Edgar Filing: RENTECH INC /CO/

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended September 30, 2006

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

For the Transition Period from to

Commission File No. 0-19260

RENTECH, INC.

(Exact name of registrant as specified in its charter)

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

10877 Wilshire Boulevard, Suite 710
Los Angeles, California 90024

(Address of principal executive offices, including zip code)

Telephone number: (310) 571-9800

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

Name of Each Exchange on Which Registered: The American Stock Exchange

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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

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

At December 1, 2006, the number of outstanding shares of common stock was 141,986,937.

DOCUMENTS INCORPORATED BY REFERENCE

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

TABLE OF 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

FORWARD-LOOKING STATEMENTS

Certain information included in this report contains, and other reports or materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, “forward-looking statements” within the meaning 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 the Private Securities Litigation Reform Act of 1995. The forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. They can be identified by the use of terminology such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “anticipate,” “should” and other comparable terms or the negative of them. You are cautioned that, while forward-looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Factors that could affect Rentech’s results include our ability to obtain financing for acquisitions, capital expenditures and working capital purposes; integrating and operating our recently acquired nitrogen fertilizer plant in East Dubuque, Illinois, and obtaining financing for the proposed conversion of the plant; our acquisition, construction, or conversion of other plants to produce liquid hydrocarbon products using our technology; our ability to obtain natural gas at reasonable prices while we convert the East Dubuque plant to use coal; our ability to secure long-term coal supply contracts on reasonable terms; sales prices for the products of the East Dubuque plant; our ability to successfully integrate and operate other acquisitions; environmental requirements; success in obtaining customers for our technology, products and services; the decision of our licensees, potential licensees, joint developers and potential joint developers to proceed with and the timing and success of any project using our technology; the entry into definitive agreements with others related to a project; and the risk factors detailed in “Part II. Other Information—Item 1A. Risk Factors” below and from time to time to time in the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and thus are current only as of the date made. Other factors that could cause actual results to differ from those reflected in the forward-looking statements include dangers associated with facilities construction and operation of gas processing plants like those using the Rentech Process, risks inherent in making investments and conducting business in foreign countries, protection of intellectual property rights, competition, and other risks described in this report.

Our actual results may differ materially from the results predicted or from any other forward-looking statements made by, or on behalf of, us and reported results should not be considered as an indication of future 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 in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievements. We undertake no responsibility to update any of the forward-looking statements after the date 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., a Colorado corporation and its subsidiaries, unless the context indicates otherwise.

PART I

ITEM 1. BUSINESS

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

Our Company

Rentech offers energy independence technologies utilizing domestic resources to economically produce ultra-clean synthetic fuels. We were incorporated in 1981 to develop technologies that transform under-utilized energy resources into valuable and clean alternative fuels, chemicals and power. We have developed an advanced derivative of the well-established Fischer-Tropsch, or FT, process for manufacturing diesel fuel and other fuel products. The FT process was originally developed in Germany in the 1920s. 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, biomass or natural gas into liquid hydrocarbon products, including ultra high-quality diesel fuel and other fuel products.

Both the Rentech Process and the fuels it produces carry unique and differentiating characteristics which we believe will facilitate economic deployment of the Rentech Process in large scale commercial projects. First, because our process is able to utilize carbon containing solids such as coal as a principal feedstock, we are able to take advantage of the relative stability of coal prices compared to other hydrocarbon-based feedstocks such as natural gas. Second, because the fuels derived from our proprietary process have a long shelf life and can be manufactured using domestic resources, they effectively address national security priorities framed by foreign control of oil reserves and limited domestic refining capacity. And third, because fuel produced by the Rentech Process is a clean-burning fuel which exceeds all current and promulgated environmental rules applicable to diesel engines and requires no new distribution infrastructure, we believe there are no restrictions on immediate and widespread adoption of FT fuels.

