Company generally does not require collateral or other security to supportaccounts receivable. The Company performs ongoing credit evaluations of itscustomers and records an allowance for potential bad debts based on availableinformation. To date, such losses, if any, have been within management’sexpectations.

On April 26, 2006, the Company’s subsidiary RDCentered into a Distribution Agreement with Royster-Clark Resources, LLC,  who has assigned the agreement to AgriumU.S.A. Inc. (“Agrium”), pursuant to which Agrium is obligated to usecommercially reasonable efforts to promote the sale of, and 

# F-14

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

to solicit and secure ordersfrom its customers for nitrogen fertilizer products comprising anhydrousammonia, granular urea, UAN solutions and nitric acid and relatednitrogen-based products manufactured at the East Dubuque Plant and to purchasefrom REMC all nitrogen fertilizer products manufactured at the facility forprices to be negotiated in good faith from time to time.  For the fiscal year ended September 30,2006, the Company’s distribution agreement with Agrium accounted for 97% of netrevenues from continuing operations or 82% of net revenue from continuing anddiscontinued operations combined. This same distributor had an outstandingaccounts receivable balance which equaled 83% of the total of accountsreceivable balance from continuing operations or 65% of the total accountsreceivable balance from continuing and discontinued operations. Our activitywith Agrium is included in our nitrogen products manufacturing segment.

For the fiscal year ended September 30, 2005, theCompany had three customers in the discontinued oil and gas field servicesegment which accounted for 34% (12%, 12% and 10% individually) of net revenuefrom continuing and discontinued operations combined. As of September 30,2005, two customers in discontinued oil and gas field service segment had outstandingaccounts receivable balances (16% and 12% individually) for a total of 28% ofthe total accounts receivable (including the portion of accounts receivablebalance held for sale). For the fiscal year ended September 30, 2004, theCompany had one customer in the discontinued oil and gas field service segmentwhich accounted for 14% of net revenue from continuing and discontinuedoperations combined. As of September 30, 2004, one customer in thediscontinued oil and gas field service segment had outstanding an accountsreceivable balance of 14% of the total accounts receivable (including theportion of accounts receivable balance held for sale).

The Company employs certain workers that are membersof the United Automobile, Aerospace and Agricultural Implement Workers ofAmerica (UAW) Local No. 1391. At September 30, 2006, approximately73% of REMC’s employees were subject to a collective bargaining agreement. On October 17,2006 members of the UAW Local No. 1391 ratified a six year agreement thatis effective until October 17, 2012.

In addition to theconcentration of credit risk, the Company is impacted by a number of othermarket risk factors, including the prevailing prices for natural gas which isthe primary raw material component of nitrogen products.

**Fair Value ofFinancial Instruments**

The following methods and assumptions were used toestimate the fair value of each class of financial instruments for which it ispracticable to estimate that value. Fair values of receivables, other currentassets, accounts payable, accrued liabilities and other current liabilities areassumed to approximate carrying values for these financial instruments sincethey are short term in nature and their carrying amounts approximate fair valueor they are receivable or payable on demand.

The carrying amount ofconvertible debt and other debt outstanding also approximates their fair valueas of September 30, 2006 and 2005 because interest rates on theseinstruments approximate the interest rate on debt with similar terms availableto the Company.

# F-15

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

**Cash and CashEquivalents**

The Company considershighly liquid investments purchased with original maturities of three months orless, money market accounts and deposits in financial institutions  (including deposits made pursuant to theCompany’s Revolving Credit Facility that are in excess of aggregate borrowings)that bear minimal risk to be cash equivalents. Cash equivalents are recorded atcost, which approximates fair value.

**Restricted Cash**

Restricted cash iscomprised of cash that has been pledged as collateral on an outstanding letterof credit that is being used to lease office space.

**MarketableSecurities**

The Company classifies itsmarketable securities as available for sale. These investments are comprised ofU.S. government, agency and municipal notes and bonds, corporate bonds,asset-backed securities, commercial paper, special auction variable ratesecurities and other investment-grade marketable debt securities. Even though aportion of these securities may have stated maturities beyond one year, theyare classified as short-term because it is the Company’s intent to have theseinvestments readily available for current operations. The Company reports itsmarketable securities at fair value with the unrealized gains and lossesreported in other comprehensive income and excluded from earnings. The specificidentification method is used to determine the cost of notes and bonds disposedof. The Company recognizes an impairment charge when there is a decline in thefair value of its investments, below the cost basis, which is judged to beother-than-temporary.  For the fiscalyear ended September 30, 2006 the aggregate fair value of the marketablesecurities was $30,282,602 and the related accumulated unrealized losses,reported in other comprehensive loss, totaled $2,294.

**Allowance forDoubtful Accounts**

The allowance for doubtfulaccounts reflects the Company’s best estimate of probable losses inherent inthe accounts receivable balance. The Company determines the allowance based onknown troubled accounts, historical experience, and other currently availableevidence. The Company reviews its allowance for doubtful accounts quarterly.Past due balances over 90 days and over a specified amount are reviewedindividually for collectibility. Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote.

**Inventories**

Inventories are stated at the lower of cost orestimated net realizable value. The cost of inventories is determined using thefirst-in first-out method. The Company performs a quarterly analysis of itsinventory balances to determine if the carrying amount of inventories exceedstheir net realizable value. The analysis of estimated net realizable value isbased on customer orders, market trends and historical pricing. If the carryingamount exceeds the estimated net realizable value, the carrying amount isreduced to the estimated net realizable value. Inventories are periodicallyreviewed to determine a reserve for obsolete, deteriorated, excess or slowmoving items; as of September 30, 2006 no such inventory reserve wasnecessary.

# F-16

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

The Company allocatesfixed production overhead costs based on the normal capacity of its productionfacilities and unallocated overhead costs are recognized as expense in theperiod incurred.

**Assets Held forSale**

For the fiscal year ended September 30,2006 the Company deemed its subsidiary Petroleum Mud Logging, LLC (PML) to be adiscontinued operation, and PML’s results of operations were segregated fromcontinuing operations for all years presented. In addition, the PML assets andliabilities were segregated as current and non-current held for sale assets andliabilities on our balance sheet  for allyears presented. On March 8, 2005, the Company sold all of its interest inOKON, Inc., and on August 1, 2005 the Company disposed of itsremaining interest in REN Holding Corporation (RHC). The Company consideredthese two entities to be discontinued operations for the fiscal year ended September 30,2005, and their results of operations were segregated from continuing operationsfor all years presented. Since the Company had completed its sale of these twoentities before September 30, 2005, these entities’ assets and liabilitiesare not shown on our balance sheets as of September 30, 2006 and 2005(Note 4).

**Property andEquipment**

Propertyand equipment is stated at cost less accumulated depreciation and amortization.Depreciation and amortization expense are computed using the straight-linemethod over the estimated useful lives of the assets, as follows:

| Building and building  improvements       |   | 15-40 years                                               |
|-------------------------------------------|--------|-----------------------------------------------------------|
| Machinery and equipment                   |   | 5-10 years                                                |
| Furniture, fixtures and  office equipment |   | 7-10 years                                                |
| Computer equipment and  software          |   | 3-7 years                                                 |
| Vehicles                                  |   | 3-5 years                                                 |
| Spare parts                               |   | Useful life of the spare  parts or the related equipment  |
| Leasehold improvements                    |   | Useful life or remaining  lease term whichever is shorter |

 

Platinum catalyst is amortized based on units ofproduction.

Significant renewals and betterments are capitalized;costs of maintenance and repairs are expensed as incurred. When property andequipment is retired or otherwise disposed of, the assets and accumulateddepreciation or amortization are removed from the accounts and the resultinggain or loss is reflected in operations.

We are in the initialstages of converting the existing nitrogen fertilizer plant from natural gas toan integrated fertilizer and FT fuels production facility using coalgasification and are capitalizing those costs. As of September 30, 2006,construction in progress totaled $3,916,337, which included $29,278 ofcapitalized interest costs.

# F-17

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

**Spare Parts**

Spare parts are maintainedby REMC to reduce the length of possible interruptions in plant operations froman infrastructure breakdown. The spare parts may be held for use for many yearsbefore the spare parts are used. As a result, they are capitalized as fixedasset at cost and are depreciated on straight line basis over on the usefullife of the related equipment until the spare parts are utilized (i.e., installedin the plant). When spare parts are utilized, the net book values of the assetsare charged to earnings. Periodically, the spare parts are evaluated forobsolescence and impairment and if the value of the spare parts is impaired itis charged against earnings.

**Licensed Technology**

Licensed technologyrepresents costs incurred by the Company primarily for the retrofit of a plantused for the purpose of demonstrating the Company’s proprietary technology toprospective licensees, which it licenses to third parties under various feearrangements. The Company originally capitalized $3,431,148, which wascomprised of $2,655,846 of retrofitting costs and $775,302 in costs related toa three week demonstration run at the plant. These capitalized costs arecarried at the lower of amortized cost or net realizable value and are beingamortized using the straight-line method over fifteen years.

**Investmentin an Advanced Technology Company**

The Company had aninvestment in an advanced technology company as of September 30, 2005(Note 8). The investment was stated at the estimated net realizable value, wasevaluated periodically for impairment and was carried at the lower of cost orestimated net realizable value. In March of 2006, the company sold all ofits shares of its investment in the advanced technology company.

**Technology Rights**

Technology rights arerecorded at cost and are being amortized using the straight-line method over aten-year estimated life. The technology rights represent certain rights andinterests in Rentech’s licensed technology that were repurchased by Rentech in November 1997from a company for consideration consisting of 200,000 shares of common stockand 200,000 warrants, which were valued at $287,746.

**Goodwill**

Goodwill, which relates tothe acquisition of PML in 1999, is no longer being amortized, and is testedannually for impairment in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, Goodwill and Other Intangible Assets.

**Long-Lived Assets**

Long-lived assets andidentifiable intangibles are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount may not be recoverable. Ifthe expected future cash flow from the use of the asset and its eventualdisposition is less than the carrying amount of the asset, an impairment lossis recognized and measured using the asset’s fair value.

# F-18

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 2—Summary of CertainSignificant Accounting Policies (continued)**

**Accrued Liabilities**

The Company accruessignificant expenses that occur during the year in order to match expenses tothe appropriate period. These include audit and legal fees, prepaid sales, aswell as payroll expenses such as bonuses and vacation among other expenses. Asof September 30, 2006, the largest component of our accrued liabilitiesbalance of $6,149,065 was $4,440,327 of prepaid sales associated with ournitrogen products manufacturing segment.

**Investment in SandCreek**

The Company had a 50%investment in Sand Creek Energy, LLC as of September 30, 2005 (Note 12),which was accounted for using the equity method of accounting. Under suchmethod, the Company’s proportionate share of net income (loss) was included asa separate item in the statement of operations. On October 7, 2005,Rentech Development Corporation purchased the remaining 50% ownership interestin Sand Creek Energy, LLC for a purchase price of $1,400,000.

**Revenue Recognition**

For all of our operating segments, revenue is onlyrecognized when there are no uncertainties regarding customer acceptance;persuasive evidence of an agreement exists documenting the specific terms ofthe transaction; the sales price is fixed or determinable; and collectibilityis reasonably assured. Management assesses the business environment, thecustomer’s financial condition, historical collection experience, accountsreceivable aging and customer disputes to determine whether collectibility isreasonably assured. If collectibility is not considered reasonably assured atthe time of sale, the Company does not recognize revenue until collectionoccurs.

Service revenues from oil and gas field services arerecognized based upon services provided during each month. Revenues are basedupon the number of days worked on a well multiplied by the agreed upon dailyrate. For jobs that are completed within the same month, revenue is recognizedin that month. For jobs that take place over two or more months, revenue isrecognized based on the number of days worked in that month.

Product sales revenues from our nitrogen productsmanufacturing segment are recognized when products are shipped and the customertakes ownership and assumes risk of loss, collection of the relevant receivableis probable, persuasive evidence of an arrangement exists and the sales priceis fixed or determinable. Periodically, the Company receives pre-payments forproducts which will be shipped at a specified time in the future. These prepaidsales are included as a component of accrued liabilities.

Technical services revenues from our alternative fuelssegment are recognized as the services are provided during each month. Revenuesfrom feasibility studies are recognized based on the percentage-of-completionmethod of accounting and per the terms of the contract. Thepercentage-of-completion method of accounting is discussed below in the sectionentitled Accounting for Fixed Price Contracts.

License fees and royalty fees from our alternativefuels segment are recognized when the revenue earning activities that are to beprovided by the Company have been performed and no future obligation to performservices exists.

F-19

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 2—Summary of Certain Significant Accounting Policies(continued)**

Rental income from ouralternative fuels segment is recognized monthly as per the lease agreement, andis included in the alternative fuels segment as a part of service revenues.

**Accounting for Fixed Price Contracts**

Revenues from fixed pricecontracts are recognized on the percentage-of-completion method for projects inwhich reliable estimates of the degree of completion are possible. If reliableestimates are not available, the completed contract method is used. Forcontracts accounted for under the percentage-of-completion method, the amountof revenue recognized is the percentage of the total contract price that thecost expended to date bears to the anticipated final total cost, based uponcurrent estimates of the cost to complete the contract. Contract costs includeall labor and benefits, materials unique to or installed in the project,subcontract costs and allocations of indirect costs. General and administrativecosts are charged to expense. Provisions for estimated losses on uncompletedcontracts are provided for when determined, regardless of the completionpercentage. As contracts can extend over one or more accounting periods,revisions in costs and earnings estimated during the course of the work arereflected during the accounting period in which the facts that require suchrevisions become known.

Project managers makesignificant assumptions concerning cost estimates for labor hours, consultanthours and other project costs. Due to the uncertainties inherent in theestimation process, and the potential changes in customer needs as projectsprogress, it is at least reasonably possible that completion costs for someuncompleted projects may be further revised in the near-term and that suchrevisions could be material. We had no uncompleted contracts as of September 30,2006 and 2005.

**Cost of Sales**

Cost of sales areprimarily related to manufacturing costs related to the Company’s nitrogenfertilizer products, oil and gas field services and technical services. Cost ofsales expenses include: direct materials, direct labor, indirect labor,employee fringe benefits and other miscellaneous costs, as well as for shippingand handling charges incurred to move products to the Company’s customers.

**General and Administrative Expenses**

General and administrativeexpenses include salaries and fringe benefits, travel, consulting, occupancy,legal, public relations and other costs incurred in each operating segment.

**Stock Based Compensation**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued a revision to Statement ofFinancial Accounting Standards 123, “Share-Based Payment” (“SFAS123(R)”). The revision requires all entities to recognize compensation expensein an amount equal to the fair value of share-based payments granted to employees and directors. SFAS 123(R) eliminatesthe alternative method of accounting for employee share-based payments previouslyavailable under Accounting Principles Board Opinion No. 25 (“APB 25”).In April 2005, the FASB delayed the effective date of SFAS 123(R) tofiscal years beginning after June 15, 2005. Effective October 1,2005, the Company adopted the provisions of SFAS 123(R) using the modified-prospective transition method.Under this transition method, stock-based compensation expense for the year ended September 30,2006 includes compensation expense for all stock-based compensation awards granted subsequent to September 30,2005 based on grant-date fair value estimated 

F-20

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

in accordance with the provisions ofSFAS 123(R). Refer to footnote 15 in the Notes to Condensed ConsolidatedFinancial Statements.

**Advertising Costs**

The Company recognizesadvertising expense when incurred. Advertising expense was approximately$5,110, $3,050 and $16,450 for the fiscal years ended September 30, 2006,2005 and 2004.

**Research andDevelopment Expenses**

Research and development expenses include directmaterials, direct labor, indirect labor, fringe benefits and othermiscellaneous costs incurred to develop and refine certain technologiesemployed in the respective operating segment. These costs are expensed asincurred.

In addition to theresearch and development expenses noted above, the Company has commencedconstruction of equipment and plans to build and operate, what the Companybelieves to be, the United States’ first fully integrated Fischer-Tropsch,coal-to-liquids (CTL) Product Development Unit (PDU) facility at the SandCreek Energy site. This plant will produce ultra-clean diesel and aviationfuels and naphtha from various domestic coals, petroleum coke and biomassfeedstocks on a demonstration scale, utilizing coal gasification technology.With the PDU in operation, the Company will be able to define and developoperating parameters of diverse hydrocarbon feedstocks under varyingconditions. Since the PDU will not be producing diesel fuel on a commercialscale, and the fuel will not initially be sold at a profit, the Company isexpensing the costs associated with PDU to research and development expense. Forthe fiscal years ended September 30, 2006 and 2005, the Company incurredresearch and development expenses of $10,127,423 and $116,974, respectively,related to the PDU project.

**Income Taxes**

The Company accounts forincome taxes under the liability method, which requires an entity to recognizedeferred tax assets and liabilities. Temporary differences are differencesbetween the tax basis of assets and liabilities and their reported amounts inthe financial statements that will result in taxable or deductible amounts infuture years. An income tax valuation allowance has been established to reducethe Company’s deferred tax asset to the amount that is expected to be realizedin the future.

**Comprehensive Loss**

Comprehensive loss iscomprised of net loss and all changes to the consolidated statement ofstockholders’ equity except those changes made due to investments bystockholders, changes in paid-in capital and distributions to stockholders.Comprehensive loss consists of two components: net loss and other comprehensiveloss. For the fiscal year ended September 30, 2006, the Company’s othercomprehensive loss consisted of an unrealized loss of $2,294 resulting fromadjusting the valuation of its marketable securities to fair market value. Therewere no other comprehensive loss items for the fiscal years ended September 30,2005 and 2004. For the fiscal years ended September 30, 2006, 2005, and2004, the Company had comprehensive losses of $38,649,976, $14,358,897 and$7,210,693, respectively.

F-21

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

**Net Loss Per CommonShare**

Statement of Financial Accounting Standards No. 128,“Earnings Per Share” (“SFAS No. 128”) provides for the calculation of “Basic”and “Diluted” earnings per share. Basic earnings per share includes no dilutionand is computed by dividing income (loss) applicable to common stock by theweighted average number of common shares outstanding for the period. Dilutedearnings per share reflect the potential dilution of securities that couldshare in the earnings of an entity, similar to fully diluted earnings pershare.

For the years ended September 30,2006, 2005, and 2004, stock options for a total of 4,369,500, 4,661,000 and3,131,500 shares, stock warrants for a total of 11,159,204, 12,111,952 and3,875,602, restricted stock units for a total of 1,607,000, 0 and 0 shares,total convertible debt which is convertible into 14,665,996, 3,526,356 and4,185,137 shares, and total Series A convertible preferred stock which isconvertible into a maximum number of shares of common stock of 0, 7,375,000 and0 were excluded in the computation of diluted loss per share because theireffect was anti-dilutive.

**Recent AccountingPronouncements**

In March 2006, the FASB issued FIN No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”,which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes.” This Interpretation prescribes a threshold forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also provides guidanceon de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition. The effective date of thisinterpretation is the first fiscal year that begins after December 15,2006. Management is currently evaluating the impact FIN 48 will have on theCompany’s financial statements. In September 2006, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards No. 157, “ Fair Value Measurements ” (SFAS No. 157). Thisstandard clarifies the principle that fair value should be based on theassumptions that market participants would use when pricing an asset orliability. Additionally, it establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007. Management does not expect SFAS No. 157 to have a material impact onthe Company’s financial condition or results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87,88, 106, and 132(R)” (SFAS No. 158). This standard requires employersto recognize the underfunded or overfunded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in the funded status in the year in which thechanges occur through accumulated other comprehensive income. Additionally,SFAS No. 158 requires employers to measure the funded status of a plan asof the date of its year-end statement of financial position. The new reportingrequirements and related new footnote disclosure rules of SFAS No. 158are effective for fiscal years ending after December 15, 2006. The newmeasurement date requirement applies for fiscal years ending after December 15,2008. Management does not expect SFAS No.158 to have a material impact onthe Company’s financial condition or results of operations.