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

We intend to continue to operate REMC’s East Dubuque facility for the production of nitrogen fertilizer products while we execute a phased conversion to a commercial scale FT fuel production facility. In Phase 1 of the conversion, we intend to add a commercially available coal gasification system that converts coal into syngas for use in fertilizer production. During Phase 1A of the conversion, we plan to add the Rentech Process to produce liquid hydrocarbon products, such as diesel and jet fuels, from the additional syngas produced from the coal gasification process. We estimate we would need approximately

$810 million of additional debt and equity financing to finance Phases 1 and 1A of the conversion of REMC’s nitrogen fertilizer plant (the “East Dubuque Plant”). The planned conversion of this plant to replace natural gas with coal as its feedstock is currently in the engineering stage and investment in new processes and related equipment that significantly enlarge the production facility is anticipated to begin within the next 12 months. We presently expect commercial operations of Phases 1 and 1A to commence by 2010.

We are also pursuing the development of other alternative fuels projects, including one in Natchez, Mississippi that we and potentially a partner or partners would construct to produce FT liquid hydrocarbon and other products using the Rentech Process (the “Natchez Project”). In April 2006, the State of Mississippi enacted a $15 million state funding initiative, included in House Bill 1634, providing for site improvements at the location of the Company’s proposed Natchez Project. Such funding would be subject to the Company meeting certain financial, employment and other criteria. If the Company is successful in structuring an agreement for the land and satisfies the state funding criteria, Adams County, Mississippi will provide the Company with an improved site and port facilities necessary to meet the plant’s needs. The Company currently is conducting a feasibility study, negotiating site agreements and formalizing development plans for the Natchez Project.

In addition, we are discussing proposals with owners of energy feedstocks for the joint development of alternative fuels projects and the use of the Rentech Process under selective licensing arrangements. On July 17, 2006, we entered into a Joint Development Agreement with Peabody Energy Corporation (“Peabody”), for the co-development of two coal-to-liquids (“CTL”) projects, which will be located on Peabody coal reserves. The projects will convert coal into ultra-clean transportation fuels using the Company’s proprietary FT CTL process. The companies intend to utilize Peabody’s reserves in Montana and the Midwest and will evaluate a mine-mouth project model to maximize cost and transportation advantages. One project is targeted for production of 10,000 barrels per day of transportation fuels while the other is projected to produce 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 development phases of the respective projects. Under the terms of the Joint Development Agreement, Peabody and the Company will evaluate the projects in stages by determining the scope and feasibility of each project first. After successful completion of these initial stages, Peabody and the Company expect to establish a project entity and then move forward with the Front End Engineering and Design (“FEED”) phase for each facility. Initially the companies will share the costs of any third party development expenses and have equal interests in the projects. With the exception of the agreed upon sites, the Joint Development Agreement is non-exclusive and either party may develop coal-to-liquids projects 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 License Agreement 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 in stages as DKRW-AF achieves certain milestones, including receiving a full funding commitment for developing and building such plant and commencing operation, subject to performance and other obligations on our part. The achievement of these milestones is expected to take several years.

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

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

Financial Information About Our Business Segments; Products and Services

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

Business Strategy

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

Accelerate deployment of the Rentech Process by using existing infrastructure. By using the infrastructure already in place at the East Dubuque facility, we believe we can produce an FT facility that utilizes the Rentech Process in less time than would be required if we constructed an entirely new facility to manufacture a similar type and quantity of products. We believe the enhanced speed to market will provide an opportunity for us to set the standards for manufactured fuels to be used by end users. We also believe the project will enable us to establish our technology as an accepted and financeable platform for future facilities. We believe the conversion of the East Dubuque facility to use coal as a feedstock and the addition of the Rentech Process to enable the facility to produce both nitrogen fertilizers and Fischer-Tropsch fuels can significantly 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 the facility, based on current market prices;

· using the lower cost feedstock in a significantly more efficient fashion that reduces the amount of energy required to manufacture each unit of product;

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

· providing the ability to produce sufficient electrical power to operate the facility and potentially to sell excess electricity to the market.

We also expect to continue to generate revenues and cash flows from the East Dubuque facility by continuing its current operations while the conversion process is underway.