F-22

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note2—Summary of Certain Significant Accounting Policies (continued)**

In September 2006,the SEC issued SAB No. 108 regarding the process of quantifying financialstatement misstatements. SAB No. 108 states that registrants should useboth a balance sheet approach and an income statement approach when quantifyingand evaluating the materiality of a misstatement. The interpretations in SAB No. 108contain guidance on correcting errors under the dual approach as well asprovide transition guidance for correcting errors. This interpretation does notchange the requirements within SFAS No. 154, “Accounting Changes and ErrorCorrections—a replacement of APB No. 20 and Financial Accounting StandardsBoard (“FASB”) Statement No. 3,” for the correction of an error onfinancial statements. SAB No. 108 is effective for annual financialstatements covering the first fiscal years ending after November 15, 2006.We will be required to adopt this interpretation by September 30, 2007. Weare currently evaluating the requirements of SAB No. 108 and the impactthis interpretation may have on our financial statements.

**Note 3—BusinessAcquisition**

On April 26, 2006, the Company acquired all ofthe issued and outstanding common shares of Royster-Clark Nitrogen, Inc. (“RCN”)for a purchase price of $70,773,184, consisting of $70,218,397 in cashconsideration, $554,787 of capitalized costs directly related to theacquisition and $1,787,931 of current liabilities assumed. RCN manufacturesnitrogen-based fertilizers. The acquisition was accounted for under thepurchase method of accounting. All assets and liabilities of RCN were recordedbased on their estimated fair values as follows:

Royster-Clark Nitrogen, Inc.net assets acquired:

| Current assets,  including $573 in cash |   | $          | 16,348,473 |   |
|-----------------------------------------|--------|------------|------------|--------|
| Property, plant  and equipment          |   | 54,509,574 |       |
| Other assets                            |   | 1,703,068  |       |
| Current  liabilities                    |   | (1,787,931 | )          |
|                                    |   | $          | 70,773,184 |   |

 

Subsequentto the acquisition, Royster-Clark Nitrogen, Inc. changed its name toRentech Energy Midwest Corp. (“REMC”). The results of REMC’s operations havebeen included in the consolidated financial statements commencing from theacquisition date. The unaudited pro forma effect of the acquisition on thecombined results of operations as if the acquisition had been completed on October 1,2005, 2004 and 2003 is as follows:

| ** **                                        | ** ** | **For the Years Ended September 30,** | ** **  |
|---------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                        | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(Unaudited)**                                                | ** **  | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Total revenue                                     |       | $                                                              | 111,938,837 |   | $ | 120,124,293 |   | $ | 107,789,522 |   |
| Net income (loss)  from continuing operations     |       | $                                                              | (53,042,978 | ) | $ | (5,635,893 | ) | $ | (2,378,085 | ) |
| Net income (loss)                                 |       | $                                                              | (47,247,503 | ) | $ | (4,379,870 | ) | $ | (2,501,462 | ) |
| Basic and diluted  income(loss) per common  share |       | $                                                              | (0.372      | ) | $ | (0.161 | ) | $ | (0.029 | ) |

 

F-23

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note3—Business Acquisition (continued)**

The unaudited pro forma financial information includesadjustments to eliminate certain items. Total fertilizer product sales marginshave been adjusted to reflect the price at which RCN’s products were sold tothird party customers and represent the pricing that Rentech would expect tohave received for the products sold from the plant during the time periodsdesignated. Additional adjustments were made to the estimated total cost ofsales and marketing that Rentech would have paid to Royster-Clark under itsDistribution Agreement related to the marketing and distribution of nitrogenfertilizer products from the plant.

Had the transaction closed on October 1, 2005,2004 and 2003, Rentech would have paid certain amounts in interest related to issuancesof convertible debentures. Accordingly, Rentech would not have incurred any ofthe interest expense paid by RCN during the respective fiscal periods. Inaddition, Rentech would have incurred certain amounts of depreciation expensesfor each of the fiscal periods related to the manufacturing machinery andequipment acquired. Reductions have been reflected to adjust total depreciationexpense incurred by RCN, and Rentech’s depreciation expense has been applied tothe same periods to reflect what the company would have incurred inconsolidation. Finally, per Rentech’s accounting policy, turnaround expenseswere removed from RCN’s results for the respective fiscal periods.

The unaudited pro formafinancial information is presented for informational purposes only and is notindicative of what the actual consolidated results of operations might havebeen had the acquisition occurred on October 1, 2005, 2004 and 2003. TheCompany’s business has historically focused on research and development of itsFT technology, and licensing it to third parties. During 2004, the Companydecided to directly deploy its technology in select domestic projects in orderto demonstrate commercial operation of the Rentech Process. The Company hasbegun to implement this strategy by purchasing RCN, which owns an operatingnatural gas-fed nitrogen fertilizer facility in East Dubuque, Illinois. TheCompany plans to convert the existing nitrogen fertilizer plant from naturalgas to an integrated fertilizer and Fischer-Tropsch fuels production facilityusing coal gasification. The Company believes the acquisition will allow it tocommercially deploy the Rentech Process on an accelerated basis by using theexisting infrastructure and systems of the facility.

**Note 4—DiscontinuedOperations**

*OKON, Inc.*

On March 8, 2005, Rentech entered into a StockPurchase Agreement with Zinsser Co., Inc. for the sale by Rentech of allof its interest in the stock of OKON, Inc. By the terms of the agreement,Rentech sold 100% of the issued and outstanding stock of its wholly-ownedsubsidiary, OKON, Inc. to Zinsser Co., Inc. at the closing of thesale on March 8, 2005. Rentech was paid $1.7 million at the closing. Inaddition, Rentech is to be paid an additional $300,000 in monthly payments atthe rate of seven percent of gross sales, less returns, of products sold in thefuture that are based on formulations and product technologies that OKON ownedat the time of sale. As of September 30, 2006, we have collected $236,232of this amount and have recorded $63,768 of the remaining receivable in currentassets as other receivables. We expect to collect the remainder of this withinone year from September 30, 2006. The terms of the agreement provide thatRentech will indemnify Zinsser Co., Inc. against any unknown environmentalliabilities incurred up to the date of sale as well as for product liabilityclaims in excess of $22,650 for specifically identified potential claims, perthe terms of the Stock Purchase Agreement. During the fourth quarter of fiscal2005, Rentech accrued $75,000 for potential product liability claims that would

F-24

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note4—Discontinued Operations (continued)**

be owed to Zinsser forproduct liability claims that occurred prior to the sale date but were notquantified until after the sale date. The $75,000 is recorded as a separatecomponent of loss from discontinued operations for the year ended September 30,2005.

The business of OKON, involving the manufacture andsale of paints, stains and sealers, was not part of Rentech’s core business orits strategic focus. In connection with the closing of the transaction, Rentechincurred $100,000 as one-time incentive payments for executive incentives, aswell as $35,000 in fees associated with the closing. Rentech incurredadditional non-cash costs of $94,422 associated with the transaction.

The net sales price is setforth as follows:

| Sales price                                                     |   | $        | 2,000,000 |   |
|-----------------------------------------------------------------|--------|----------|-----------|--------|
| Less transaction  costs(1)                                      |   | (135,000 | )         |
| Net sales price  to Rentech, Inc., after transaction costs |   | $        | 1,865,000 |   |
| Consisting of:                                                  |   |     |      |
| Cash(2)                                                         |   | $        | 1,700,000 |   |
| Accrued  liabilities(1)                                         |   | (135,000 | )         |
| Earn-Out  receivable(2)                                         |   | 300,000  |      |
| Net sales price  to Rentech, Inc., after transaction costs |   | $        | 1,865,000 |   |
| Other transaction  costs, noncash                               |   |     |      |
| Extension of employee  options(3)                               |   | $        | 73,919    |   |
| 20,000 options  issued to employees(4)                          |   | $        | 20,503    |   |
| Book value of Rentech’s ownership in OKON, Inc.       |   | $        | 1,071,334 |   |
| Rentech’s gain on sale  of OKON, Inc.                 |   | $        | 699,244   |   |

----

(1)          Includes $35,000 inlegal fees and $100,000 as a one-time payment to two executives as an incentiveto remain employed with OKON, Inc. through the close of the saletransaction.

(2)          The aggregate salesprice is $2.0 million. Of this amount, $1.7 million was received at the closingof the sale and $300,000 is to be paid in monthly payments at the rate of sevenpercent of gross sales, less returns, of products sold in the future that arebased on OKON formulations and technologies.

(3)          Includes the value ofthe extension of 61,000 stock options that were previously issued to twoexecutives as an incentive to remain employed with OKON, Inc. through theclose of the sale transaction. The extension of the options was valued usingthe Black-Scholes option-pricing model.

(4)          Includes the value of10,000 stock options issued to each of two executives as an incentive to remainemployed with OKON, Inc. through the close of the sale transaction. Theoptions were valued using the Black-Scholes option-pricing model.

F-25

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note4—Discontinued Operations (continued)**

The assets and liabilitiesof OKON, Inc. as of March 8, 2005, immediately prior to sale, were asfollows:

| ** **                              | ** ** | **As of March 8, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| Accounts  receivable, net               |       |                                        | $          | 154,636 |   |   |
| Inventories                             |       |                                        | 273,056    |   |   |
| Total current assets held for sale      |       |                                        | 427,692    |   |   |
| Property and  equipment, net            |       |                                        | 21,173     |   |   |
| Goodwill, net                           |       |                                        | 839,841    |   |   |
| Deposits and  other assets              |       |                                        | 6,226      |   |   |
| Total assets held for sale              |       |                                        | $          | 1,294,932 |   |   |
| Accounts payable                        |       |                                        | $          | 143,985 |   |   |
| Accrued payroll  and benefits           |       |                                        | 56,963     |   |   |
| Accrued  liabilities                    |       |                                        | 22,650     |   |   |
| Total current liabilities held for sale |       |                                        | 223,598    |   |   |
| Total liabilities  held for sale        |       |                                        | $          | 223,598 |   |   |

 

Effectivewith the second quarter of fiscal year 2005, this business has been reflectedas a discontinued operation in the consolidated statements of operations. Allprior period results have been reclassified to reflect this presentation. Therewere no assets or liabilities attributable to this business at September 30,2006 and 2005. Operating results of the discontinued operations from OKON, Inc.are as follows:

| ** **                             | ** ** | **For the Years Ended September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                |       |                                                           | $          | — |   |   | $ | 846,141 |   | $ | 2,265,567 |   |
| Net loss from  discontinued operations |       |                                                           | $          | — |   |   | $ | (89,821 | ) | $ | (109,832 | ) |
| Loss due to  product liability accrual |       |                                                           | —     |   |   | (75,000 | ) | — |   |
| Net loss from  discontinued operations |       |                                                           | $          | — |   |   | $ | (164,821 | ) | $ | (109,832 | ) |

 

F-26

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 4—DiscontinuedOperations (continued)**

*REN Corporation*

In the second quarter offiscal year 2005, the Company’s board of directors decided to dispose ofRentech’s 56% ownership in REN Corporation. Effective August 1, 2005, theCompany sold its 56% ownership interest in REN Corporation. The purchasingentity was REN Holding Corporation (RHC), an Oklahoma corporation, consistingof a management group previously involved in REN. The sales price of thetransaction was $1,175,000, payable in the form of earn-out payments based onRHC’s qualified cash receipts. These qualified cash receipts are intended toinclude payments for sales and services received by REN from its customers. Notincluded as qualified cash receipts are any cash proceeds from loans, investmentsor collection of accounts receivable in existence as of June 30, 2005 andother non-operating revenues. The earn-out will be paid based on 5% of RENCorporation’s qualified cash receipts up to the first $2,500,000 per year andat a rate of 10% of qualified cash receipts in excess of $2,500,000 per year.The earn-out payment will continue indefinitely until Rentech collects the$1,175,000. As of September 30, 2006, the Company has collected $128,154of this amount and has recorded $46,846 of the remaining receivable in currentassets as other receivables. In addition, the Company recorded a reserve of$1,000,000 against the total earn-out receivable due to uncertainty surroundingthe estimation of collections. The Company incurred closing costs of $6,304 onthe sale. Pursuant to the terms of the agreement, the buyer is responsible forall contingent liabilities that now exist or might be incurred after the dateof disposal.

Thenet sales price is set forth as follows: 

| Sales price                                                                |   |   | $      | 1,175,000  |   |   |
|----------------------------------------------------------------------------|--------|--------|--------|------------|--------|--------|
| Less transaction  costs                                                    |   |   | $      | (6,304     | )      |   |
| Net sales price  to Rentech, Inc., after transaction costs            |   |   | $      | 1,168,696  |   |   |
| Consisting of:                                                             |   |   |   |       |   |
| Earn-Out  receivable                                                       |   |   | $      | 1,175,000  |   |   |
| Legal fees                                                                 |   |   | $      | (6,304     | )      |   |
| Net sales price  to Rentech, Inc., after transaction costs            |   |   | $      | 1,168,696  |   |   |
| Less reserve on Earn-Out                                                   |   |   | $      | (1,000,000 | )      |   |
| Net sales price  after transaction costs and reserve                       |   |   | $      | 168,696    |   |   |
| Book value of Rentech’s ownership in REN Corporation                  |   |   | $      | 405,267    |   |   |
| Rentech’s loss on sale  of REN Corporation (prior to taxes of $6,172) |   |   | $      | (236,571   | )      |   |

 

F-27

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note4—Discontinued Operations (continued)**

The assets and liabilitiesof REN Corporation as of August 1, 2005, immediately prior to sale, wereas follows: 

| ** **                              | ** ** | **As of August 1, 2005** | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|
| Cash                                    |       |                                         | $          | 55,453 |   |   |
| Accounts  receivable, net               |       |                                         | 129,462    |   |   |
| Costs in excess  of billings            |       |                                         | 82         |   |   |
| Prepaid expenses                        |       |                                         | 11,656     |   |   |
| Inventories                             |       |                                         | 297,507    |   |   |
| Total current assets held for sale      |       |                                         | 494,160    |   |   |
| Property and  equipment, net            |       |                                         | 306,875    |   |   |
| Total assets held for sale              |       |                                         | $          | 801,035 |   |   |
| Accounts payable                        |       |                                         | $          | 167,987 |   |   |
| Billings in  excess of costs            |       |                                         | 92,265     |   |   |
| Accrued payroll  and benefits           |       |                                         | 34,359     |   |   |
| Accrued  liabilities                    |       |                                         | 40,202     |   |   |
| Current portion  of long-term debt      |       |                                         | 27,223     |   |   |
| Total current liabilities held for sale |       |                                         | 362,036    |   |   |
| Long-term debt,  net of current portion |       |                                         | 33,732     |   |   |
| Total liabilities  held for sale        |       |                                         | $          | 395,768 |   |   |

 

Effective with the secondquarter of fiscal year 2005, this business has been reflected as a discontinuedoperation in the consolidated statements of operations. All prior periodresults have been reclassified to reflect this presentation. There were noassets or liabilities attributable to this business at September 30, 2006and 2005. Operating results of the discontinued operations from REN Corporationare as follows: 

| ** ** | ** ** | **For the Years Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue    |       |                                                           | $          | — |   |   | $ | 364,190 |   | $ | 801,270 |   |
| Net loss   |       |                                                           | $          | — |   |   | $ | (281,304 | ) | $ | (608,303 | ) |

 

*Petroleum MudLogging, LLC*

The Company committed to a plan to sell Petroleum MudLogging, LLC (“PML”) which is a wholly owned subsidiary of Rentech andrepresents our oil and gas field services segment. Effective with the fourthquarter of fiscal year 2006, this business has been shown as a discontinuedoperation in the consolidated statements of operations. All prior periodresults have been reclassified to reflect this presentation. The assets andliabilities components attributable to this business as of September 30,2006 and 2005 are shown on the consolidated balance sheets as current and noncurrent held for sale assets and liabilities. 

F-28

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note4—Discontinued Operations (continued)**

Theassets and liabilities of PML that were held for sale are as follows: 

| ** **                              | ** ** | **As of September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Accounts  receivable, net               |       | $                                      | 1,452,933  |   | $ | 983,786 |   |
| Other receivables                       |       | 42,675                                 |       | 8,610 |   |
| Prepaid expenses                        |       | 28,055                                 |       | 6,947 |   |
| Total current assets held for sale      |       | $                                      | 1,523,663  |   | $ | 999,343 |   |
| Property and  equipment, net            |       | 1,502,003                              |       | 1,461,014 |   |
| Goodwill, net                           |       | 166,713                                |       | 166,713 |   |
| Deposits and  other assets              |       | 11,322                                 |       | 5,723 |   |
| Total assets held for sale              |       | $                                      | 3,203,701  |   | $ | 2,632,793 |   |
| Accounts payable                        |       | $                                      | 63,887     |   | $ | 32,267 |   |
| Accrued payroll  and benefits           |       | 323,386                                |       | 235,264 |   |
| Accrued liabilities                     |       | 47,134                                 |       | 112,911 |   |
| Line of credit  payable                 |       | —                                 |       | 499,218 |   |
| Current portion  of long-term debt      |       | 71,351                                 |       | 70,352 |   |
| Total current liabilities held for sale |       | $                                      | 505,758    |   | $ | 950,012 |   |
| Long-term debt,  net of current portion |       | 118,359                                |       | 147,326 |   |
| Total liabilities  held for sale        |       | $                                      | 624,117    |   | $ | 1,097,338 |   |

 

The components of revenue,cost of sales operating expense attributable to this business as of September 30,2006, 2005 and 2004 are not shown on the consolidated statement of earnings forthese periods. Operating results of the discontinued operations from PetroleumMud Logging, LLC are as follows: 

| ** ** | ** ** | **For the Years Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue    |       | $                                                              | 8,291,649  |   | $ | 6,596,798 |   | $ | 4,721,788 |   |
| Net income |       | $                                                              | 1,264,161  |   | $ | 1,245,647 |   | $ | 594,758 |   |

 

On November 15, 2006, Rentech entered into anEquity Purchase Agreement (“Purchase Agreement”) with PML Exploration Services,LLC, a Delaware limited liability company (“PML Exploration”), pursuant towhich Rentech sold all of the equity securities of Petroleum Mud Logging, LLC,a Colorado limited liability company (formerly Petroleum Mud Logging, Inc.,“PML”) to PML Exploration. PML Exploration paid approximately $5.4 million incash to Rentech for PML. The Purchase Agreement contained customaryrepresentations and warranties of Rentech relating to PML, and provisionsrelating to the indemnification of PML Exploration by Rentech for breaches ofsuch representations and warranties. 

PML, a provider of well logging services to the oiland gas industry was not part of Rentech’s core business or its strategic focus.The sale of PML completes Rentech’s divestiture of its non-core subsidiaries,as the Company focuses its efforts and resources on its long-term business planto commercialize Rentech’s Fischer-Tropsch technology. The sale of PML’snet assets excluded approximately $500,000 of cash on hand which was retainedby Rentech at the close of the transaction. 

F-29

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note4—Discontinued Operations (continued)**

Also excluded was anintercompany receivable from Rentech of approximately $1,683,000 which wasforgiven by PML. In connection with the closing of the transaction, Rentechincurred $100,000 as one-time incentive payments for executive incentives, aswell as approximately $49,000 in legal fees. 

Theapproximate net sales price and the gain on its sale of PML is shown asfollows:

| Sales price                                                     |   | $         | 5,398,000 |   |
|-----------------------------------------------------------------|--------|-----------|-----------|--------|
| Less transaction  costs                                         |   | (49,000   | )         |
| Net sales price  to Rentech, Inc., after transaction costs |   | $         | 5,349,000 |   |
| Book value of Rentech’s ownership in PML                   |   | 2,628,000 |      |
| Rentech’s gain on sale  of PML                             |   | $         | 2,721,000 |   |

 

**Note 5—Inventories**

Inventories consisted of the following: 

| ** **     | ** ** | **As of September 30,** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Finished goods |       | $                                      | 12,993,995 |   |   | $ | — |   |   |
| Raw materials  |       | 1,848,806                              |       |   | — |   |   |
|           |       | $                                      | 14,842,801 |   |   | $ | — |   |   |

 

**Note 6—Property andEquipment**

Propertyand equipment consisted of the following:

| ** **                                                             | ** ** | **As of September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Land                                                                   |       | $                                      | 1,829,705  |   | $ | 139,000 |   |
| Buildings                                                              |       | 6,670,071                              |       | 1,290,713 |   |
| Machinery and  equipment                                               |       | 52,232,558                             |       | 850,821 |   |
| Construction in  progress                                              |       | 3,916,337                              |       | — |   |
| Office furniture  and equipment                                        |       | 606,966                                |       | 263,217 |   |
| Computer  equipment & computer software                       |       | 573,139                                |       | 385,779 |   |
| Vehicles                                                               |       | 23,784                                 |       | 23,784 |   |
| Leasehold  improvements                                                |       | 405,461                                |       | 373,970 |   |
|                                                                   |       | 66,258,021                             |       | 3,327,284 |   |
| Less accumulated  depreciation and amortization                        |       | (4,853,133                             | )          | (1,393,810 | ) |
|                                                                   |       | $                                      | 61,404,888 |   | $ | 1,933,474 |   |
| Property and  equipment held for sale                             |       | $                                      | 2,567,758  |   | $ | 2,271,508 |   |
| Less accumulated  depreciation on property and equipment held for sale |       | (1,065,755                             | )          | (810,494 | ) |
|                                                                   |       | $                                      | 1,502,003  |   | $ | 1,461,014 |   |

 

F-30

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 7—Goodwill and OtherIntangibles**

Based upon our application of SFAS No. 142, theCompany evaluated the useful lives of its existing identifiable intangibleassets and determined that the existing useful lives are appropriate. Goodwilland intangible assets are tested annually and whenever events and circumstancesoccur indicating that they might be impaired. As of September 30, 2006 and2005, the Company completed its annual impairment test and determined thatgoodwill was not impaired. 