Strategically build projects in the United States utilizing the Rentech Process. We intend to develop greenfield projects, which involve no existing infrastructure or process plant, where the design is both replicable and scalable. In addition to the East Dubuque and Natchez projects, we plan to focus on greenfield projects located at coal mines. We believe we will be able to leverage the engineering, design and construction associated with each facility, thereby reducing the required capital and technical resources for each subsequent project. We initiated this strategy in July of 2006 with our Joint Development Agreement with Peabody for the co-development of two CTL projects, which would be located on Peabody coal reserves. We will target projects where the scale-up opportunities are such that, over time, we can achieve production capacity of up to 50,000 barrels per day of FT fuels. While our technology would enable us to pursue larger projects, we believe that small to medium sized projects require less capital and development time. For example, we are pursuing a greenfield project situated along the Mississippi River at the Port of Natchez. We are presently conducting a feasibility study, negotiating site agreements and formalizing development plans for the Natchez Project. There is no assurance the Natchez Project or our proposed CTL projects with Peabody will proceed as presently contemplated.

Continue investment in our research and development program. We intend to continue to invest in advancing our technology. We own a development and testing laboratory located in Denver, Colorado, which includes a pilot plant consisting of a bubble column slurry reactor. The laboratory contains equipment and support facilities that provide us with a resource for the continued development and testing of our Fischer-Tropsch technology. Our laboratory and engineering staff currently consists of 33 permanent and contract employees.

Our principal research and development efforts at our laboratory are now focused on increasing the efficiency of the catalyst we use in producing FT products and validating our ability to cost-effectively remove catalysts from our wax based on intermediate product streams. We are also developing additional FT catalysts attempting to further increase the efficiency of converting feedstock into liquid hydrocarbons, and working on other ways of reducing the cost of our process. Our research efforts are focused on supporting our goal of achieving commercial use of the Rentech Process with as many types of hydrocarbon feedstocks as are available.

Our product development unit, or PDU, currently being developed on a site we own in Commerce City, Colorado, will serve as a platform to allow us to remain a leader in alternative fuels technology. We are preparing to build and operate on the site what we believe will be the United States’ first fully integrated Fischer-Tropsch, coal-to-liquids, product development unit research facility. We anticipate that our Commerce City site will eventually house our existing pilot plant and research and development and engineering teams. This facility would produce ultra-clean diesel fuel and other fuel products from various domestic coals, petroleum coke and biomass feedstocks on a demonstration scale, utilizing coal gasification technologies fully integrated with the Rentech Process. With the PDU in operation, we believe we will be able to further optimize the operating conditions of the FT synthesis and upgrading section for producing different specialized cuts of fuels. The products from the facility will be used to supply test quantities of FT fuels to potential licensees and customers. We expect construction of the PDU to be completed by the third calendar quarter of 2007 and to cost approximately $40 million.

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

Extend the reach of Rentech technology through licensing. We plan to continue to market the licensing of our technology for coal and other carbon bearing feedstock to enhance the deployment and acceptance of our technology. We believe that successful commercialization of the Rentech Process will enhance our licensing opportunities, resulting in additional revenue streams.

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

In January 2006, we entered into a master license agreement with DKRW-AF for the use of the Rentech Process. The master license agreement provides that if DKRW-AF wishes to build a coal to liquids facility in any domestic or international location, they are obligated to use our technology and to enter into a separate site license agreement for such project. Concurrent with the execution of the master license agreement, we entered into a site license agreement with Medicine Bow Fuel & Power, LLC, or MBF&P, a wholly-owned subsidiary of DKRW-AF, for the use of our technology in the facility to be

constructed by MBF&P in Medicine Bow, Wyoming. The site license agreement provides that MBF&P shall have the obligation to buy the catalyst developed by us from us or our designated suppliers pursuant to a separate supply agreement to be entered into. Pursuant to the site license agreement, we will receive license fees based on plant production capacity, payable in stages as DKRW-AF achieves certain milestones, including receiving a full funding commitment for developing and building such plant and commencing operation, subject to performance and other obligations on our part. The achievement of these milestones is expected to take several years.