The Company recorded $257,556 and $257,556 inamortization expense during the years ended September 30, 2006 and 2005,and estimates expense of approximately $258,000, $210,000, and $0 in each ofthe fiscal years ending September 30, 2007, 2008, and 2009 related toidentifiable intangibles with a finite life. 

The following tablesummarizes the activity in the net book value of goodwill for the periodsindicated: 

| ** **                                               | ** ** | **For the Years Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Paints—Discontinued  operations                     |       |                                                       |       |   |   |
| Beginning balance                                        |       | $                                                          | —     |   | $ | 839,841 |   |
| Additions                                                |       | —                                                     |       | — |   |
| Deletions for sold subsidiary                            |       | —                                                     |       | (839,841 | ) |
| Amortization                                             |       | —                                                     |       | — |   |
|                                                     |       | $                                                          | —     |   | $ | — |   |
| Oil and gas field  services—Discontinued operations |       |                                                       |       |   |   |
| Beginning balance                                        |       | $                                                          | 166,713    |   | $ | 166,713 |   |
| Additions                                                |       | —                                                     |       | — |   |
| Amortization                                             |       | —                                                     |       | — |   |
|                                                     |       | $                                                          | 166,713    |   | $ | 166,713 |   |

 

Thefollowing table summarizes the activity of intangible assets subject toamortization: 

| ** **                                 | ** ** | **For the Years Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| Licensed  technology and technology rights |       |                                                       |       |   |   |
| Gross carrying amount                      |       | $                                                          | 3,718,895  |   | $ | 3,718,895 |   |
| Accumulated amortization                   |       | (3,251,623                                                 | )          | (2,994,067 | ) |
|                                       |       | $                                                          | 467,272    |   | $ | 724,827 |   |

 

**Note 8—Investment inAdvanced Technology Company**

On May 29, 1998, the Company acquired a 10%ownership in INICA, Inc. for $3,079,107. During the fourth quarter offiscal 2003, the Company exchanged its 10% ownership in INICA for a 2.28%ownership in the common stock of Global Solar Energy, Inc. (“GSE”) and a5.76% ownership in the common stock of Infinite Power Solutions, Inc. (“IPS”).GSE manufactures and markets flexible photovoltaic (PV) modules, while IPS isdeveloping micro-miniature thin-film rechargeable batteries.

F-31

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 8—Investment inAdvanced Technology Company (continued)**

As of September 30, 2003, the Company assessedthe value of its minority ownership interests in GSE and IPS based uponcurrently available information. We used the most recent equity transaction toestablish a per share price for our shares in GSE. We used that most recentequity transaction as a baseline and then added a 25% premium for future upsidepotential. Our 410,400 shares were valued at $750,000. We used the most recentequity transaction to establish a per share price for our shares in IPS. Weused that most recent equity transaction as a baseline and then added a 25%premium for future upside potential. Our 375,840 shares were valued at$450,000. As a result of that assessment, the Company recorded an impairment ofinvestment of approximately $1,900,000, reducing the net realizable value ofthe investment to $1,200,000.

As of September 30, 2004, the Company completedan assessment of the value of its minority ownership interests in GSE and IPSbased upon currently available information. No additional equity transactionshad occurred since the prior calculation was completed. The existing debt ofGSE is convertible, but it is not expected to convert at less than the value ofthe most recent equity transaction. As a result of the significant differencebetween previously projected revenues and cash flow for fiscal 2004 andprojections at the time, as well as the revised projections for fiscal 2005,management concluded that the premium added to the value of the stock wasimpaired. Therefore, we reduced our valuation of our GSE shares to value of themost recent equity transaction, or $611,500. Due to the fact that at that timeIPS had only sufficient cash to sustain itself through December 2004 andthat it had not yet reached the point of signing a memorandum of understandingor a letter of intent with any potential new partners, management concludedthat Rentech’s investment in IPS was impaired. As there were no definitiveagreements that would lead us to believe that IPS would continue its operationsinto 2005, we concluded that the investment was fully impaired and we wrote ourinvestment down to $0. As a result of that assessment, the Company recorded animpairment of investment of $588,500 in fiscal 2004 and the investment in thetwo Advanced Technology Companies was recorded at the estimated net realizablevalue of $611,500.

As of September 30,2005, the Company completed another assessment of the value of its minorityownership interest in GSE based upon currently available information. Noadditional equity transactions had occurred since the prior calculation wascompleted. The parent company of GSE, Unisource, announced plans to sell theirinterest in GSE during 2005. We used the anticipated sales price of themajority shares of GSE to value our minority shares. As a result of ananticipated sales price that lowered the estimated per share value of ourminority shares, management concluded that our investment was further impaired.Therefore, we reduced our valuation of our GSE shares to a value determined bythe anticipated sales price of GSE, or $405,000. In March 2006, theCompany reached an agreement with Unisource and exchanged all of its 410,400shares of GSE for $100,000. As a result of that transaction, the Companyrecognized a loss on disposal of its investment in GSE of $305,000.

**Note 9—Debt**

On September 27, 2002, the Company entered into a$500,000 line of credit agreement with the Bank of Denver. The line of creditwas due on demand. On March 4, 2004, the Company and the Bank of Denversigned a change in terms agreement converting the line of credit to aninstallment loan under which the maturity date of the line was extended from March 1,2004 to September 1, 2007, at which time all unpaid principal and interestwas due. The line of credit accrued interest at the Bank of Denver Base Rateplus 0.5%, and was payable monthly through October 1, 2004, at which timethe line of credit

# F-32

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 9—Debt(continued)**

converted to aninstallment loan which bore interest at the same rate. The remaining balancewas amortized over 36 months beginning October 1, 2004. The installmentloan was collateralized by all inventory, accounts receivable and equipment ofRentech. In addition, the installment loan was secured by a second mortgageagainst the building in which our research and development laboratory is housedas well as 1,308,500 shares of the Company’s common stock consisting of sharesowned by four officers of the Company. As of September 30, 2005, theinstallment loan was accruing interest at 8.5% and the balance was $349,430. OnOctober 6, 2005, the Company paid $352,187 to pay off the remainingprincipal and accrued interest due on this note.

Under date of November 19, 2004, the Companyissued three unsecured promissory notes for loans totaling $850,000. TheCompany paid $61,528 in debt issuance costs related to the promissory notes.The promissory notes matured on November 18, 2005, and bore annualinterest between 8.5% and 10.0% with principal and interest payable uponmaturity. In connection with the promissory notes, the Company issued stockpurchase warrants for the purchase of 745,613 shares of common stock andentered into Registration Rights Agreements providing for the registration ofthe shares of common stock underlying the warrants. The warrants have anexercise price of $1.14 per share of common stock, and are exercisable until November 18,2007. The warrants were valued using the Black-Scholes option-pricing model,which resulted in debt issuance charges of $288,154. On February 17, 2005,Rentech was in default of these promissory notes because we did not completethe acquisition of Royster-Clark Nitrogen on the date specified in the promissorynotes. As a result of the default on the loan, the Company issued additionalwarrants to the investors on the same terms as the original warrants for thepurchase of 186,404 additional shares of its common stock at $1.14 per share.The warrants were valued using the Black-Scholes option-pricing model, whichresulted in a charge to interest expense of $229,528. The Company paid aplacement agent $42,500 for its services related to these promissory notes,which was recorded as debt issuance costs. In addition, the Company issued theplacement agent 37,280 warrants to purchase the common stock of the Company.The warrants are exercisable at $1.14 per share, and were valued using theBlack-Scholes option-pricing model, which resulted in debt issuance costs of$14,407. In November 2005, the Company paid a total of $923,679, includingprincipal and accrued interest, to pay off all of these promissory notes.

On May 1, 2006, the Company entered into anunsecured short-term note payable, to finance insurance premiums, totaling$1,284,186. The note payable matures on March 1, 2007 and bears interestat 6.74% with monthly payments of principal and interest. On September 19,2006, the Company paid a total of $785,771, including principal and accruedinterest, to pay off this note.

# F-33

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note9—Debt (continued)**

Long-term debt consists ofthe following:

| ** **                                                                                                                                                                                                                                                  | ** ** | **As of September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Mortgage dated  February 8, 1999; monthly principal and interest payments of $7,067 with  interest of 6.5% unpaid principal and accrued interest due March 1,  2029; collateralized by land and building                                          |       | $                                      | 992,980    |   | $ | 1,011,839 |   |
| Installment loan;  monthly principal and interest payments of $15,286 with interest of  8.5%, unpaid principal and interest maturing October 2007;  collateralized by 2nd deed of trust at property on E. 37th Ave. in Denver, Colorado |       | —                                 |       | 349,430 |   |
| Total long-term debt                                                                                                                                                                                                                                        |       | 992,980                                |       | 1,361,269 |   |
| Less current maturities                                                                                                                                                                                                                                     |       | (19,952                                | )          | (184,621 | ) |
| Long-term debt                                                                                                                                                                                                                                              |       | $                                      | 973,028    |   | $ | 1,176,648 |   |
| Long-term debt  held for sale(1)                                                                                                                                                                                                                            |       | $                                      | 189,710    |   | $ | 217,679 |   |
| Less current  maturities held for sale                                                                                                                                                                                                                      |       | (71,351                                | )          | (70,353 | ) |
|                                                                                                                                                                                                                                                        |       | $                                      | 118,359    |   | $ | 147,326 |   |

----

(1)          Various promissorynotes; monthly principal and interest payments of $7,783 and $6,949 at September 30,2006 and 2005, respectively, with interest of 0% to 9.6%, unpaid principal andinterest maturing from August 2006 through August 2010;collateralized by certain fixed assets of the Company. These liabilities wereeither settled or assumed in connection with the sale of PML that occurredsubsequent to our fiscal year ended September 30, 2006.

Future maturities oflong-term debt, related to the Company’s continuing operations and discontinuedoperations, are as follows:

| **Year Ending September 30,** | ** ** | ** ** | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations(1)** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|
| 2007                                         |       |       | $          | 19,952                     |       |                            |       | $ | 71,351 |   |   |
| 2008                                         |       |       | 21,127     |                       |       |                            | 57,254     |   |   |
| 2009                                         |       |       | 22,742     |                       |       |                            | 42,798     |   |   |
| 2010                                         |       |       | 24,287     |                       |       |                            | 18,307     |   |   |
| 2011                                         |       |       | 25,937     |                       |       |                            | —     |   |   |
| Thereafter                                   |       |       | 878,935    |                       |       |                            | —     |   |   |
|                                         |       |       | $          | 992,980                    |       |                            |       | $ | 189,710 |   |   |

----

(1)          Theunderlying obligations related to the future maturities of long term debt wereeither settled or assumed by the purchaser in connection with our sale of PMLthat occurred subsequent to our fiscal year ended September 30, 2006.

**Note 10—ConvertibleDebt **

On February 25, 2002, the Company issued fourlong-term convertible notes totaling $2,250,000 to existing stockholders of theCompany, which accrued interest at 8.5% and were due in full on 

# F-34

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note10—Convertible Debt (continued)**

February 25, 2006. TheCompany recorded $132,461 in debt issuance costs related to these notes. Monthlypayments on the notes of $19,526 commenced on April 1, 2002. The noteswere convertible into no more than 4,500,000 registered shares of the Company’scommon stock, less two shares for every one dollar of principal reduction ofthe notes paid in the form of cash. The notes allowed the lenders to convertpart or all of the principal balance into common stock at a conversion price of$0.50 per share if the market price of the common stock on the conversion datewas $0.50 per share or higher. Starting on the first day of the thirteenthcalendar month following the date of the notes, and continuing on the first dayof each succeeding month until the notes were paid in full, principal in theamount of one-thirty-sixth of the declining principal balance of the notesautomatically converted into the Company’s common stock at a conversion priceof $0.50 per share. The notes began to automatically convert into the Company’scommon stock on March 1, 2003. On December 29, 2004, three of theconvertible notes were converted by the note holders into 1,629,929 shares ofthe Company’s common stock. On January 19, 2005, the balance of theremaining convertible note was converted by the holder into 424,332 shares ofthe Company’s common stock.

On August 28, 2003, the Company entered into twoconvertible notes totaling $865,000 with existing stockholders of the Company.Funds of $550,000 were received in fiscal 2003, and $315,000 was received infiscal 2004. The notes bore interest at 10% and matured on August 28,2006, with all unpaid principal and interest due at that time. Interest-onlypayments were due on the first day of each month. The Company recorded $10,133in debt issuance costs related to these notes, including $1,650 in the yearended September 30, 2004. The market price of the Company’s common stockwas greater than the conversion rate included in the notes. As a result, the Companyrecorded $431,333 in deferred financing charges related to these notes,including $187,000 in the year ended September 30, 2004. The deferredfinancing charges were amortized over the life of the notes. The notes wereconvertible at any time in whole or in part into registered common stock of theCompany at a conversion rate of $0.45 per share. The balance of theseconvertible notes at September 30, 2005 was $865,000, which was shown netof unamortized deferred financing charges of $135,594 on the balance sheet fora total of $729,406. On January 3, 2006, one of these notes totaling$250,000 was converted into 555,556 shares of the Company’s common stock at aconversion price of $0.45. On July 11, 2006, the balance of the remaining$615,000 note was converted into 1,366,667 shares of the Company’s common stockat a conversion price of $0.45.

On November 19, 2004, the Company issued twounsecured promissory notes to an existing stockholder totaling $1,000,000. Inconnection with the promissory notes, the Company issued stock purchasewarrants for the purchase of 877,192 shares of common stock and entered intoRegistration Rights Agreements providing for the registration of the shares ofcommon stock underlying the warrants. The promissory notes matured November 18,2005, and bore interest at 8.5% with principal and interest payable uponmaturity. The warrants have an exercise price of $1.14 per share of commonstock, and are exercisable until November 18, 2007. The warrants werevalued using the Black-Scholes option-pricing model, which resulted in debtissuance charges of $339,005. On February 17, 2005, the Company was indefault of these promissory notes as it failed to complete the acquisition ofRoyster-Clark Nitrogen, Inc. on the date specified in the promissorynotes. As a result of the default on the loan, Rentech issued additionalwarrants to the investor on the same terms as the original warrants for thepurchase of 219,298 additional shares of its common stock at $1.14 per share,and has allowed for the conversion of the unpaid balances of the notes intocommon stock. The conversion rate is determined by dividing the balance ofprincipal and interest due on the notes as of the date of a written conversionnotice by 90% of the average closing price 

# F-35

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note10—Convertible Debt (continued)**

of the Company’s commonstock over the ten trading days immediately prior to the date the writtennotice is received by Rentech, provided the conversion price will be no lessthan $1.14 per share. The warrants were valued using the Black-Scholesoption-pricing model, which resulted in a charge to interest expense of$270,034. As of September 30, 2005 the balance of the promissory notes,including principal and interest, was $1,067,301, which was shown net ofunamortized debt issuance costs of $46,439 on the balance sheet for a total of$1,020,862. On October 27, 2005, the two promissory notes were convertedinto 493,332 shares of Rentech common stock at a conversion price of $2.18 pershare.

On May 20, 2005, the Company issued twoconvertible promissory notes to then-current directors of the company totaling$1,000,000. The promissory notes have no maturity date, and bear annualinterest at the Wall Street Journal Prime Rate plus 2% (8.75% at September 30,2005). Commencing on the earlier of 90 days after the date of the notes or thedate that an effective registration is on file with the Securities and ExchangeCommission, any outstanding principal balance of these notes may, at the optionof the holder, be converted at any time or from time to time into common stockof the Company at a conversion price of $1.52 per share. Rentech may, at itsoption, require the holders to convert all their convertible shares into commonshares if the market price for the common stock for the preceding 20 tradingdays has been $2.70 or more per share. Interest is payable monthly in arrearson the last day of each month, in cash or at the option of the Company, payablein shares of the Company’s registered, free-trading common stock at aconversion price of $1.52 per share. In connection with the promissory notes,the Company issued stock purchase warrants for the purchase of 657,981 sharesof common stock. The warrants have an exercise price of $1.61 per share ofcommon stock, and are exercisable until April 7, 2008. The warrants werevalued using the Black-Scholes option-pricing model, which resulted in debtissuance charges of $381,474. The issuance of the convertible notes resulted ina beneficial conversion feature of $315,685. The beneficial conversion featurewas fully amortized to interest expense in fiscal 2005. As of September 30,2005, the balance of the promissory notes was $1,000,000, which was shown netof unamortized debt issuance costs of $356,042 on the balance sheet for a totalof $643,958. On December 14, 2005, one of these notes totaling $125,000was converted into 82,237 shares of the Company’s common stock at a conversionprice of $1.52. On May 18, 2006, the remaining $875,000 note was convertedinto 575,658 shares of the Company’s common stock at a conversion price of$1.52.

On April 18, 2006, the Company closed itsconcurrent public offerings (the “Offerings”) of 16,000,000 shares of commonstock at a price per share of $3.40 and $50,000,000 principal amount of its4.00% Convertible Senior Notes Due 2013 (the “Notes”). In connection with the closings, the Company, and Wells FargoBank, National Association, as the Trustee, entered into an Indenture dated April 18,2006 (the “Indenture”). Certain subsidiaries of the Company are also parties tothe Indenture, although none of the subsidiary guarantors has any obligationunder the Notes. The Notes bear interest at the rate of 4.00% per year on theprincipal amount of the Notes, payable in cash semi-annually in arrears on April 15and October 15 of each year, beginning October 15, 2006. The Notesare the Company’s general unsubordinated unsecured obligations, ranking equallyin right of payment to all of the Company’s existing and future unsubordinatedunsecured indebtedness, and senior in right of payment to any of the Company’sfuture indebtedness that is expressly subordinated to the Notes. The Notes arejunior in right of payment to all of the Company’s existing and future securedindebtedness to the extent of the value of the collateral securing suchobligations and structurally subordinated in right of payment to all existingand future obligations of the Company’s subsidiaries, including trade credit.The Notes are not guaranteed by any of the Company’s subsidiaries.

# F-36

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note10—Convertible Debt (continued)**

Holders may convert their Notes into shares of theCompany’s common stock (or cash or a combination of cash and shares of commonstock, if the Company so elects) at an initial conversion rate of 249.2522shares of the Company’s common stock per $1,000 principal amount of Notes(which represents a conversion price of approximately $4.012 per share ofcommon stock), subject to adjustment as provided in the Indenture, under thefollowing circumstances: (1) during any fiscal quarter, if the closingsale price of the Company’s common stock for at least 20 trading days in theperiod of 30 consecutive trading days ending on the last trading day of thepreceding fiscal quarter exceeds 120% of the conversion price per share on suchlast trading day, (2) if the Company has called the Notes for redemption, (3) ifthe average of the trading prices of the Notes for any five consecutive tradingday period is less than 98% of the average of the conversion values of theNotes during that period, (4) if the Company makes certain significantdistributions to the holders of its common stock, (5) in connection with atransaction or event constituting a fundamental change or (6) at any timeon or after January 15, 2013 until the close of business on the businessday immediately preceding the maturity date. In the event of a fundamentalchange (as defined in the Indenture), the Company may be required to pay amake-whole premium on Notes converted in connection with the fundamentalchange. The make-whole premium will be payable in shares of the Company’scommon stock, or the consideration into which of the Company’s common stock hasbeen converted or exchanged in connection with such fundamental change, on therepurchase date for the Notes after the fundamental change.