Our Proprietary Rentech Process

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

The Rentech Process can be used with syngas derived from feedstocks such as coal, petroleum coke, natural gas and biomass. In addition to coal-to-liquids markets, other potential markets for the Rentech Process include unused natural gas supplies associated with crude oil fields that are presently being flared, re-injected into the reservoir or merely left in the ground due to the lack of economic or practical means to transport these resources to market. We believe that the Rentech Process can be used for on-site conversion of these resources into liquid hydrocarbon products that are more easily and cost-effectively transported to market. Increasing environmental and regulatory pressures to reduce the wasteful flaring of natural gas, the economic attractiveness of monetizing wasted assets, and the growing need for cleaner fuels are driving the growing interest of owners of these hydrocarbon resources and the energy industry in this application of the Rentech Process. Our technology could also enable refineries to more fully utilize heavier crude oil in addition to petroleum coke to produce an improved slate of higher-value products. Potential benefits to the refiner include lower refinery feedstock costs, higher revenue and a reduction in waste disposal costs leading to increased margins. The Rentech Process also has applications in the conversion of existing facilities that produce nitrogen fertilizers, industrial off-gases or petrochemicals.

Fischer-Tropsch Technology

The Fischer-Tropsch process that is the basis of our technology is one step in the three stage chemical process by which carbon-bearing materials are converted into synthetic liquid hydrocarbons. The three stages are described below.

· In the first stage, commercially available technologies, such as gasification or steam methane reforming, convert carbon-bearing material into syngas, which is a mixture of hydrogen and carbon monoxide. Oxygen is usually added for the efficient conversion of any solid or liquid feedstock. The addition of oxygen may also be necessary in Fischer-Tropsch processes that use gaseous feedstocks, depending on the technology selected, to reform the gaseous feedstocks into the desired composition of syngas.

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

· In the third stage, the synthetic hydrocarbon products are upgraded on site with a commercially available refining technology by distillation or other conventional processing steps to the specifications required for the target market.

The Fischer-Tropsch process was first used in Germany during World War II in commercial-scale industrial facilities constructed with government funding. These facilities used coal as feedstock for the syngas and primarily produced diesel fuel. After World War II, others, notably the South African government, the United States Bureau of Mines and several companies in the United States, began research and development for improvements to the Fischer-Tropsch process. South Africa’s effort led to the Fischer-Tropsch process now owned by South African Synthetic Oil, Ltd., or Sasol. Sasol’s process is used at four facilities in South Africa that, according to published reports, produce a total of approximately 160,000 barrels per day of liquid hydrocarbons, primarily from coal, using an iron-based catalyst.

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

Development of the Rentech Process

We developed our Fischer-Tropsch technology in the early 1980s, based on earlier research and development efforts conducted by two of our founders, Dr. Charles Benham and Dr. Mark Bohn. The ability of the Rentech Process to convert syngas into valuable liquid hydrocarbons has been demonstrated over the course of our history.

Use of the Rentech Process in a Fischer-Tropsch facility was successfully demonstrated in 1992 and 1993 at the Synhytech facility located at Pueblo, Colorado. The Synhytech facility was designed to produce up to 235 barrels of liquid hydrocarbons per day. Our licensee, Fuel Resources Development Company, or Fuelco, had full control of the supply of syngas and the construction and operation of the facility. We designed, fabricated and operated the Fischer-Tropsch reactors and provided our catalyst for use in the FT reactors. Fuelco constructed the facility at the Pueblo municipal landfill, with the intent of using, at minimal cost, the methane and carbon dioxide in the landfill gas that was generated each day from the decomposition of the landfill material. Although the Rentech Process performed as expected to produce liquid hydrocarbons, Fuelco determined that the volume and the energy content of the landfill gas it captured were inadequate to operate the facility on an economic basis, and thus ceased operation of the facility.