The Company may redeem the Notes, in whole or in part,at any time before April 15, 2011, at a redemption price payable in cashequal to 100% of the principal amount of Notes to be redeemed, plus any accruedand unpaid interest and an additional coupon make-whole payment if in theprevious 10 trading days ending on the trading day before the date of themailing of the provisional redemption notice the volume weighted average priceof the Company’s common stock exceeds 150% of the conversion price for at leastfive consecutive trading days. The coupon make-whole payment will be in cash inan amount per $1,000 principal amount of Notes equal to the present value ofall remaining scheduled payments of interest on each note to be redeemedthrough April 15, 2011. At any time on or after April 15, 2011, theCompany may redeem the Notes, in whole or in part, at a redemption pricepayable in cash equal to 100% of the principal amount of the Notes to beredeemed, plus any accrued and unpaid interest to, but not including, theredemption date.

On April 24, 2006, the underwriters of theCompany’s concurrent public offerings exercised in full their over-allotmentoptions by purchasing an additional $7,500,000 of convertible senior notes. Includingthe over-allotment purchases, the Company’s offering of convertible seniornotes totaled $57,500,000 with net proceeds to the Company of approximately$53,700,000 after deducting the underwriting discounts, commissions, fees andother expenses. The issuance of the notes resulted in a beneficial conversionfeature of $874,875, which is amortized to interest expense over the term ofthe notes. The balance of the convertible senior notes at September 30,2006 was $57,500,000, which is shown net of unamortized deferred financingcharges related to the beneficial conversion feature of $820,716 on the balancesheet for a total of $56,679,284. In connection with these notes, the Companyhas recognized $4,325,606, as of September 30, 2006, of prepaid debtissuance costs which is the largest component of deposits and other assets onthe balance sheet.

# F-37

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note10—Convertible Debt (continued)**

Long-term convertibledebt, including automatic conversions to common stock as well as cash payments,matures thereafter in five years, due in 2013. The required cash payments onconvertible notes for the year ending September 30, 2007 based on currentinterest rates will be $2,280,833.

**Note 11—Lines ofCredit **

On February 25, 2002, the Company entered into a$1,000,000 business line of credit agreement with Premier Bank through ourformer 56% owned subsidiary, REN Corporation. The line of credit bore interestat prime plus 1.5%, and interest was accrued and payable monthly. On February 27,2002, the Company purchased a $500,000 certificate of deposit with PremierBank, to be used as collateral on the line of credit. On September 29,2004, the Company entered into an amended agreement with Premier Bank wherebythe Company redeemed the $500,000 certificate of deposit and applied it againstthe outstanding balance of the loan. In addition, the available line of creditamount was reduced from $1,000,000 to $500,000. On July 29, 2005, the lineof credit was transferred from REN Corporation to Petroleum Mud Logging, LLC.The terms of the loan remained the same, however, the guarantee by the minorityshareholder of REN Corporation and the collateral of the first deed of trust onthe real property of REN Corporation were eliminated from the loan collateral.The line of credit was then collateralized by the first deed of trust on thereal property of PML and was guaranteed by Rentech. In addition, two debtcovenants were added to the loan whereby PML was required to maintain a minimumtangible net worth of not less than $1,600,000 and the balance of the line ofcredit was not to exceed 70% of the accounts receivable balance less than 90days. The line of credit matured on May 1, 2006, at which time all unpaidprincipal and interest was due. On May 1, 2006, the Company paid a totalof $503,080, including principal and accrued interest, to pay off the line ofcredit.

On April 26, 2006,REMC entered into a Financing Agreement (the “Revolving Credit Facility”) withThe CIT Group/Business Credit, Inc. to support the working capital needsof REMC’s nitrogen fertilizer plant. The Revolving Credit Facility has amaximum availability of $30,000,000, subject to borrowing base limitations, andbears interest at the Chase Bank Rate plus 0.25% for Chase Bank Rate Loans andLIBOR rate plus 2.50% for LIBOR Loans. Subject to the conditions andlimitations stipulated in the agreement, we may elect that such principal debtwill be Chase Bank Rate Loans, LIBOR Loan, or a combination of both. Theinterest rate at September 30, 2006 was 8.25%. The Revolving CreditFacility is guaranteed by RDC, and is secured by a first priority securityinterest in all of REMC’s current assets, including, without limitation, allreceivables, accounts, inventories and general intangibles. The RevolvingCredit Facility also imposes various restrictions and covenants on REMC,including, without limitation, limitations on REMC’s ability to incuradditional debt, guarantees or liens, ability to make distributions ordividends or payments of management fees or similar fees to affiliates, aminimum fixed charge coverage ratio and a minimum tangible net worth covenant. Inaddition, the facility provides for a letter of credit guarantee by CIT whichwould be deducted from the $30,000,000 maximum availability. As of September 30,2006, REMC had no aggregate borrowings or letter of credit guarantees under thefacility.

**Note 12—Investment in SandCreek**

On January 7, 2000, the Company and RepublicFinancial Corporation (“Republic”) through Sand Creek Energy, LLC (SCE)purchased the “Sand Creek” methanol facility and all the supportinginfrastructure, buildings and the underlying 17-acre site. The Companyand Republic did not expect to use 

# F-38

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note12—Investment in Sand Creek (continued)**

the Sand Creek plant forcommercial production of liquid hydrocarbons. Instead, the Company planned tosell some or all of the assets of SCE.

The owner of the facility as of September 30,2005 was SCE, which was 50 percent owned by Rentech Development Corporation, awholly owned subsidiary of the Company, and 50 percent owned by RFC-Sand CreekDevelopment, LLC, a wholly-owned subsidiary of Republic.

For the years ended September 30, 2005 and 2004,the Company had contributed $170,834 and $178,049 to SCE and recognized$171,202 and $181,890 related to its equity in SCE’s losses. As of September 30,2005 and 2004, the Company had a $22,154 and a $18,868 receivable due from SCE.As of September 30, 2005 and 2004, SCE had no short-term or long-termdebt.

On October 7, 2005,Rentech Development Corporation purchased Republic’s 50% ownership interest inSand Creek Energy, LLC for a purchase price of $1,400,000. The Company hascommenced construction and plans to build and operate, what the Companybelieves to be, the United States’ first fully integrated Fischer-Tropsch,coal-to-liquids (CTL), Product Development Unit (PDU) facility at the SCE site.This plant will produce ultra-clean diesel and aviation fuels and naphtha fromvarious domestic coals, petroleum coke and biomass feedstocks on ademonstration scale, utilizing coal gasification technology. With the PDU inoperation, Rentech will be able to define operating parameters of diversehydrocarbon feedstocks under varying conditions. The products from the plantwill be used to supply test quantities of these ultra-clean fuels to thenumerous groups which have expressed a deepening interest in acquiring commercialquantities of Rentech’s fuels.

**Note 13—Commitments andContingencies**

**EmploymentAgreements**

The Company has enteredinto various employment agreements with its officers that extend to May 15,2009. The employment agreements set forth annual compensation to the officersthat range from $114,000 to $370,000. Certain of the employment agreements alsoprovide for severance payments upon terminations other than for cause rangingfrom salary for the remaining term of the agreement to two years of salary anda specified bonus. The Company’s total future obligations under employmentagreements as of September 30, 2006, for the fiscal years ended 2007, 2008and 2009 are $1,602,513, $1,478,789, and $587,689, respectively. Certain of theemployment agreement provide for compensation to be adjusted annually based onthe cost of living index.

# F-39

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 13—Commitments andContingencies (continued)**

**Retirement Payable**

Effective September 30, 2005, the Companyannounced the retirement packages for the Company’s former CEO and COO. TheCompany agreed to pay total severance of $500,911 for each of the calendaryears 2006 and 2007 as well as six months severance on the last day ofemployment with monthly payments commencing in the seventh month afterretirement. The Company also agreed to pay $440,000 in lieu of certain benefitsand bonus opportunities that would have accrued under the employmentagreements, in cash, or at their election, against the exercise price of stockoptions. The Company amended $127,263 of convertible promissory notes to extendthe term to September 30, 2008, and to reduce the interest rate to theprime rate published by the Wall Street Journal. The Company agreed to paytheir unfunded deferred compensation in the amount of $326,508 in cash or, attheir election, against the exercise price of stock options. The former CEOagreed to enter into a consulting agreement with the Company providing for amonthly fee of $10,000, for a term of one year, commencing on the day after hislast date of employment. The Company also granted the former CEO and COO stockoptions with a two year term and an exercise price of $2.53 per share for190,000 shares under the Company’s 2005 Stock Option Plan, and 775,000 sharesunder the Company’s 2006 Incentive Award Plan.

During the fiscal year ended September 30, 2006,the former CEO and COO used the $440,000 payment in lieu of certain benefitsand bonus opportunities and their remaining deferred compensation balance, toexercise stock options. On October 12, 2005, they used the remaining$326,508 of deferred compensation and $137,727 of their payment due in lieu ofcertain benefits and bonus opportunities to exercise 365,000 stock options. On November 3,2005, they used $199,695 of their payment due in lieu of certain benefits andbonus opportunities and a cash payment of $25,402 to exercise 75,000 stockoptions, which reduced the outstanding payment due in lieu of certain benefitsand bonus opportunities to $102,578.

As of September 30,2006 and 2005, the Company has accrued $530,893 and $905,683 as a short-termretirement payable and $125,228 and $656,139 as a long-term retirement payable,respectively.

**Retirement Plans**

On January 1, 1998,the Company established a 401(k) plan. Employees who are at least 21 yearsof age are eligible to participate in the plan and share in the employermatching contribution. The Company is currently matching 75% of the first 6% ofthe participant’s salary deferrals. All participants who have completed 1,000hours of service and who are employed on the last day of the plan year areeligible to share in the non-matching employer contributions. Employer matchingand non-matching contributions vest immediately in years in which the plan isnot top heavy. During years in which the plan is top heavy, employer matchingand non-matching contributions vest 100% after three years of service. TheCompany contributed $347,547, $183,244and $143,963 to the plan for the yearsended September 30, 2006, 2005, and 2004.

**Operating Leases**

On April 21, 2006, we entered into a leaseagreement, dated as of March 30, 2006 (the “Lease Agreement”), with CenterWest (the “Landlord”) for the office lease of the Suites Nos. 708 and 710 ofthe building located at 10877 Wilshire Boulevard, in Los Angeles, California(the “Office Space”). The Office Space will serve as our administrativeoffices. The total rentable area of the office space is approximately 

# F-40

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note13—Commitments and Contingencies (continued)**

7,181 square feet. Theterm of the Lease Agreement (the “Lease Term”) is forty-nine (49) monthscommencing upon May 15, 2006 (the “Commencement Date”). The Company willpay an annual basic rent of $323,145 (the “Annual Basic Rent”) in twelve (12)equal monthly installments of $26,928 (the “Monthly Basic Rent”). The AnnualBasic Rent shall be increased by three and one-half percent (3.5%) per annum,on a cumulative and compounded basis, commencing on the first anniversary ofthe Commencement Date and thereafter on each subsequent anniversary thereof. Inaddition, the Company is obligated to pay its proportional share of theincrease in certain real estate taxes and operating costs for the building eachyear. Concurrently with the execution of the Lease Agreement, the Company andthe Landlord entered into a rider to the Lease Agreement (the “Rider”). TheRider provides that the Monthly Basic Rent with respect to Suite 708 willbe fully abated for the initial six (6) months of the Lease Term and theMonthly Basic Rent with respect to Suite 710 will be fully abated for theinitial month of the Lease Term. The Rider also provides that the Company isnot initially obligated to lease all the Parking Spaces until the seventh (7th)month of the Lease Term. The Company is also obligated to carry and maintaincertain insurance coverage during the Lease Term. Under the Lease Agreement,the Company was required to provide a security deposit of $29,856. Pursuant tothe Rider, the Company was required to deliver a $200,000 letter of credit (the“Letter of Credit”) in favor of the Landlord to remain in place as security forthe performance of the Company’s obligations under the Lease Agreement until 30days after the expiration of the Lease Term. If the Company has not failed toperform its obligations under the Lease Agreement, the amount of the Letter ofCredit shall be reduced to the following amounts on the anniversary of theCommencement Date: (i) Second Anniversary—$150,000; (ii) ThirdAnniversary—$100,000; and (iii) Fourth Anniversary—$50,000.

The Company’s other principal office space is leasedunder a non-cancelable operating lease, which expires on October 31, 2009,with a renewal option for an additional five years. The Company also hasvarious operating leases, which expire through January 2011. Total leaseexpense for the years ended September 30, 2006, 2005, and 2004 was approximately$379,000, $224,000 and $237,000, respectively.

Futureminimum lease payments as of September 30, 2006 are as follows:

| **For the Years Ending September 30,** | ** ** | ** ** | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations(1)** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|
| 2007                                                            |       | $          | 475,445    |                       |       | $                               | 108,681    |   |   |
| 2008                                                            |       | 499,608    |       |                       | 54,044     |                            |       |
| 2009                                                            |       | 526,269    |       |                       | —     |                            |       |
| 2010                                                            |       | 261,359    |       |                       | —     |                            |       |
| 2011                                                            |       | 206        |       |                       | —     |                            |       |
| Thereafter                                                      |       | —     |       |                       | —     |                            |       |
|                                                            |       | $          | 1,762,887  |                       |       | $                               | 162,725    |   |   |

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(1)          The underlyingobligations related to the future minimum lease payments were assumed by thepurchaser in connection with our sale of PML that occurred subsequent to ourfiscal year ended September 30, 2006.

The Company leases a portion of its building locatedin Denver Colorado, to a third party under a non-cancelable leasingarrangement. The Company accounts for this lease as an operating lease. Thelease 

# F-41

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note13—Commitments and Contingencies (continued)**

expires on April 30,2010. Total lease income for the years ended September 30, 2006, 2005 and2004 was approximately $88,000 each year.

Futureminimum lease payments receivable as of September 30, 2006 are as follows:

| **For the Years Ending September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                                            |       | $          | 88,248     |       |
| 2008                                                            |       | 88,248     |       |
| 2009                                                            |       | 88,248     |       |
| 2010                                                            |       | 51,476     |       |
| 2011                                                            |       | —     |       |
| Thereafter                                                      |       | —     |       |
|                                                            |       | $          | 316,220    |       |

 

**Litigation**

In the normal course ofbusiness, the Company is party to litigation from time to time. The Companymaintains insurance to cover certain actions and believe that resolution ofsuch litigation will not have a material adverse effect on the Company.

**ContractualLiability**

On January 18, 2001, the Company was granted aservices contract by the Wyoming Business Council, Energy Section, InvestmentReady Communities Division (“WBC”). Under the contract, Rentech received$800,000 to finance a Gas-to-Liquids (“GTL”) feasibility study within theState. If in fact the Company chooses to proceed with the conversion of amethanol facility worldwide at any time in the future, the Company would berequired to repay to the WBC the grant at the rate of 120% of the original$800,000 for a total amount not to exceed $960,000, over a period of time notto exceed six years. The repayment would only be from a 5% share of royaltiesfrom the conversion of methanol facilities to the Rentech GTL Technologyworldwide. Based on the conclusions reached in the study, the Company does notintend to proceed with an application of its technology in a methanol facility.

On April 26, 2006, RDC entered into aDistribution Agreement with Royster-Clark Resources, LLC, a subsidiary ofRoyster-Clark, Inc. (“RCR”), pursuant to which RCR is obligated to usecommercially reasonable efforts to promote the sale of, and to solicit andsecure orders from its customers for nitrogen fertilizer products comprisinganhydrous ammonia, granular urea, UAN solutions and nitric acid and relatednitrogen-based products manufactured at the East Dubuque Plant and to purchasefrom REMC all nitrogen fertilizer products manufactured at the facility forprices to be negotiated in good faith from time to time. RDC must pay RCR acommission for these services. RDC’s rights under the Distribution Agreementinclude the right to store specified amounts of its ammonia at RCR’s ammoniaterminal in Niota, Illinois for a monthly fee.

On May 26, 2006, REMC entered into a ProfessionalServices Agreement with Kiewit Energy Company (“KEC”), a subsidiary of KiewitCorporation. WorleyParsons Group, Inc., who has a separate contractualrelationship with KEC, will lead the Front End Engineering and Design (“FEED”)process in East Dubuque. FEED services will include the planned coalgasification conversion of REMC’s natural gas-fed ammonia fertilizer facilityin East Dubuque, Illinois and the production of ultra-clean fuels based 

# F-42

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note13—Commitments and Contingencies (continued)**

on the Company’sFischer-Tropsch (“FT”), coal-to-liquids (“CTL”) technology. The Company intendsto implement ConocoPhillips E-Gas äTechnology for clean coal gasification at the site to produce syngas initiallyfor use in the production of ammonia and ammonia-based fertilizers andultra-clean FT fuels. The FEED contract for the first phase of the project,which includes the conversion of the ammonia plant feedstock to coal derivedsyngas and the installation of FT liquids production, has been initiated. Theresults of the FEED work will be used in advance of the project and willprovide a basis for an Engineering Procurement and Construction Contract. FEEDactivities are scheduled for completion by third calendar quarter of the 2007.

During the fiscal yearended September 30, 2006, the Company entered into fixed quantity naturalgas contracts, which were short-term in duration. These contracts committed theCompany to quantities of natural gas (daily MMBTU’s) at prices linked to theNYMEX index. The Company has commitments to purchase natural gas under thesecontracts of approximately $4,981,080 as of fiscal year ended September 30,2006.

**Note 14—Stockholders’Equity**

**Rights Agreement**

On January 18, 2005, the Company adopted a RightsAgreement which supersedes and amends the Rights Agreement adopted on November 10,1998. The Rights Agreement, as amended on April 10, 2006, authorizes issuance to existing shareholders ofsubstantial numbers of rights to purchase shares of preferred stock or sharesof common stock in the event a third party seeks to acquire control of asubstantial block of the Company’s common stock. These provisions could deteran offer by a third party for the purchase of some or all of our outstandingsecurities and could have the effect of entrenching management. Pursuant to theRights Agreement, the Company amended its Articles of Incorporation toauthorize the issuance of rights to 500,000 shares of Series 1998-CParticipating Cumulative Preference Stock. One preferred stock purchase rightis attached to each outstanding share of common stock. The rights becomeexercisable under specified circumstances, including any person (an “acquiringperson”) along with its affiliates and associates becoming the beneficial owner(as defined in the Rights Agreement) of 15% or more of our outstanding commonstock, or the commencement by such person or public announcement by such personof the intention to commence a tender or exchange offer, the consummation ofwhich would result in such person becoming an acquiring person, in each casesubject to specified exceptions. Each right entitles the registered holder topurchase from Rentech one five-hundredth of a share of Series 1998-CParticipating Cumulative Preference Stock, par value $10.00 per share, at anexercise price of $12.00 per share, subject to adjustment in specifiedcircumstances. If events specified in the Rights Agreement occur, each holderof rights other than the acquiring person can exercise his or her rights. Aftera person becomes an acquiring person, when a holder exercises a right, theholder will be entitled to receive common stock valued (according to the RightsAgreement) at twice the exercise price of the right. In some cases, the holderwill receive cash, property or other securities instead of common stock. TheCompany may redeem the rights for $.0001 per right (which amount is subject toadjustment under certain circumstances) at any time prior to the time a personbecomes an acquiring person. The Rights Agreement and the rights expire at theclose of business on December 1, 2008, if the rights are not redeemed orexchanged earlier.

In the event Rentechenters into any consolidation, merger, combination or other transaction inwhich shares of its common stock are exchanged for cash or other property, theneach fractional interest is 

# F-43

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note14—Stockholders’ Equity (continued)**

entitledto an amount per share equal to one-fifth of the amount of consideration to bereceived by a holder of each share of common stock, subject to adjustment incertain circumstances. A holder of each one five-hundredth of a share ofthe Series 1998-C Participating Cumulative Preference Stock would beentitled to three-fifths of a vote on all matters submitted to a vote ofour stockholders, subject to adjustment in certain circumstances. If at anytime dividends on the Series 1998-C Participating CumulativePreference Stock are in arrears in an amount equal to six quarterly dividendsthereon, all holders of preferred stock with dividends in arrears in an amountequal to six quarterly dividends thereon (voting as a single class) would havethe right to elect two directors. Whenever quarterly dividends or otherdividends or distributions payable on the Series 1998-CParticipating Cumulative Preference Stock are in arrears, we would be indefault in payment thereof, and until all accrued and unpaid dividends anddistributions have been paid or set aside for payment in full, we would be prohibitedfrom declaring or paying dividends or making any other distributions on, or,subject to certain exceptions, redeeming, purchasing or otherwise acquiring,shares of stock ranking junior to the preferred stock as to dividends or uponliquidation, dissolution or winding up. No share rights or shares of preferredstock have been issued under the Rights Agreement.

**Preferred Stock**

During fiscal 2005, the Company filed Amended andRestated Articles of Incorporation authorizing 90,000 shares of Series AConvertible Preferred Stock. On April 8, 2005, Rentech, Inc. enteredinto a Securities Purchase Agreement that provided it with gross proceeds of $9million through a private placement of preferred stock with M.A.G. Capital, LLCthrough its designated funds, Monarch Pointe Fund, Ltd, Mercator Momentum Fund, III,LP, and Mercator Momentum Fund, LP, and with Pentagon Special Purpose Fund,Ltd. (the “Investors”). The agreement provided for a private placement of90,000 shares of Rentech’s Series A Convertible Preferred Stock at$100 per share. The preferred stock was non-voting and had a preference ofpriority in liquidation over common and prior or subsequent series of preferredstock, if any. The preferred stock was convertible into shares of Rentech’scommon stock, at the earlier of 90 days after closing or the effective date ofthe registration statement, at 80 percent of the volume weighted average priceper share for the five trading days preceding any conversion, but not at morethan $1.3852 or less than $0.80 per share. After registering the shares ofcommon stock that could be acquired through conversion of the preferred shares,Rentech may, at its option, require the holders to convert all their preferredstock into common shares if the market price for the common stock for thepreceding 20 trading days had been $2.70 or more per share. Such a conversionby Rentech may be limited if it would make the stock held by the Investorsthrough this transaction and the conversion exceed 9.99% of the common stock outstanding.The difference between the conversion price and the fair market value of theconvertible preferred stock on the commitment date (transaction date) resultedin a beneficial conversion feature of $5,674,749, which was treated as adiscount on preferred stock. The beneficial conversion feature was fullyamortized to deemed dividends over 90 days. During fiscal 2005, 31,000 sharesof the convertible preferred stock were converted into 2,237,944 shares ofRentech common stock at a conversion price of $1.3852 per share. During fiscal2006, the remaining 59,000 shares of the convertible preferred stock wereconverted into 4,259,313 shares of Rentech common stock at a conversion priceof $1.3852 per share.

The Investors also acquired warrants for the purchaseof 5,921,910 shares of common stock in conjunction with the preferred stock.The warrants may be exercised at a price of $1.61 per share for a 

# F-44

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note14—Stockholders’ Equity (continued)**

term of three years,ending April 8, 2008. The warrants were valued using the Black-Scholesoption-pricing model and adjusted to relative fair value, which resulted in adeemed dividend of $3,325,251. Under the terms of the Registration RightsAgreement with the Investors, Rentech filed a registration statement with theSecurities and Exchange Commission on May 23, 2005, which was declaredeffective on August 5, 2005, for the shares of common stock underlying thepreferred stock and the warrants.

By the placement of the preferred stock describedabove, Rentech became obligated to pay a monthly dividend on the outstandingshares of preferred stock. The dividend rate was the prime rate as reported bythe Wall Street Journal on the first day of the month, plus two percent, times $100per share. The dividend was payable in cash, or at Rentech’s option, inregistered shares of common stock at the market price at the time of payment aslong as the stock price was greater than or equal to $2.00 per share. Duringfiscal 2005, the Company paid all such dividends in cash in the amount of$341,475, and during fiscal 2006, dividends paid in cash amounted to $74,437.

The Company engaged a financial consultant to assistwith the structuring and issuance of the Preferred Stock. The Company paid thefinancial consultant $410,000 for services provided, which was charged toadditional paid in capital. In addition, the Company issued a warrant topurchase 270,000 shares of common stock to the consultant, on the sameterms as the warrants issued to the Investors. The warrants are exercisable at$1.61 per share. The warrants were valued using the Black-Scholesoption-pricing model, which resulted in offering cost charges of $187,758recorded to additional paid in capital.

In addition to thecompensation and warrants paid to the financial consultant, the Company issued540,000 warrants as a breakup fee to other subscribers whose subscriptions forthe purchase of preferred stock were not accepted by the Company. Thesewarrants were issued under the same terms as the financial consultant warrants.These warrants were valued using the Black-Scholes option pricing model, whichresulted in aborted offering expense of $375,517.

**Common Stock**

During fiscal 2004, the Company offered shares of itscommon stock for sale in a private placement offering of up to $500,000. TheCompany granted non-exclusive rights to several placement agents to sell theshares under the terms described in the memorandum. The Company offered itsshares for sale at $0.45 per share. In addition, the Company agreed to issuewarrants to its brokers, who served as selected dealers in the privateplacement, to purchase one share of the Company’s common stock for every$4.00 of the Company’s common stock sold, at a purchase price of $1.00. The warrantswere exercisable through November 21, 2006. The Company issued 986,665shares of its common stock for cash proceeds of $444,000 during fiscal 2004under the private placement. The Company incurred $95,600 in offering costs andissued warrants to brokers to purchase 93,500 shares of the Company’s commonstock related to the private placement.

During fiscal 2004, the Company also issued 5,736,687shares of its common stock upon the exercise of stock options and warrants fornet cash proceeds of $4,107,357. The Company incurred $155,595 in offeringcosts related to the common stock issued for options and warrants exercised.

# F-45

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note14—Stockholders’ Equity (continued)**

During fiscal 2004, the Company issued 3,569,835shares of its common stock upon the conversion of $1,682,916 of long-termconvertible debt to stockholders. The Company incurred $307,000 in non-cashoffering costs during fiscal 2004 related to the convertible notes issuedduring the period.

During fiscal 2004, the Company issued 78,737 sharesof common stock for services valued at $73,466.

During fiscal 2004, the Company distributed 100,000shares of its common stock with a fair market value of $53,000 in payment fordirector’s fees for fiscal 2004. The shares were distributed upon completion ofdirector services for that annual period, which resulted in a charge to boardexpenses of $53,000.

During fiscal 2005, the Company and WellingtonManagement Company completed a Securities Purchase Agreement whereby a group ofpurchasers represented by Wellington purchased 13,436,000 shares ofRentech common stock at a price of $2.30 per share. The Company received$18,647,250 of the $30,902,800 total proceeds during fiscal 2005 and recordedthe additional $12,255,550 as a subscription receivable on the balance sheet. TheCompany received the subscription receivable balance of $12,255,550 duringfiscal 2006.

During fiscal 2005, the Company issued 2,405,249shares of its common stock upon the exercise of stock options and warrants fornet cash proceeds of $2,432,314. In addition, certain officers of the Companyused $74,375 of deferred compensation to exercise stock options for 70,000shares of the Company’s common stock.

During fiscal 2005, the Company issued 2,256,219shares of its common stock upon the conversion of $1,128,109 of long-termconvertible debt to stockholders. The Company incurred $697,159 in non-cashoffering costs during fiscal 2005 related to the convertible notes issuedduring the period.

During fiscal 2005, the Company issued 6,579 shares ofcommon stock for services valued at $9,759.

During fiscal 2006, the Company closed its concurrentpublic offerings of 16,000,000 shares of common stock at a price per share of$3.40 and $50 million principal amount of its 4.00% Convertible Senior NotesDue 2013. Also during fiscal 2006, the underwriters of the Company’s concurrentpublic offerings exercised in full their over-allotment options by purchasingan additional 2,400,000 shares of common stock at a price per share of $3.40.Including the over-allotment purchases, the Company’s offering of common stocktotaled 18,400,000 shares with proceeds of $62,560,000, resulting in net cashproceeds to Rentech of $58,188,168 after deducting offering costs.

During fiscal 2006, the Company issued 5,394,129shares of its common stock upon the exercise of stock options and warrants forcash proceeds of $7,021,225. In addition, certain former officers of theCompany used $392,999 of deferred compensation and accrued retirement payablesto exercise stock options for 426,269 shares of the Company’s common stock.

During fiscal 2006, the Company issued 3,156,576shares of its common stock upon the conversion of $2,975,996 of long-termconvertible debt to stockholders. The Company incurred $874,875 in non-cashoffering costs during fiscal 2006 related to the convertible notes issuedduring the period.

During fiscal 2006, theCompany issued 36,000 shares of common stock in settlement of restricted stockunits which vested during the period.

# F-46

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 15—Accounting forStock Based Compensation**

**Stock Options**

Effective October 1, 2005, the Company adoptedSFAS 123(R) which requires all share-based payments, including grantsof stock options, to be recognized in the statement of operations as anoperating expense, based on their fair values. Pro forma disclosure is nolonger an alternative. We previously accounted for our stock-based compensation using theintrinsic method as defined in APB Opinion No. 25 and accordingly,we have not previously recognized any expense for our stock option plans in ourconsolidated financial statements. The Company elected to utilize the modified-prospective transition method aspermitted by SFAS 123(R). Under this transition method, stock-based compensation expensefor the year ended September 30, 2006 includes compensation expense forall stock-based compensation awards grantedsubsequent to September 30, 2005 based on grant-date fair value estimated inaccordance with the provisions of SFAS 123(R). In addition to stockoptions issued, we have also included the warrant issued to East CliffAdvisors, LLC, an entity controlled by D. Hunt Ramsbottom, the Company’sPresident and Chief Executive Officer, that was previously accounted for underAPB 25, in implementing SFAS 123(R). Please refer to section entitled “Warrants”in this footnote for further information regarding the warrant issued to EastCliff Advisors, LLC. For options granted during the year ended September 30,2006, the Company recorded $1,603,571, in aggregate, of related stock-based compensation expense,included in general and administrative expense. In accordance with SFAS 123(R),there was no tax benefit from recording this non-cash expense as such benefitswill be recorded upon utilization of the Company’s net operating losses.The compensation expense reduced both basic and diluted earnings per share by$0.013 for the year ended September 30, 2006. In accordance with themodified-prospective transition method ofSFAS 123(R), results for prior periods have not been restated.

F-47

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

Stock options granted bythe Company prior to those granted on July 14, 2006 were typicallyfully-vested at the time of grant and all outstanding and unexercised optionswere fully vested as of October 1, 2005. Had compensation expense for ourstock option plans been determined in accordance with the fair value methodprescribed by SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148,Accounting for Stock-Based Compensation: An Amendmentof FASB Statement No. 123, our net loss attributable to commonshareholders and corresponding basic and diluted loss per share would have beenthe following for the years ended September 30, 2005 and 2004:

| ** **                                                                                                                                    | ** ** | **For the Years Ended September 30,**                                                                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **          2005          ** | ** ** | **          2004          ** | ** ** |
| Net loss from continuing  operations                                                                                                          |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | (15,614,920 | ) |   |   | $ | (7,087,316 | ) |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                                                                                                             | (2,128,950 | ) |   |   | (185,817 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | (17,743,870 | ) |   |   | $ | (7,273,133 | ) |   |
| Net loss per  common share from continuing operations                                                                                         |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | (.168 | ) |   |   | $ | (.076 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | (.191 | ) |   |   | $ | (.078 | ) |   |
| Net income (loss)  from discontinued operations                                                                                               |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | 1,256,023 |   |   |   | $ | (123,377 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | 1,256,023 |   |   |   | $ | (123,377 | ) |   |
| Net income (loss)  per common share from discontinued operations                                                                              |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | .015 |   |   |   | $ | (.001 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | .015 |   |   |   | $ | (.001 | ) |   |
| Total net loss  applicable to common stockholders                                                                                             |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | (23,700,372 | ) |   |   | $ | (7,210,693 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | (25,829,322 | ) |   |   | $ | (7,396,510 | ) |   |
| Total net loss  per common share                                                                                                              |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                   |       |                                                                                                                             | $          | (.255 | ) |   |   | $ | (.084 | ) |   |
| Pro forma                                                                                                                                     |       |                                                                                                                             | $          | (.278 | ) |   |   | $ | (.086 | ) |   |

 

TheCompany uses the Black-Scholes option pricing model to determine the weightedaverage fair value of options. The fair value of options at the date of grantand the assumptions utilized to determine such values are indicated in thefollowing table:

| ** **                | ** ** | **For the Years Ended September 30,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate  |       | 4.39% - 5.05                                                   | %          | 2.60% - 4.18 | % | 1.00% - 3.80 | % |
| Expected  volatility      |       | 58.0% - 61.0                                                   | %          | 48.0% - 75.0 | % | 40.0% - 55.0 | % |
| Expected life (in  years) |       | 2.50 - 4.50                                                    |       | 0.06 - 5.00 |   | 0.76 - 5.00 |   |
| Dividend yield            |       | 0.0                                                            | %          | 0.0 | % | 0.0 | % |

 

# F-48

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

The risk-free interest rate is based on atreasury instrument whose term is consistent with the expected life of ourstock options. The Company used the average stock price over the last 40months to project expected stock price volatility. The Company estimated theexpected life of stock options to be the mid-point between the grant dateand expiration date. Historical experience shows that most employees exerciseoptions close to the expiration date, however, due to our recent increase instock price, the Company expects more employees to exercise stock optionsthroughout the life of the option. Therefore, for the first year of compliancewith SFAS 123(R), the Company will use the short-cut method and select themid-point as the expected life. We will revise our estimate in fiscal year 2007based on experience in fiscal 2006. The Company estimates stock optionforfeitures to be zero based on historical experience.

The Company has seven stock option plans, describedbelow, under which options have been granted to employees, including officersand directors of the Company, at a price not less than the fair market value ofthe Company’s common stock at the date the options were granted. Options underthe Company’s stock option plans for the years 1994 through 2005 generallyexpire five years from the date of grant or at an alternative date asdetermined by the committee of the Board of Directors of the Company thatadministers the plan. Options under the Company’s 2006 Incentive Award Plangenerally expire between three and ten years from the date of grant or at analternative date as determined by the committee of the Board of Directors ofthe Company that administers the plan. Options under the Company’s stock optionplan for the years 1994 through 2005 are generally exercisable on the grantdate. Options under the Company’s 2006 Incentive Award Plan are generallyexercisable on the grant date or a vesting schedule between one and three yearsfrom the grant date as determined by the committee of the Board of Directors ofthe Company that administers the plans.

During 1994, the Company’s board of directors adoptedthe 1994 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other optionspursuant to the plan that constitute nonstatutory options. The Company hadreserved 300,000 shares of the Company’s $0.01 par value common stock forissuance under the plan. At September 30, 2006 and 2005, 20,000 stockoptions were outstanding under this plan. The 1994 Stock Option Plan terminatedon March 16, 2004 and therefore options are no longer granted under thisplan.

During 1996, the Company’s board of directors adoptedthe 1996 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other optionspursuant to the plan that constitute nonstatutory options. The Company hadreserved 500,000 shares of the Company’s $0.01 par value common stock forissuance under the plan. At September 30, 2006 and 2005, 101,000 and209,000 stock options were outstanding under this plan. The 1996 Stock OptionPlan terminated on May 23, 2006 and therefore options are no longergranted under this plan.

During 1998, the Company’s board of directors adoptedthe 1998 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other optionspursuant to the plan that constitute nonstatutory options. The Company hasreserved 500,000 shares of the Company’s $0.01 par value common stock forissuance under the plan. At September 30, 2006 and 2005, 66,000 and251,000 stock options were outstanding under this plan, and 28,000 and 0options were available for issuance under this plan.

During 2001, the Company’s board of directors adoptedthe 2001 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other options 

# F-49

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

pursuant to the plan thatconstitute nonstatutory options. The Company has reserved 500,000 shares of theCompany’s $0.01 par value common stock for issuance under the plan. At September 30,2006 and 2005, 177,000 and 482,000 stock options were outstanding under thisplan, and 2,000 and 0 options were available for issuance under this plan.

During 2003, the Company’s board of directors adoptedthe 2003 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other optionspursuant to the plan that constitute nonstatutory options. The Company hasreserved 500,000 shares of the Company’s $0.01 par value common stock for issuanceunder the plan. At September 30, 2006 and 2005, 263,000 and 460,000 stockoptions were outstanding under this plan, and no options were available forissuance under this plan.

During 2005, the Company’s board of directors adoptedthe 2005 Stock Option Plan which allows the issuance of incentive stockoptions, within the meaning of the Internal Revenue Code, and other optionspursuant to the plan that constitute nonstatutory options. The Company hasreserved 1,000,000 shares of the Company’s $0.01 par value common stock forissuance under the plan. At September 30, 2006 and 2005, 671,000 and1,000,000 stock options were outstanding under this plan, and no options wereavailable for issuance under this plan.

During 2006, the Company’sboard of directors adopted the 2006 Incentive Award Plan which allows theissuance of incentive stock awards, within the meaning of the Internal RevenueCode, and other stock awards pursuant to the plan that constitute nonstatutorystock awards. The Company has reserved 5,000,000 shares of the Company’s $0.01par value common stock for issuance under the plan. At September 30, 2006,2,316,000 stock options and 907,000 restricted stock units were outstandingunder this plan, and 1,777,000 stock awards were available for issuance underthis plan. At September 30, 2005, 825,000 stock options were outstandingunder this plan. As of that date, the plan was proposed, subject to shareholderapproval, and the grants were approved by the Board of Directors.

In addition to the stock option plans described above,the Company has issued options to purchase the Company’s $0.01 par value commonstock pursuant to minutes of the board of directors. At September 30, 2006and 2005, 255,500 and 754,000 of these stock options were outstanding. TheCompany has also issued options to purchase the Company’s $0.01 par valuecommon stock pursuant to business option agreements. At September 30, 2006and 2005, 500,000 and 660,000 of these stock options were outstanding.

During fiscal 2004, the Company issued options toemployees of the Company to purchase 440,000 shares of the Company’scommon stock at the market price on the date of grant. The options were valuedat $185,817 using the Black-Scholes option-pricing model and did not result ina charge to compensation expense.

During fiscal 2004, the Company also issued options tocertain consultants to purchase 160,000 shares of the Company’s common stock.The options were issued as compensation and were valued using the Black-Scholesoption-pricing model, which resulted in consulting expense charges of $28,522.

During fiscal 2004, the Company issued options toRoyster-Clark, Inc. as part of a stand-still agreement to purchase 250,000shares of the Company’s common stock. The options were valued using the Black-Scholesoption-pricing model, which resulted in an offering cost charge to additionalpaid in capital of $117,235.

# F-50

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

During fiscal 2005, the Company issued options toRoyster-Clark, Inc. to purchase 250,000 shares of the Company’s commonstock as part of a stand-still agreement. The options were valued using the Black-Scholesoption-pricing model, which resulted in deferred acquisition costs of $178,766,which were subsequently written-off to abandoned acquisition costs.

During fiscal 2005, the Company also issued a total of20,000 options to two executives of our former subsidiary, OKON, Inc., asexecutive incentives to remain employed with OKON, Inc. through the closeof the sale transaction. These options were valued using the Black-Scholesoption-pricing model, which resulted in a reduction of the gain on sale of$20,503. In addition to the options issued, the Company also granted anextension of 61,000 options previously issued to these executives under Rentechstock option plans. The extensions were valued under the Black-Scholesoption-pricing model, which resulted in a reduction of the gain on sale of$73,919.

During fiscal 2005, the Company issued options toemployees and directors of the Company to purchase 902,000 shares of theCompany’s common stock at the market price on the date of grant. The optionswere valued at $861,015 using the Black-Scholes option-pricing model and didnot result in a charge to compensation expense.

During fiscal 2005, a consultant of the Company earned60,000 options to purchase common stock of Rentech under a consultingagreement. The options issued were valued using the Black-Scholesoption-pricing model, which resulted in consulting expenses of $67,679. Inaddition, the same consultant earned 50,000 options as a success reward forwork done to ensure inclusions in the recently signed Energy Bill that wouldprovide significant benefit for FT projects. The options issued were valuedusing the Black-Scholes option-pricing model, which resulted in consultingexpenses of $67,946.