We obtained ownership and control of the Synhytech facility in 1993. In order to further evaluate performance of the Rentech Process, we decided to operate the facility for a short period of time using natural gas supplied by pipeline as the feedstock. In July and August 1993, we operated the facility continuously for three weeks. The results confirmed that the Rentech Process operated successfully and our ability to produce the desired products. We closed the Synhytech facility at the end of 1993 because no cost-efficient source of natural gas feedstock was available.

Our technology was also successfully used by Texaco Energy Systems at a facility in Laporte, Texas in 2000. Texaco leased the use of this facility from the United States Department of Energy on a short-term basis to conduct a joint demonstration with us of the results of using the Rentech Process with Texaco’s gasification process. The Laporte facility had the capacity to produce approximately ten barrels of product per day using the Rentech Process.

Competition in Fischer-Tropsch Technology

The development of Fischer-Tropsch technology for the production of liquid hydrocarbon products like ours is highly competitive. Several major integrated oil companies, as well as several smaller companies, have developed or are developing competing technologies. The United States Department of Energy has also sponsored a number of research programs in Fischer-Tropsch technology. Advances by others in their Fischer Tropsch technology might lower the cost of processes that compete with the Rentech Process. Our ability to create and maintain technological advantages is critical to our future success.

Developing commercial FT technology requires significant capital and time, which we believe provides a material barrier to competitors. The fundamental differences between the various FT technologies developed by us and our competitors are the FT catalyst, the syngas reactors where the syngas reacts with the catalyst, our patented process for separating iron catalyst from the wax product used in the reaction chamber (which permits the catalyst to be re-used), and our focus on small to medium sized facilities with a production capacity of up to 50,000 barrels of FT fuel per day. Because it uses an iron-based catalyst, the Rentech Process can use syngas derived from a wide range of feedstock to produce the syngas necessary for the FT process. FT technologies that use cobalt-based catalysts can be used to convert syngas produced from coal and petroleum coke; however, due to their sensitivity to impurities in the syngas stream that coal and petroleum coke gasification units may produce, the expensive cobalt catalyst can be damaged. Such a facility requires the addition of expensive equipment that would likely cause reduced product yields and increased capital and operating costs. As a result, our ability to compete with FT technologies that use cobalt-based catalysts is, instead, significantly dependant on the relative cost of coal, as compared to 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 160,000 barrels per day of liquid hydrocarbons, primarily from coal. Sasol’s published reports of its licensing activity suggest to us that its current business strategy is to focus on licensing its cobalt-based technology for use with natural gas feedstock, and that the use of its iron based catalyst is preferred for use in large-scale facilities (greater than 70,000 barrels per day) where coal is to be the feedstock for the facility. In contrast, our focus on facilities with production capacities of up to 50,000 barrels per day of FT fuels will require less capital and development time.

Sources of Feedstocks for the Rentech Process

Economic use of the Rentech Process requires substantial quantities of inexpensive carbon-bearing solids or gasses that can be economically converted into syngas. We believe that coal, which is available in great quantities in the United States, is the best source of feedstock for the Rentech Process in the United States. Based on current market prices, we believe we can obtain and gasify a wide-variety of coal types to produce the syngas that we use in the Rentech Process at significantly lower costs than if we were to use a natural gas feedstock.

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

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

Other potential feedstocks for the Rentech Process include heavy crude oil and heavy, high-sulfur residual materials created as a byproduct of the crude oil refining process. These residual materials are commonly referred to as petroleum coke or refinery bottoms. Some petroleum coke, unless treated at considerable expense, must be disposed of as a hazardous material. If the residues are gasified, or transformed into syngas for use in the Rentech Process, they could be converted by our process into higher-value FT products. Natural gas, plant and plant derived materials, commonly referred to as biomass, may also be gasified and could serve as potential feedstock for the Rentech Process.

Products and Markets for Liquid Hydrocarbon Products

Facilities using the Rentech Process can be designed and configured to produce a variety of liquid hydrocarbon products. Our synthetic liquid hydrocarbon products are similar to analogous products derived from crude oil refining, but have environmental benefits that conventional petroleum-based refinery products do not possess.