During fiscal 2005, the Company issued 965,000 optionsas part of a retirement package for the CEO and COO of the Company. The optionswere valued at $944,041 using the Black-Scholes option-pricing model and didnot result in a charge to compensation expense.

During fiscal 2006, the Company issued options toemployees of the Company to purchase 306,000 shares of the Company’scommon stock at the market price on the date of grant with exercise pricesranging from $3.35 to $4.48. The options vested immediately and have a fiveyear term from the grant date. These options were valued using theBlack-Scholes option-pricing model which resulted in a charge to compensationexpense of $455,889.

During fiscal 2006, the Company issued options toemployees and one consultant of the Company to purchase 1,125,000 shares of theCompany’s common stock at the market price on the date of grant with anexercise price of $4.15. The options vest over a three-year period such thatone-third will vest on each of the one year, two year and three yearanniversary dates of the date of grant, with the exception of 50,000 optionsgranted to one consultant, whose grant vests over a two-year period such thatone-half will vest on each of the one year and two year anniversary dates ofthe date of grant, and have a ten year term from the grant date. These optionswere valued at $2,712,627 using the Black-Scholes option-pricing model whichresulted in a charge to compensation expense during fiscal 2006 of $158,124.

During fiscal 2006, the Company issued options to adirector of the Company to purchase 20,000 shares of the Company’s commonstock at the market price on the date of grant with an exercise price of $3.74.The options vested immediately and have a five year term from the grant date. These

# F-51

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

options were valued usingthe Black-Scholes option-pricing model which resulted in a charge to boardcompensation expense of $29,553.

During fiscal 2006, the Company issued options todirectors of the Company to purchase 90,000 shares of the Company’s commonstock at the market price on the date of grant with an exercise price of $3.35.The options vest over a one-year period and have a six year term from the grantdate. These options were valued at $134,073 using the Black-Scholesoption-pricing model which resulted in a charge to compensation expense duringfiscal 2006 of $67,036.

On April 13, 2006, our shareholders approved the2006 Incentive Award Plan. As a result, the Company valued 775,000 of theoptions related to the retirement packages of the CEO and COO which were issuedduring fiscal 2005 under the proposed 2006 Plan using the Black-Scholesoption-pricing model. This resulted in a charge to compensation expense of$891,872.

On October 11, 2006, the Company issued optionsto employees of the Company to purchase 191,000 shares of the Company’scommon stock at the market price on the date of grant with an exercise price of$4.30. The options have a ten year term and vest over a three-year period suchthat one-third will vest on each of the one year, two year and three yearanniversary dates of the date of grant. The Company also issued options topurchase 40,000 shares to a consultant, whose grant vested immediately, has afive year term from the grant date, and includes an exercise price of $4.30. Theseoptions were valued at $515,210 using the Black-Scholes option-pricingmodel which will result in a charge to compensation expense and a charge toconsulting expense in fiscal 2007.

On December 12, 2006, the Company issued options to anemployee of the Company to purchase 100,000 shares of the Company’s commonstock at the market price on the date of grant with an exercise price of $3.76.The options have a ten year term and vest over a three-year period such thatone-third will vest on each of the one year, two year and three yearanniversary dates of the date of grant. The Company also issued options topurchase 20,000 shares to a director, whose grant vested immediately, has a tenyear term from the grant date and includes an exercise price of $3.76. Theseoptions were valued at $253,267 using the Black-Scholes option-pricing modelwhich will result in a charge to compensation expense and a charge to boardcompensation expense in fiscal 2007.

# F-52

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

Option transactions during the years endedSeptember 30, 2006, 2005 and 2004 are summarized as follows:

| ** **                                                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise   Price** | ** ** | **Aggregate  Intrinsic   Value** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|
| Outstanding at  September 30, 2003                            |       | 4,827,766                  |       |                                         | $          | 2.53                                  |       |   |   |   |
| Granted                                                            |       | 850,784                    |       |                                         | 0.90       |                                  |       |   |   |
| Exercised                                                          |       | (2,325,820                 | )          |                                         | 1.05       |                                  |       |   |   |
| Canceled/Expired                                                   |       | (221,230                   | )          |                                         | 0.63       |                                  |       |   |   |
| Outstanding at  September 30, 2004                            |       | 3,131,500                  |       |                                         | $          | 0.80                                  |       |   |   |   |
| Granted                                                            |       | 2,247,000                  |       |                                         | 2.00       |                                  |       |   |   |
| Exercised                                                          |       | (643,000                   | )          |                                         | 0.89       |                                  |       |   |   |
| Canceled/Expired                                                   |       | (74,500                    | )          |                                         | 1.59       |                                  |       |   |   |
| Outstanding at  September 30, 2005                            |       | 4,661,000                  |       |                                         | $          | 1.35                                  |       |   |   |   |
| Granted                                                            |       | 1,541,000                  |       |                                         | 4.09       |                                  |       |   |   |
| Exercised                                                          |       | (1,714,500                 | )          |                                         | 0.98       |                                  |       |   |   |
| Canceled/Expired                                                   |       | (118,000                   | )          |                                         | 0.90       |                                  |       |   |   |
| Outstanding at  September 30, 2006                            |       | 4,369,500                  |       |                                         | $          | 2.47                                  |       |   | $ | 9,419,830 |   |
| Options  exercisable at September 30, 2006                    |       | 3,159,500                  |       |                                         | $          | 1.86                                  |       |   | $ | 8,767,030 |   |
| Options exercisable at  September 30, 2005                    |       | 4,661,000                  |       |                                         | $          | 1.35                                  |       |   |   |   |
| Options exercisable at  September 30, 2004                    |       | 3,131,500                  |       |                                         | $          | 0.80                                  |       |   |   |   |
| Weighted average  fair value of options granted during fiscal 2006 |       |                       |       |                                         | $          | 1.89                                  |       |   |   |   |
| Weighted average fair  value of options granted during fiscal 2005 |       |                       |       |                                         | $          | 0.95                                  |       |   |   |   |
| Weighted average fair  value of options granted during fiscal 2004 |       |                       |       |                                         | $          | 0.39                                  |       |   |   |   |

 

The aggregate intrinsic valuewas calculated based on the difference between the Company’s stock price on September 30,2006 and the exercise price of the outstanding shares, multiplied by the numberof outstanding shares as of September 30, 2006. The total intrinsic valueof options exercised during the years ended September 30, 2006 and 2005were $4,462,555 and $752,990, respectively.

# F-53

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 15—Accounting forStock Based Compensation (continued)**

The following information summarizes stock optionsoutstanding and exercisable at September 30, 2006:

| ** **                                  | ** ** | **Outstanding** | ** ** | **Exercisable**         | ** ** |
|---------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **      | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life  in Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.41-$0.47                                 |       |            | 420,500    |                    |       |   | 0.74 |   |   |   | $ | 0.41 |   |   | 420,500 |   |   | $ | 0.41 |   |   |
| $0.70-$0.94                                 |       |            | 560,000    |                    |       |   | 2.29 |   |   |   | 0.89 |   |   | 560,000 |   |   | 0.89 |   |   |
| $1.06-$1.14                                 |       |            | 185,000    |                    |       |   | 2.85 |   |   |   | 1.11 |   |   | 185,000 |   |   | 1.11 |   |   |
| $1.44-$1.50                                 |       |            | 270,000    |                    |       |   | 3.22 |   |   |   | 1.50 |   |   | 270,000 |   |   | 1.50 |   |   |
| $1.85                                       |       |            | 428,000    |                    |       |   | 3.79 |   |   |   | 1.85 |   |   | 428,000 |   |   | 1.85 |   |   |
| $2.53                                       |       |            | 965,000    |                    |       |   | 1.00 |   |   |   | 2.53 |   |   | 965,000 |   |   | 2.53 |   |   |
| $3.35-$3.74                                 |       |            | 125,000    |                    |       |   | 5.20 |   |   |   | 3.41 |   |   | 35,000 |   |   | 3.57 |   |   |
| $4.00-$4.48                                 |       |            | 1,416,000  |                    |       |   | 8.81 |   |   |   | 4.14 |   |   | 296,000 |   |   | 4.12 |   |   |
| $0.41-$4.48                                 |       |            | 4,369,500  |                    |       |   | 4.28 |   |   |   | $ | 2.47 |   |   | 3,159,500 |   |   | $ | 1.86 |   |   |
|                                             |            |                 |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Warrants**

During fiscal 2004, the Company issued warrants tocertain brokers to purchase 93,500 shares of the Company’s common stock. Thewarrants were issued as placement agent fees and were valued using theBlack-Scholes option-pricing model, which resulted in an offering cost chargeto additional paid in capital of $29,413.

During fiscal 2004, the Company also issued warrantsauthorizing certain warrant-holders to purchase 139,500 shares of the Company’scommon stock in connection with amendments to other warrant agreements. Thewarrants were valued using the Black-Scholes option-pricing model, whichresulted in an offering cost charge to additional paid in capital of $21,547.

During fiscal 2004, the Company issued warrants to alender and a consultant to purchase 1,300,000 shares of the Company’scommon stock. The warrants were related to a bridge loan. The warrants werevalued using the Black-Scholes option-pricing model, which resulted in anoffering costs of $511,962 recorded as debt issue costs.

During fiscal 2004, the Company issued warrants to aconsultant to purchase 100,000 shares of the Company’s common stock. Thewarrants were related to work done on the potential Royster-Clark Nitrogen, Inc.acquisition. The warrants were valued using the Black-Scholes option-pricingmodel, which resulted in an offering costs of $44,588 recorded as deferredacquisition costs.

During fiscal 2005, the Company extended theexpiration date of 579,828 warrants that were previously issued to accreditedinvestors of the Company. The extension was valued under the Black-Scholesoption-pricing model, which resulted in no compensation expense. The Companyalso extended the term of 231,667 warrants issued to a broker. The extensionwas valued under the Black-Scholes option-pricing model, which resulted in acharge to additional paid in capital of $199,257. In fiscal 2005, the brokerexercised these warrants.

F-54

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

During fiscal 2005, the Company issued warrants toaccredited investors in conjunction with five bridge loans to purchase1,660,085 shares of the Company’s common stock. The warrants were valued usingthe Black-Scholes option-pricing model, which resulted in charges to additionalpaid in capital of $641,566. In February 2005, the Company issued anadditional 405,702 warrants to purchase shares of the Company’s common stock tothe same accredited investors as a result of default provisions in thepromissory notes. The warrants were valued using the Black-Scholesoption-pricing model, which resulted in charges to interest expense of$499,560.

During fiscal 2005, the Company issued variouswarrants in conjunction with the issuance of convertible preferred stock. Referto the Preferred Stock section of footnote 14 for further information regardingthose warrants During fiscal 2005, in connection with convertible promissorynotes issued to two directors of the Company, the Company issued stock purchasewarrants for the purchase of 657,981 shares of common stock. The warrantshave an exercise price of $1.61 per share of common stock, and are exercisableuntil April 7, 2008. The warrants were valued using the Black-Scholesoption-pricing model, which resulted in debt issuance charges of $381,474.

During fiscal 2005, the Company issued 60,000 warrantsto purchase shares of the Company’s common stock to a financial publicrelations company who signed a consulting agreement with the Company. Thewarrants were valued using the Black-Scholes option-pricing model, whichresulted in consulting expense of $30,299.

During fiscal2005, the Company issued a warrant to Management Resource Center, Inc, anentity controlled by Hunt Ramsbottom, Rentech’s President and CEO. During thelast quarter of fiscal 2005, Mr. Ramsbottom assigned the warrant to EastCliff Advisors, LLC, an entity controlled by Mr. Ramsbottom. The warrantis for the purchase of 3.5 million shares of the Company’s common stock at anexercise price of $1.82. The warrant has vested or will vest in the followingincremental amounts upon such time as the Company’s stock reaches the statedclosing prices for 12 consecutive trading days: 10% at $2.10 (vested); 15% at$2.75 (vested); 20% at $3.50 (vested); 25% at $4.25 (vested); and 30% at $5.25(not vested). The Company recognizes compensation expense as the warrants vest,as the total number of shares to be granted under the warrant was not known onthe grant date. In fiscal 2005, the Company accounted for the warrant under APBOpinion 25, “Accounting for Stock Issued to Employees” due to theemployer-employee relationship between the Company and Mr. Ramsbottom. UnderAPB Opinion 25, compensation cost would only be recognized for stock-basedcompensation issued to employees when the exercise price of the Company’s stockoptions granted is less than the market price of the underlying common stock onthe date of grant. On September 2, 2005, 10%, or 350,000 shares underlyingthe warrant vested. The Company recognized $332,500 of compensation expenseunder APB Opinion 25. The Company also valued the vested shares at $656,394using the Black-Scholes option-pricing model, which did not result in a chargeto compensation expense under SFAS No. 123, and was shown as a pro-formadisclosure to our consolidated financial statements for the fiscal year ended September 30,2005.

During fiscal 2006, additionalshares underlying the warrant to East Cliff Advisors, LLC vested. The Companyaccounted for these shares under SFAS No. 123(R), which was adopted October 1,2005. On November 29, 2005, 15% or 525,000 shares underlying the warrantvested when the Company’s stock price traded at or above $2.75 for twelveconsecutive days. The Company valued the shares underlying the warrant underthe Black-Scholes option-pricing model which resulted in a charge tocompensation expense of $844,531. On December 23, 2005, another 20% or700,000 shares underlying the warrant vested when 

F-55

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

theCompany’s stock price traded at or above $3.50 for twelve consecutive days. TheCompany valued the warrant under the Black-Scholes option-pricing model whichresulted in a charge to compensation expense of $1,675,494. On February 1,2006, another 25% or 875,000 shares vested when the Company’s stock pricetraded at or above $4.25 for twelve consecutive days. The Company valued thewarrant under the Black-Scholes option-pricing model which resulted in a chargeto compensation expense of $3,207,879.

During fiscal 2006, the Company issued a warrant topurchase 1,000,000 shares of the Company’s common stock at $2.4138 per share toDKRW Advanced Fuels LLC. The warrant is fully vested and exercisable at anytime until January 11, 2014. The warrant was valued using theBlack-Scholes option-pricing model and resulted in a charge to marketing expenseof $2,676,602.

In the fourth quarter of fiscal 2005 as a result of acontract dated April 1, 2004, a consultant earned an option to purchase50,000 shares at an exercise price of $0.98 per share as a success reward forwork completed to ensure inclusions in the Energy Bill of provisions that wouldprovide significant benefit for FT projects. The option was valued using theBlack-Scholes option-pricing model, which resulted in consulting expenses of$67,946 in fiscal 2005. During fiscal 2006, the Company issued the consultant awarrant to purchase 53,150 shares of the Company’s common stock at $1.14 pershare in satisfaction of the contractual obligation. The warrants were valuedat $75,397 using the Black-Scholes option-pricing model and the Company, therefore,recorded additional consulting expense of $7,451 during fiscal 2006.

For warrants vesting during the year ended September 30,2006, the Company recorded $8,411,957, in aggregate, of related stock-based compensation expense,included in general and administrative expense. The compensation expensereduced both basic and diluted earnings per share by $0.066 for the year ended September 30,2006.

F-56

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

Warrant transactionsduring the years ended September 30, 2006, 2005 and 2004 are summarized asfollows:

| ** **                                                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| Outstanding at  September 30, 2003                             |       | 6,599,905                  |       |                                       | $          | 1.40 |   |   |
| Granted                                                             |       | 1,647,064                  |       |                                       | 1.11       |   |   |
| Exercised                                                           |       | (3,771,367                 | )          |                                       | 0.69       |   |   |
| Canceled/Expired                                                    |       | (600,000                   | )          |                                       | 0.45       |   |   |
| Outstanding at  September 30, 2004                             |       | 3,875,602                  |       |                                       | $          | 1.14 |   |   |
| Granted                                                             |       | 10,251,678                 |       |                                       | 1.50       |   |   |
| Exercised                                                           |       | (1,832,249                 | )          |                                       | 1.06       |   |   |
| Canceled/Expired                                                    |       | (183,079                   | )          |                                       | 2.51       |   |   |
| Outstanding at  September 30, 2005                             |       | 12,111,952                 |       |                                       | $          | 1.44 |   |   |
| Granted                                                             |       | 3,153,150                  |  (1)  |                                       | 2.00       |   |   |
| Exercised                                                           |       | (4,105,898                 | )          |                                       | 1.39       |   |   |
| Canceled/Expired                                                    |       | —                     |       |                                       | —     |   |   |
| Outstanding at  September 30, 2006                             |       | 11,159,204                 |       |                                       | $          | 1.61 |   |   |
| Warrants exercisable at September 30, 2006                     |       | 11,159,204                 |       |                                       | $          | 1.61 |   |   |
| Warrants  exercisable at September 30, 2005                    |       | 12,111,952                 |       |                                       | $          | 1.44 |   |   |
| Warrants  exercisable at September 30, 2004                    |       | 3,875,602                  |       |                                       | $          | 1.14 |   |   |
| Weighted average fair value of warrants granted  during fiscal 2006 |       |                       |       |                                       | $          | 2.69 |   |   |
| Weighted average  fair value of warrants granted during fiscal 2005 |       |                       |       |                                       | $          | 0.70 |   |   |
| Weighted average fair  value of warrants granted during fiscal 2004 |       |                       |       |                                       | $          | 0.37 |   |   |

 

Thefollowing information summarizes warrants outstanding and exercisable at September 30,2006:

| ** **                                  | ** ** | **Outstanding** | ** ** | **Exercisable**         | ** ** |
|---------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **      | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life  in Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average   Exercise  Price** | ** ** |
| $0.75                                       |       | 36,000          |       |                    | 8.71       |   |   |   | $ | 0.75 |   |   | 36,000 |   |   | $ | 0.75 |   |   |
| $1.00-$1.14                                 |       | 2,513,140       |       |                    | 2.05       |   |   |   | 1.13 |   |   | 2,513,140 |   |   | 1.13 |   |   |
| $1.30                                       |       | 60,000          |       |                    | 1.75       |   |   |   | 1.30 |   |   | 60,000 |   |   | 1.30 |   |   |
| $1.46-$1.61                                 |       | 5,100,064       |       |                    | 1.52       |   |   |   | 1.61 |   |   | 5,100,064 |   |   | 1.61 |   |   |
| $1.82                                       |       | 2,450,000       | (1)        |                    | 3.85       |   |   |   | 1.82 |   |   | 2,450,000 |   |   | 1.82 |   |   |
| $2.41                                       |       | 1,000,000       |       |                    | 7.29       |   |   |   | 2.41 |   |   | 1,000,000 |   |   | 2.41 |   |   |
| $0.75-$2.41                                 |       | 11,159,204      |       |                    | 2.69       |   |   |   | $ | 1.61 |   |   | 11,159,204 |   |   | $ | 1.61 |   |   |
|                                             |            |                 |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)**   **includes 2,100,000 shares underlying thewarrants issued to East Cliff Advisors, LLC that were accounted for under SFAS123(R). The aggregate intrinsic value of these shares was $5,901,000 for theyear ended September 30, 2006.

F-57

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

**Restricted StockUnits**

On January 20, 2006, Rentech entered into anemployment agreement with D. Hunt Ramsbottom to serve as the President andChief Executive Officer of the Company. The term of the employment agreement isfor three years from December 15, 2005, subject to automatic renewalunless the Company or Mr. Ramsbottom gives prior notice. In connectionwith the agreement, we agreed to grant Mr. Ramsbottom 450,000 restrictedstock units (“RSU’s) that are to be settled in shares of common stock of theCompany. These RSU’s will vest over a three-year period such that one-thirdwill vest on each of Mr. Ramsbottom’s one year, two year and three yearanniversary dates of his vesting commencement date of December 15, 2005,subject to partial or complete acceleration under certain circumstances,including termination without cause, ends his employment for good reason orupon a change in control (in each case as defined in the agreement). If Mr. Ramsbottomis terminated without cause, ends his employment for good reason or we fail tooffer to renew this agreement on competitive terms, we will be obligated toaccelerate the vesting of a portion of the restricted stock unit grant. If atermination entitling Mr. Ramsbottom to severance occurs during the periodof three months prior and two years after a change in control, the fullrestricted stock unit grant will vest. The Company determined the grant datefair value of the RSU’s to be $2,227,500. This amount will be recorded ascompensation expense on a straight line basis over the term of the employmentagreement. The Company recorded $587,813 of compensation expense related tothese RSU’s through September 30, 2006.

On January 20, 2006, we entered into anemployment agreement with Douglas M. Miller to serve as the Chief OperatingOfficer and an Executive Vice President of the Company. The term of the employmentagreement is for three years from January 20, 2006, subject to automaticrenewal unless we or Mr. Miller give prior notice. In connection with theagreement, we agreed to grant Mr. Miller 375,000 RSU’s that are to besettled in shares of common stock of the Company. These RSU’s will vest over athree-year period such that one-third will vest on each of Mr. Miller’sone year, two year and three year anniversary dates of his vestingcommencement date of January 20, 2006, subject to partial or completeacceleration under certain circumstances, including termination without cause,ends his employment for good reason or upon a change in control (in each caseas defined in the agreement). If Mr. Miller is terminated without cause,ends his employment for good reason or we fail to offer to renew this agreementon competitive terms, we will be obligated to accelerate the vesting of aportion of the restricted stock unit grant. If a termination entitling Mr. Millerto severance occurs during the period of three months prior and two years aftera change in control, the full restricted stock unit grant will vest. TheCompany determined the grant date fair value of the RSU’s to be $1,856,250. Thisamount will be recorded as compensation expense on a straight line basis overthe term of the employment agreement. The Company recorded $432,460 ofcompensation expense related to these RSU’s through September 30, 2006.

On January 20, 2006, we entered into anemployment agreement with Kevin M. Smith to serve as the Chief FinancialOfficer and an Executive Vice President of our Company. The term of theemployment agreement was January 20, 2006 to January 20, 2009. Inconnection with the agreement, we agreed to grant Mr. Smith 325,000 RSU’sthat were to have been settled in shares of common stock of the Company. EffectiveFebruary 10, 2006, Mr. Smith resigned from his position at Rentech,thus terminating the employment agreement and voiding the RSU’s. Nocompensation expense was recognized related to the RSU’s.

F-58

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

On March 1, 2006, inconnection with an employment agreement, we granted Richard Sheppard 235,000RSU’s that are to be settled in shares of common stock of the Company. TheseRSU’s will vest over a three-year period such that one-third will vest on eachof Mr. Sheppard’s one year, two year and three year anniversary dates ofhis vesting commencement date of March 1, 2006, subject to partial orcomplete acceleration under certain circumstances, including terminationwithout cause, ends his employment for good reason or upon a change in control(in each case as defined in the agreement). If Mr. Sheppard is terminatedwithout cause, ends his employment for good reason or we fail to offer to renewthis agreement on competitive terms, we will be obligated to accelerate thevesting of a portion of the restricted stock unit grant. If a terminationentitling Mr. Sheppard to severance occurs during the period of three monthsprior and two years after a change in control, the full restricted stock unitgrant will vest. The Company determined the grant date fair value of the RSU’sto be $940,000. This amount will be recorded as compensation expense on astraight line basis over the term of the employment agreement. The Companyrecorded $182,778 of compensation expense related to these RSU’s through September 30, 2006.

On April 13, 2006, the Company’s Board ofDirectors granted a total of 72,000 restricted stock units (“RSU’s”) that areto be settled in shares of common stock of the Company to six directors as partof a board compensation package approved on April 13, 2006. The RSU’s vestin four equal increments on the last day of each quarter, for the next fourfiscal quarters. The Company determined the grant-date fair value of the RSU’sto be $241,200, which will be recorded as board compensation expense on astraight line basis over the vesting period. The Company recorded $120,600 ofboard compensation expense related to these RSU’s through September 30,2006.

On May 15, 2006, we entered into an employmentagreement with I. Merrick Kerr to serve as the Chief Financial Officer and anExecutive Vice President of the Company. The term of the employment agreementis for three years from May 15, 2006, subject to automatic renewal unlesswe or Mr. Kerr give prior notice. In connection with the agreement, weagreed to grant Mr. Kerr 325,000 RSU’s that are to be settled in shares ofcommon stock of the Company. These RSU’s will vest over a three-year periodsuch that one-third will vest on each of Mr. Kerr’s one year, two year andthree year anniversary dates of his vesting commencement date of May 15,2006, subject to partial or complete acceleration under certain circumstances,including termination without cause, ends his employment for good reason orupon a change in control (in each case as defined in the agreement). If Mr. Kerris terminated without cause, ends his employment for good reason or we fail tooffer to renew this agreement on competitive terms, we will be obligated toaccelerate the vesting of a portion of the restricted stock unit grant. If atermination entitling Mr. Kerr to severance occurs during the period ofthree months prior and two years after a change in control, the full restrictedstock unit grant will vest. The Company determined the grant date fair value ofthe RSU’s to be $1,462,500. This amount will be recorded as compensationexpense on a straight line basis over the term of the employment agreement. TheCompany recorded $182,813 of compensation expense related to these RSU’sthrough September 30, 2006.

On June 19, 2006, the Company’s Board ofDirectors granted a total of 150,000 RSU’s to Colin M. Morris, theCompany’s Vice President and General Counsel. These RSU’s will vest over athree-year period such that one-third will vest on each of the one year, twoyear and three year anniversary dates of the vesting commencement date of June 19,2006. The Company determined the grant-date fair value of the RSU’s to be$648,000. This amount will be recorded as compensation expense on a straightline basis 

F-59

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note15—Accounting for Stock Based Compensation (continued)**

over the term of theemployment agreement. The Company recorded $63,000 of compensation expenserelated to these RSU’s through September 30, 2006.

RSUtransactions during the year ended September 30, 2006 are summarized asfollows:

| ** **                                    | ** ** | **Number of  Shares** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| Outstanding at  September 30, 2005       |       | —                     |       |
| Granted                                       |       | 1,932,000                  |       |
| Canceled/Expired                              |       | (325,000                   | )          |
| Outstanding at  September 30, 2006       |       | 1,607,000                  |       |
| RSU’s vested at  September 30, 2006 |       | 36,000                     |       |

 

Of the 1,607,000 RSU’soutstanding at September 30, 2006, 907,000 were granted pursuant to our2006 Incentive Award Plan. The other 700,000 RSU’s were not granted pursuant toa stock option plan but were “inducement grants.”  Such grants may be made without priorshareholder approval pursuant to the rules of the American Stock Exchangeif the grants are made to new employees as an inducement to joining theCompany, the grants are approved by the company’s independent compensationcommittee and terms of the grants are promptly disclosed in a press release. ForRSU’s granted during the year ended September 30, 2006, the Company recorded$1,569,462, in aggregate, of related stock-based compensation expense,included in general and administrative expense. The compensation expensereduced both basic and diluted earnings per share by $0.012 for the year ended September 30,2006.

**Note 16—Income Taxes**

The Company has not recorded a provision for federaland state income taxes related to continuing operations for the years endedSeptember 30, 2006, 2005 and 2004, due to operating losses in those years and afull valuation allowance of the cumulative net operating losscarryforwards.  At September 30, 2006,the Company had available net operating loss carry forwards of approximately$78,000,000 for federal tax reporting purposes. These operating loss carryforwards expire through 2026. Due to state rules and regulations, the amountsof net operating losses generated in the states of California and Illinois varyfrom the federal amount and have shorter carry forward periods.  The losses generated in these states expirein 10 years and 12 years, respectively. The net operating loss carry forwards may be subject to variouslimitations imposed by the rules and regulations of the Internal RevenueService and state taxing authorities.

During the fiscal year ended September 30, 2004, PMLutilized its remaining state net operating loss carry forwards.  A state income tax expense from discontinuedoperations related to PML of $49,000 was established in the consolidatedstatement of operations for the year ended September 30, 2006.

Management is not able to determine if it is morelikely than not that the deferred tax assets will be realized. The Companytherefore has recorded a full valuation allowance against its deferred taxassets at September 30, 2006 and 2005.

F-60

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 16—Income Taxes(continued)**

The Company has approximately $1,100,000 in researchand development credit carryforwards that will expire from fiscal 2020 tofiscal 2026. The credit carryforwards have also been offset by the valuationallowance at September 30, 2006.

The tax effect on thecomponents is as follows:

| ** **                                                                              | ** ** | **As of September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Net operating  loss carry forwards                                                      |       | $                                      | 28,667,000 |   | $ | 17,859,000 |   |
| Accruals for  financial statement purposes not allowed for income taxes—cash basis |       | 1,144,000                              |       | 224,000 |   |
| Basis difference  in prepaid expenses                                                   |       | (57,000                                | )          | — |   |
| Basis difference  in investment in Dresser                                              |       | 681,000                                |       | 687,000 |   |
| Basis difference  in investment in Advanced Technologies                                |       | 871,200                                |       | 997,000 |   |
| Basis difference  in other intangible assets                                            |       | 17,000                                 |       | 17,000 |   |
| Basis difference  relating to licensed technology                                       |       | 678,000                                |       | 632,000 |   |
| Basis difference  in property and equipment                                             |       | (2,054,000                             | )          | (380,000 | ) |
| Basis difference  in other assets                                                       |       | 3,000                                  |       | 3,000 |   |
| Basis difference  in goodwill                                                           |       | (24,000                                | )          | (20,000 | ) |
| Basis difference  in technology rights                                                  |       | 32,000                                 |       | 28,000 |   |
| Basis difference  in retirement payables                                                |       | 121,000                                |       | 460,000 |   |
| Basis difference  in reserve for REN earn-out                                           |       | 370,000                                |       | 373,000 |   |
| Basis difference  in product liabilities                                                |       | 28,000                                 |       | 28,000 |   |
| Basis difference  in deferred rent liability                                            |       | 23,000                                 |       | — |   |
| Research &  development credit                                                 |       | 1,100,000                              |       | 260,000 |   |
| Stock Options  123R Adjustment                                                          |       | 4,281,000                              |       | — |   |
| Debt Beneficial  Conversions                                                            |       | 107,000                                |       | — |   |
| Basis difference  in investment in Sand Creek                                           |       | 7,000                                  |       | 7,000 |   |
|                                                                                    |       | 35,995,200                             |       | 21,175,000 |   |
| Valuation  allowance                                                                    |       | (35,995,200                            | )          | (21,175,000 | ) |
|                                                                                    |       | $                                      | —     |   | $ | — |   |

 

 

F-61

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note16—Income Taxes (continued)**

A reconciliation of theincome taxes at the federal statutory rate to the effective tax rate is asfollows: 

| ** **                                                         | ** ** | **For the Years Ended September 30,** | ** **  |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                                         | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| Federal income tax  benefit computed at the Federal statutory rate |       | $                                                              | (14,748,000 | ) | $ | (4,865,000 | ) | $ | (2,452,000 | ) |
| State income tax benefit  net of Federal benefit                   |       | (1,219,600                                                     | )           | (421,400 | ) | (220,000 | ) |
| Other                                                              |       | 356,400                                                        |        | (184,000 | ) | 251,000 |   |
| Research &  development credit                            |       | 840,000                                                        |        | 260,000 |   | — |   |
| Change in valuation  allowance                                     |       | 14,820,200                                                     |        | 5,278,000 |   | 2,421,000 |   |
| Income tax expense                                                 |       | $                                                              | 49,000      |   | $ | 67,600 |   | $ | — |   |

 

**Note 17—Segment Information**

The Companyoperates in two business segments as follows:

·       Nitrogenproducts manufacturing—The Company manufactures a variety of upgraded nitrogenfertilizer products.

·       Alternativefuels—The Company develops and markets processes for conversion of low-value,carbon-bearing solids or gases into valuable liquid hydrocarbons.

The Company’s reportable operating segments have beendetermined in accordance with the Company’s internal management structure,which is organized based on operating activities. The accounting policies ofthe operating segments are the same as those described in the summary ofaccounting policies. The Company evaluates performance based upon severalfactors, of which the primary financial measure is segment-operating income.

F-62

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note17—Segment Information (Continued)**

On March 8, 2005, theCompany sold OKON, Inc. (OKON), which had been reported as the Company’spaint segment in previous filings. In addition, effective August 1, 2005,the Company sold its 56% ownership in REN Corporation (REN). REN had beenreported as the Company’s industrial automation systems segment in previousfilings. Effective for the fiscal year ended September 30, 2006, theCompany committed to a plan to sell Petroleum Mud Logging, LLC, which had beenreported as the Company’s oil and gas field services segment in previousfilings. The results from these three businesses are excluded from the segmentresults, as they are included in discontinued operations in our ConsolidatedStatements of Operations and as assets and liabilities held for sale on ourConsolidated Balance Sheets. Segment information for the prior periods has beenreclassified to reflect this presentation (Note 4).

| ** **                                       | ** ** | **For the Years Ended September 30,** | ** **  |
|--------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                       | ** ** | **2006**                                                       | ** **  | **2005** | ** ** | **2004** | ** ** |
| Revenues                                         |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                  |       | $                                                              | 44,397,519  |   | $ | — |   | $ | — |   |
| Alternative fuels                                |       | 119,013                                                        |        | 588,687 |   | 984,492 |   |
|                                             |       | $                                                              | 44,516,532  |   | $ | 588,687 |   | $ | 984,492 |   |
| Operating loss                                   |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                  |       | $                                                              | (1,319,780  | ) | $ | — |   | $ | — |   |
| Alternative fuels                                |       | (38,099,090                                                    | )           | (11,880,027 | ) | (5,401,029 | ) |
|                                             |       | $                                                              | (39,418,870 | ) | $ | (11,880,027 | ) | $ | (5,401,029 | ) |
| Depreciation and  amortization                   |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                  |       | $                                                              | 2, 435,123  |   | $ | — |   | $ | — |   |
| Alternative fuels                                |       | 516,028                                                        |        | 444,030 |   | 461,530 |   |
|                                             |       | $                                                              | 2,951,151   |   | $ | 444,030 |   | $ | 461,530 |   |
| Interest expense                                 |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                  |       | $                                                              | 249,458     |   | $ | — |   | $ | — |   |
| Alternative fuels                                |       | 2,152,939                                                      |        | 2,874,661 |   | 856,732 |   |
|                                             |       | $                                                              | 2,402,397   |   | $ | 2,874,661 |   | $ | 856,732 |   |
| Equity in net  loss of investees:                |       |                                                           |        |   |   |   |   |
| Alternative fuels                                |       | $                                                              | —      |   | $ | 735,815 |   | $ | 252,415 |   |
| Expenditures for  additions of long-lived assets |       |                                                           |        |   |   |   |   |
| Nitrogen products manufacturing                  |       | $                                                              | 2,815,384   |   | $ | — |   | $ | — |   |
| Alternative fuels                                |       | 2,128,915                                                      |        | 91,011 |   | 70,603 |   |
|                                             |       | $                                                              | 4,944,299   |   | $ | 91,011 |   | $ | 70,603 |   |

 

| ** **                             | ** ** | **As of September 30,** | ** **  |
|----------------------------------------|------------|----------------------------------------|-------------|
| ** **                             | ** ** | **2006**                               | ** **  | **2005** | ** ** | **2004** | ** ** |
| Investment in  equity method investees |       |                                   |        |   |   |   |   |
| Alternative fuels                      |       | $                                      | —      |   | $ | (19,278 | ) | $ | (89,436 | ) |
| Total assets                           |       |                                   |        |   |   |   |   |
| Nitrogen products manufacturing        |       | $                                      | 81,274,656  |   | $ | — |   | $ | — |   |
| Alternative fuels                      |       | 66,207,820                             |        | 40,859,156 |   | 4,860,728 |   |
|                                   |       | $                                      | 147,482,476 |   | $ | 40,859,156 |   | $ | 4,860,728 |   |

 

F-63

----

**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note17—Segment Information (Continued)**

Revenues from externalcustomers are shown below for groups of similar products and services:

| ** **                      | ** ** | **For the Years Ended September 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                        |       |                                                           |       |   |   |   |   |
| Nitrogen products manufacturing |       | $                                                              | 44,397,519 |   | $ | — |   | $ | — |   |
| Technical services              |       | —                                                         |       | 140,066 |   | 235,306 |   |
| Feasibility studies             |       | —                                                         |       | 325,199 |   | 631,973 |   |
| Rental income                   |       | 119,013                                                        |       | 123,422 |   | 117,213 |   |
|                            |       | $                                                              | 44,516,532 |   | $ | 588,687 |   | $ | 984,492 |   |

 

**Note18—Valuation and Qualifying Accounts**

| ** **                                                     | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Expense** | ** **  | **Deductions and  Write-Offs** | ** ** | **Balance at End  of Period** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------|-------------|-------------------------------------|------------|----------------------------------------------|------------|
| Year Ended  September 30, 2006                            |       |                                           |       |                         |        |                                |       |                                         |       |   |   |   |   |
| Allowance for doubtful accounts, from continuing  operations   |       | $                                              | 125,755    |                         | $           | —                              |       |                                         | $          | — |   |   |   | $ | 125,755 |   |   |
| Allowance for doubtful accounts, from discontinued  operations |       | 10,500                                         |       | —                       |        |                                | —     |                                         |       |   | 10,500 |   |   |
| Allowance for doubtful accounts                                |       | $                                              | 136,255    |                         | $           | —                              |       |                                         | $          | — |   |   |   | $ | 136,255 |   |   |
| Deferred tax valuation account                                 |       | $                                              | 21,175,000 |                         | $14,820,200 |                                |       | $                                            | —     |   |   |   | $35,995,200 |   |   |
| Reserve for REN Earn-Out(1)                                    |       | $                                              | 1,000,000  |                         | $           | —                              |       |                                         | $          | — |   |   |   | $ | 1,000,000 |   |   |
| Year Ended September 30, 2005                             |       |                                           |       |                         |        |                                |       |                                         |       |   |   |   |   |
| Allowance for doubtful accounts, from continuing  operations   |       | $                                              | 125,755    |                         | $           | —                              |       |                                         | $          | — |   |   |   | $ | 125,755 |   |   |
| Allowance for doubtful accounts, from discontinued  operations |       | 17,500                                         |       | —                       |        |                                | (7,000     | )                                            |       |   | 10,500 |   |   |
| Allowance for doubtful accounts                                |       | $                                              | 143,255    |                         | $           | —                              |       |                                         | $          | (7,000 | ) |   |   | $ | 136,255 |   |   |
| Deferred tax valuation account                                 |       | $                                              | 15,897,000 |                         | $           | 5,278,000                           |       |                                         | $          | — |   |   |   | $ | 21,175,000 |   |   |
| Reserve for REN Earn-Out(1)                                    |       | $                                              | —     |                         | $           | 1,000,000                           |       |                                         | $          | — |   |   |   | $ | 1,000,000 |   |   |
| Year Ended September 30, 2004                             |       |                                           |       |                         |        |                                |       |                                         |       |   |   |   |   |
| Allowance for doubtful accounts, from continuing  operations   |       | $                                              | —     |                         | $           | 125,755                             |       |                                         | $          | — |   |   |   | $ | 125,755 |   |   |
| Allowance for doubtful accounts, from discontinued  operations |       | 17,500                                         |       | —                       |        |                                | —     |                                         |       |   | 17,500 |   |   |
| Allowance for doubtful accounts                                |       | $                                              | 17,500     |                         | $           | 125,755                             |       |                                         | $          | — |   |   |   | $ | 143,255 |   |   |
| Deferred tax  valuation account                                |       | $                                              | 13,476,000 |                         | $           | 2,421,000                           |       |                                         | $          | — |   |   |   | $ | 15,897,000 |   |   |

----

(1)          Companyrecorded a reserve of $1,000,000 against the total earn-out receivable due touncertainty surrounding the estimation of collections related to the Company’ssale of REN Corporation (Note 4).

F-64

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**RENTECH, INC. Notes to Consolidated Financial Statements**

**Note 19—Related PartyTransactions**

During fiscal 2000, the Company began to defer thepayment of a portion of the compensation of certain officers of the Company. Asof September 30, 2006 and 2005, the Company had deferred compensation of$0 and $326,508.

During January 2003, the Company began to defermonthly salary payments to certain officers. These officers and the Companyentered into convertible notes in the amount of such deferred salary payments.The notes bear interest at 9% and mature in twelve months, with all unpaidprincipal and interest due at that time. Within the first 120 days, the notesmay be converted in whole or in part into unregistered common stock of theCompany at a conversion rate of $0.45 per share if the closing market price forthe Company’s common stock for three consecutive days exceeds $1.00 per share.After the first 120 days, the notes may be converted in whole or in part intounregistered common stock of the Company without respect to the closing marketprice of the Company’s common stock at a conversion rate of $0.45 per share forthe deferrals between January 1, 2003 and March 31, 2003 and at theclosing market price for all subsequent deferrals. On September 30, 2005,these convertible promissory notes were amended to extend the term to September 30,2008 and to reduce the interest rate to the prime rate published by the WallStreet Journal. As of September 30, 2006 and 2005 the balance in theseconvertible notes was $169,482 and $199,109, respectively.

In addition to the related party disclosures in Notes10, 13, 14 and 15, in fiscal 2006 and 2005, the Company incurred $0 and$44,213, respectively  in consultingservices, which were paid to a company whose President was appointed a directorof Rentech in fiscal 2005.

F-65

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**EXHIBIT INDEX**
| 2.1   |   | Stock Purchase Agreement, dated November 5,  2005, by and between Rentech Development Corporation and  Royster-Clark, Inc. (incorporated by reference to Exhibit 2.1 to  Current Report on Form 8-K filed November 9, 2005).                                        |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2   |   | Stock Purchase  Agreement, dated August 1, 2005, with REN Holding Corporation  (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed August 9, 2005).                                                                                          |
| 2.3   |   | Purchase and Sale  Agreement, dated September 16, 2005, with RFC-Sand Creek Development,  LLC (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed September 22, 2005).                                                                       |
| 3(i)  |   | Amended and Restated  Articles of Incorporation, dated April 29, 2005 (incorporated by  reference to Exhibit 3(i) to Quarterly Report on Form 10-Q,  for the quarterly period ended March 31, 2005, filed May 9, 2005).                                        |
| 3(ii) |   | Bylaws dated  November 30, 2004 (incorporated by reference to  Exhibit 3(ii) to Annual Report on Form 10-K for the year  ended September 30, 2004 filed December 9, 2004).                                                                                     |
| 4.1   |   | Amended Shareholder  Rights Plan, dated January 18, 2005 (incorporated by reference to  Exhibit 4.2 to Current Report on Form 8-K filed  January 19, 2005).                                                                                                              |
| 4.2   |   | Rights Agreement, dated  January 18, 2005, with ComputerShare Trust (incorporated by reference to  Exhibit 4.2 to Current Report on Form 8-K filed May 23,  2005).                                                                                                       |
| 4.3   |   | Stock Purchase Warrants,  dated November 19, 2004, for December 2004 Short-Term Loan with C.  David Callaham and J.P. Turner & Company LLC (incorporated by  reference to Exhibits 10.3, 10.6 and 10.9 to Current Report on Form 8-K  filed December 16, 2004). |
| 4.4   |   | Promissory Notes, dated  November 19, 2004, for December 2004 Short-Term Loan with C. David  Callaham and J.P. Turner and Company LLC (incorporated by reference to  Exhibits 10.2, 10.5 and 10.9 to Current Report on Form 8-K  filed December 16, 2004).     |
| 4.5   |   | Registration Rights  Agreements for December 2004 Short-Term Loan with C. David Callaham  (incorporated by reference to Exhibits 10.4 and 10.7 to Current Report on  Form 8-K filed December 16, 2004).                                                                       |
| 4.6   |   | Promissory Notes for  December 2004 Short-Term Loan with Geduld Revocable Trust, Geduld Capital  Management LLC and Daniel Kern (incorporated by reference to Exhibits to  10.1, 10.4 and 10.7 to Current Report on Form 8-K filed  December 7, 2004).                   |
| 4.7   |   | Stock Purchase Warrants  with Geduld Revocable Trust, Geduld Capital Management LLC and Daniel Kern  (incorporated by reference to Exhibits to 10.2, 10.5 and 10.8 to Current  Report on Form 8-K filed December 7, 2004).                                                         |
| 4.8   |   | Registration Rights  Agreements for December 2004 Short-Term Loan with Geduld Revocable  Trust, Geduld Capital Management LLC and Daniel Kern (incorporated by  reference to Exhibits 10.3, 10.6 and 10.9 to Current Report on Form 8-K  filed December 7, 2004).             |
| 4.9   |   | Form of Stock  Purchase Warrant issued to investors in the 1999 private placement of  securities (incorporated by reference to Exhibit 4.2 to Annual Report on  Form 10-K for the year ended September 30, 1999 filed  January 12, 2000).                           |
| 4.10  |   | Form of Convertible  Promissory Note issued under the 2002 private placement of convertible  promissory notes (incorporated by reference to Exhibit 4 to Form S-3/A  Amendment Two to Registration Statement No. 333-85682 filed  October 28, 2002).                |

1

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| 4.11  |   | Form of Stock Purchase Warrant for the 2002  private placement of securities (incorporated by reference to Exhibit 4  to Form S-3/A Amendment Two to Registration Statement No. 333-85682  filed October 28, 2002).                                                                                                                                                         |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.12  |   | Form of  Registration Rights Agreement (incorporated by reference to Exhibit 4 to  Form S-3/A Amendment Two to Registration Statement No. 333-85682  filed October 28, 2002).                                                                                                                                                                                               |
| 4.13  |   | Form of  Non-statutory Stock Option Agreement (incorporated by reference to  Exhibit 4 to Form S-3/A Amendment Two to Registration  Statement No. 333-85682 filed October 28, 2002).                                                                                                                                                                                        |
| 4.14  |   | Form of Convertible  Promissory Note issued under the 2003 private placement of convertible  promissory notes (incorporated by reference to Exhibit 4.7 to Quarterly  Report on Form 10-Q, for the quarterly period ended  December 31, 2003, filed February 13, 2004).                                                                                                     |
| 4.15  |   | Form of Stock  Purchase Warrant issued under the 2003 private placement of convertible  promissory notes (incorporated by reference to Exhibit 4.8 to Quarterly  Report on Form 10-Q, for the quarterly period ended  December 31, 2003, filed February 13, 2004).                                                                                                          |
| 4.16  |   | Senior Secured Note,  dated September 17, 2004, with Mitchell Hospitality Investments  (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed September 23, 2004).                                                                                                                                                                                      |
| 4.17  |   | Stock Purchase Warrant,  dated September 17, 2004, with Mitchell Technology Investments  (incorporated by reference to Exhibit 10.2 to Current Report on  Form 8-K filed September 23, 2004).                                                                                                                                                                                    |
| 4.18  |   | Registration Rights  Agreement, dated September 17, 2004, with Mitchell Technology  Investments (incorporated by reference to Exhibit 10.3 to Current Report  on Form 8-K filed September 23, 2004).                                                                                                                                                                             |
| 4.19  |   | Subscription Agreement,  dated April 8, 2005, with Mercator Momentum Fund, LP, Mercator Momentum  Fund III, LP, Monarch Pointe Fund, Ltd., Pentagon Special Purpose Fund, Ltd.  and M.A.G. CAPITAL, LLC, for Placement of Preferred Stock (incorporated by  reference to Exhibit 10.1 to Current Report on Form 8-K filed  April 14, 2005).                                      |
| 4.20  |   | Form of Stock  Purchase Warrants, dated April 8, 2005, with Mercator Momentum Fund, LP,  Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd., Pentagon Special  Purpose Fund, Ltd. and M.A.G. CAPITAL, LLC, for Placement of Preferred Stock  (incorporated by reference to Exhibits 10.2, 10.3, 10.4, 10.5 and 10.6 to  Current Report on Form 8-K filed April 14, 2005). |
| 4.21  |   | Registration Rights  Agreement, dated April 8, 2005, with Mercator Momentum Fund, LP,  Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd., Pentagon Special  Purpose Fund, Ltd. and M.A.G. CAPITAL, LLC, for Placement of Preferred Stock  (incorporated by reference to Exhibit 10.7 to Current Report on  Form 8-K filed April 14, 2005).                               |
| 4.22  |   | Warrant to Purchase  1,000,000 Shares of Common Stock with DKRW Advanced Fuels LLC, dated  January 12, 2006 (incorporated by reference to Exhibit 2.1 to  Current Report on Form 8-K filed January 19, 2006).                                                                                                                                                                    |
| 10.1  |   | Securities Purchase  Agreement, dated September 22, 2005, with Wellington Management Capital,  LLP (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed September 23, 2005).                                                                                                                                                                          |
| 10.2  |   | Stock Purchase  Agreement, dated March 8, 2005, with Zinsser Co., Inc.  (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed March 10, 2005).                                                                                                                                                                                                    |
| 10.3* |   | Term sheet for Dennis L.  Yakobson retirement benefits (incorporated by reference to Exhibit 10.1  to Current Report on Form 8-K filed October 6, 2005).                                                                                                                                                                                                                              |

2

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| 10.4*  |   | Term sheet for Ronald C. Butz retirement benefits  (incorporated by reference to Exhibit 10.2 to Current Report on  Form 8-K filed October 6, 2005).                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5   |   | Management and  Consulting Agreement, dated July 29, 2005, with Management Resource  Center, Inc. (incorporated by reference to Exhibit 10.1 to Current  Report on Form 8-K filed August, 11, 2005).                                                   |
| 10.6*  |   | 1994 Stock Option Plan  (incorporated by reference to the exhibits to Form S-18 on  Form SB-2, post-effective Amendment No. 5 to Registration  Statement No. 33-37150-D).                                                                              |
| 10.7*  |   | 1996 Stock Option Plan  (incorporated by reference to Exhibit 99.2 to Current Report on  Form 8-K dated December 18, 1996).                                                                                                                                 |
| 10.8*  |   | 1998 Stock Option Plan  (incorporated by reference to Exhibit 4.1 to Form S-8).  Registration Statement No. 333-95537.                                                                                                                                      |
| 10.9*  |   | 2001 Stock Option Plan  (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K  for the year ended September 30, 2002 filed December 24, 2002).                                                                                      |
| 10.10* |   | 2003 Stock Option Plan  (incorporated by reference to Exhibit 10.6 to Annual Report on  Form 10-K for the year ended September 30, 2002 filed  December 24, 2002).                                                                                     |
| 10.11  |   | License Agreement, dated  October 8, 1998, with Texaco Natural Gas, Inc. (incorporated by  reference to Exhibit 10.10 to Annual Report on Form 10-KSB,  No. 000-19260, for the year ended September 30, 1998, filed  January 13, 1999). |
| 10.12  |   | Technical Services  Agreement, dated June 14, 1999, between Rentech and Texaco Energy  Systems, Inc. (incorporated by reference to Exhibit 10.7 to Annual  Report on Form 10-K for the year ended September 30, 2001).                            |
| 10.13  |   | Services Contract, dated  June 7, 2004, with Wyoming Business Council (incorporated by reference  to Exhibit 10.9 to the Current Report on Form 8-K filed  June 7, 2004).                                                                              |
| 10.14  |   | Memorandum of  Understanding, dated April 29, 2005, with Baard Generation L.L.C  (incorporated by reference to Exhibit 10.22 to Annual Report on Form 10-K for  the year ended September 30, 2005 filed December 9, 2005).                                                 |
| 10.15  |   | Memorandum of  Understanding, dated January 20, 2004, with Jacobs Engineering U.K.  Limited (incorporated by reference to Exhibit 10 to Current Report on  Form 8-K filed January 29, 2004).                                                           |
| 10.16  |   | Convertible Promissory  Note, dated May 20, 2005, to Michael Ray (incorporated by reference to  Exhibit 10.17 to Current Report on Form 8-K filed  May 20, 2005).                                                                                      |
| 10.17  |   | Convertible Promissory  Note, dated May 20, 2005, to David Zimel (incorporated by reference to  Exhibit 10.18 to Current Report on Form 8-K filed  May 20, 2005).                                                                                      |
| 10.18  |   | Stock Purchase Warrants  (incorporated by reference to Exhibits 10.1 through 10.16 to Current Report  on Form 8-K filed May 20, 2005).                                                                                                                           |
| 10.19* |   | 1990 Stock Option Plan  (incorporated by reference to the exhibits to Form S-18  Registration Statement No. 33-37150).                                                                                                                                           |
| 10.20* |   | 2005 Stock Option Plan  (incorporated by reference to Exhibit 10.34 to Quarterly Report on  Form 10-Q for the fiscal quarter ended December 31, 2004  filed February 9, 2005).                                                                         |
| 10.21  |   | Amendment effective  March 1, 2005 to Stock Purchase Agreement, dated December 10, 2004,  with Royster-Clark, Inc. (incorporated by reference to Exhibit 10.1  to Current Report on Form 8-K filed March 3, 2005).                           |

3

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| 10.22  |   | Amendment effective February 17, 2005 to Stock  Purchase Agreement, dated December 10, 2004, between Rentech Development  Corporation and Royster-Clark, Inc. (incorporated by reference to  Exhibit 10.1 to Current Report on Form 8-K filed  February 22, 2005). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23  |   | Amendment effective January 18, 2005 to Stock  Purchase Agreement, dated December 10, 2004, between Rentech Development  Corporation and Royster-Clark, Inc. (incorporated by reference to  Exhibit 10.1 to Current Report on Form 8-K filed  January 27, 2005).   |
| 10.24  |   | Stock Purchase  Agreement, dated December 10, 2004, between Rentech Development  Corporation and Royster-Clark, Inc. (incorporated by reference to  Exhibit 10.1 to Current Report on Form 8-K filed  December 16, 2004).                                               |
| 10.25  |   | Promissory Note with C.  David Callaham (incorporated by reference to the Exhibit 10.2 to  Form 8-K filed December 10, 2004).                                                                                                                                                     |
| 10.26  |   | Form of  Distribution Agreement by and between Rentech Development Inc. and  Royster-Clark Resources LLC (incorporated by reference to Exhibit 10.40 to  Annual Report on Form 10-K for the year ended September 30, 2005 filed  December 9, 2005).**                                       |
| 10.27  |   | Stock Option Agreement,  dated December 10, 2004, with Royster-Clark Inc. (incorporated by  reference to Exhibit 10.8 to Current Report on Form 8-K filed  December 16, 2004).                                                                                               |
| 10.28  |   | Termination Agreement  for FT Solutions, LLC dated January 10, 2006, by and between Headwaters  Technology Innovation Group, Inc. and Rentech, Inc (incorporated by  reference to Exhibit 10.1 to Current Report on Form 8-K filed  January 17, 2006).                  |
| 10.29  |   | Master License Agreement  with DKRW Energy LLC and DKRW Advanced Fuels LLC, dated January 12, 2006  (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed January 19, 2006).**                                                                     |
| 10.30  |   | License Agreement with  Medicine Bow Fuel & Power, LLC, dated January 12, 2006  (incorporated by reference to Exhibit 10.2 to Current Report on  Form 8-K filed January 19, 2006).**                                                                                |
| 10.31  |   | Project Development  Participation Agreement with DKRW Advanced Fuels LLC, dated January 12,  2006 (incorporated by reference to Exhibit 10.3 to Current Report on  Form 8-K filed January 19, 2006).                                                                        |
| 10.32* |   | Employment Agreement  with D. Hunt Ramsbottom, Jr. dated January 20, 2006 (incorporated  by reference to Exhibit 99.1 to Current Report on Form 8-K  filed January 26, 2006).                                                                                           |
| 10.32* |   | Employment Agreement  with Douglas M. Miller dated January 20, 2006 (incorporated by reference  to Exhibit 99.2 to Current Report on Form 8-K filed  January 26, 2006).                                                                                                      |
| 10.33* |   | Employment Agreement  with Richard O. Sheppard dated March 1, 2006 (incorporated by reference  to Exhibit 99.1 to Current Report on Form 8-K filed  March 14, 2006).                                                                                                         |
| 10.34* |   | Employment Agreement  with Kevin M. Smith dated January 20, 2006 (incorporated by reference to  Exhibit 99.3 to Current Report on Form 8-K filed  January 26, 2006).                                                                                                         |
| 10.35  |   | First Amendment to the  Stock Purchase Agreement dated November 5, 2005, by and between Rentech  Development Corporation and Royster-Clark, Inc. (incorporated by  reference to Exhibit 2.2 to Registration Statement on Form S-3  filed March 20, 2006).               |
| 10.36  |   | Second Amendment to the  Stock Purchase Agreement dated November 5, 2005, by and between Rentech  Development Corporation and Royster-Clark Nitrogen, Inc. (incorporated  by reference to Exhibit 2.1 to Current Report on Form 8-K  filed March 14, 2006).             |
| 10.37  |   | Third Amendment to the  Stock Purchase Agreement dated November 5, 2005, by and between Rentech  Development Corporation and Royster-Clark Nitrogen, Inc. (incorporated  by reference to Exhibit 2.2 to Current Report on Form 8-K filed  March 14, 2006).              |

4

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| 10.38* |   | 2006  Incentive Award Plan (incorporated by reference to Exhibit E to the  Company’s Definitive Proxy Statement filed on March 15, 2006).                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.39  |   | Amendment  to amended Rights Agreement dated April 13, 2006 (incorporated by reference  to Exhibit 4.1 to Current Report on Form 8-K filed  April 18, 2006).                                                                                                    |
| 10.40  |   | Indenture dated April 18, 2006, with Wells  Fargo Bank, National Association, as Trustee (incorporated by reference to  Exhibit 4.2 to Current Report on Form 8-K filed April 18,  2006).                                                                       |
| 10.41  |   | Officers’ Certificate to Indenture dated  April 18, 2006 to Indenture (incorporated by reference to  Exhibit 4.3 to Current Report on Form 8-K filed  April 18, 2006).                                                                                     |
| 10.42  |   | Form of 4.00% Convertible Senior Note Due 2013  (incorporated by reference to Exhibit 4.4 to Current Report on  Form 8-K filed April 18, 2006).                                                                                                                 |
| 10.43* |   | Compensation Plan for Outside Directors  (incorporated by reference to Item 1.01 to Current Report on Form 8-K  filed April 19, 2006).                                                                                                                                    |
| 10.44  |   | Lease Agreement dated as of April 21, 2006 with  Center West (incorporated by reference to Exhibit 99.1 to Current Report  on Form 8-K filed April 21, 2006).                                                                                                   |
| 10.45  |   | Rider to the Lease Agreement dated as of  April 21, 2006 with Center West (incorporated by reference to  Exhibit 99.2 to Current Report on Form 8-K filed  April 21, 2006).                                                                                     |
| 10.46  |   | Financing Agreement dated as of April 26, 2006  by and between Rentech Energy Midwest Corporation and The CIT Group/Business  Credit, Inc. (incorporated by reference to Exhibit 10.1 to Current  Report on Form 8-K filed May 2, 2006).                   |
| 10.47* |   | Employment Agreement with I. Merrick Kerr dated  May 15, 2006 (incorporated by reference to Exhibit 99.1 to Current  Report on Form 8-K filed May 17, 2006).                                                                                                    |
| 10.48* |   | Form of Stock Option Grant Notice and Stock  Option Agreement under 2006 Incentive Award Plan (incorporated by reference  to Exhibit 10.1 to Current Report on Form 8-K filed  July 20, 2006).                                                                  |
| 10.49* |   | First Amendment to the Rentech, Inc. 2006  Incentive Award Plan (incorporated by reference to Exhibit 10.1 to Current  Report on Form 8-K filed September 14, 2006).                                                                                            |
| 10.50  |   | Equity Purchase Agreement dated November 15,  2006 with PML Exploration Services, LLC (incorporated by reference to  Exhibit 2.1 to Current Report on Form 8-K filed  November 16, 2006).                                                                       |
| 10.51  |   | Commitment Letter by and among Rentech, Inc.,  Rentech Development Corporation. M.A.G Capital, LLC and Pentagon Bernini  Fund, Ltd. Dated November 15, 2005 (incorporated by reference to exhibit  10.1 to Current Report on Form 8-K filed November 16, 2005). |
| 14     |   | Code of Ethics (incorporated by references to  Exhibit 14 to Annual Report on Form 10-K for the year ended  September 30, 2004 filed December 9, 2004).                                                                                                         |
| 21     |   | Subsidiaries of Rentech, Inc.                                                                                                                                                                                                                                                  |
| 23     |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                          |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14 or Rule 15d-14(a).                                                                                                                                                                                      |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14 or Rule 15d-14(a).                                                                                                                                                                                      |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                                  |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                                  |

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*                    Managementcontract or compensatory plan or arrangement.

**             Certain portions ofthis Exhibit have been omitted and filed separately under an applicationfor confidential treatment.

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