The products we can produce using the Rentech Process include:

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

· clean-burning, manufactured jet fuels;

· naphthas useful as a feedstock for chemical processing;

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

· normal paraffins; and

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

Because of the way they are produced, our liquid hydrocarbon products are substantially free of contaminants usually found in crude oil, such as sulfur, aromatics, nitrogen and heavy metals. Vehicle engine tests of our synthetic diesel conducted by independent labs have demonstrated that our FT diesel fuel is clean-burning with excellent combustion qualities, and substantially reduces harmful air emissions from vehicles. Our diesel fuel can be used directly or as a blending component with conventionally refined petroleum diesel to reduce harmful emissions. Moreover, we believe our diesel fuel can be used in currently available diesel engines without requiring any modifications to the engines, and can be delivered to end-users with no modifications to delivery infrastructure.

Clean Air Regulations

The Clean Air Act Amendments of 1990, or the CAAA, established several programs in order to improve air quality by, among other things, imposing restrictions on the emissions of hazardous pollutants into the atmosphere. As a means to address common sources of air pollution such as automobiles, trucks and electric power plants, the CAAA encourages the development and sale of alternative fuels as the nation attempts to meet national air quality standards. In addition, beginning in June 2006, the United States Environmental Protection Agency started to phase-in a program to reduce the permissible sulfur content in highway diesel fuel from 500 parts per million to 15 parts per million. Furthermore, California has promulgated state-specific standards to reduce the sulfur content of diesel fuel. FT diesel fuel produced using the Rentech Process is a low-sulfur, clean-burning fuel, and should therefore be attractive to users.

Government Incentives

In 2000, Congress designated domestically produced Fischer-Tropsch fuels made from natural gas as an alternative fuel under the Energy Policy Act of 1992. This act also designates liquid fuels from coal as an “alternative fuel.”

The Energy Policy Act of 2005, or EPACT 2005, provides for tax credits, grants, loan guarantees and other incentives to stimulate coal gasification into Fischer-Tropsch fuels and chemicals. EPACT 2005 provides a 20% tax credit for qualifying gasification projects, including by entities which produce chemicals, fertilizers, glass, steel, and for forest products. In order to qualify for the tax credit, coal must comprise at least 90% of fuels required for “production of chemical feedstocks, liquid transportation fuels or coproduction of electricity.” EPACT 2005 also authorizes grants for gasification and gasification coproduction, which includes the production of Fischer-Tropsch fuels, fertilizer and electricity, as well as comprehensive loan guarantees up to 80% of the project cost for deployment and commercialization of innovative technologies including gasification projects and gasifying coal to produce “ultra-clean premium fuels through Fischer-Tropsch process.” EPACT 2005 incentives may be used together with tax credits provided by the statute. EPACT 2005 also provides a temporary election to expense up to 50% of qualified refinery costs, including those for a facility which processes coal via gas into liquid fuel. To qualify, there must be a binding construction contract before January 1, 2008 and the refinery must be placed in service before January 1, 2012. We anticipate 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 to develop a strategy to use fuel produced from coal, tar sands and shale and authorizes the Department of Defense to enter into multi-year procurement contracts.

The Highway Reauthorization and Excise Tax Simplification Act of 2005 also provides a $0.50 per gallon fuel excise tax credit for “any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process.”

We believe the projects to deploy product developed with the Rentech Process may in appropriate circumstances be eligible for one of more of the above incentives.

Acquisition of Royster-Clark Nitrogen, Inc.

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

Conversion of East Dubuque Facility

We will convert the facility in phases, the construction of which will overlap. In Phase 1 of the conversion, we intend to add a commercially available clean coal gasification module that converts coal into syngas for use in fertilizer production. We expect the conversion will allow us to capture the price differential between natural gas and coal and produce fertilizers more cost effectively. Phase 1 will also include the construction of a power plant which will capture the waste heat from the coal gasification process. It is anticipated that the converted Facility will be capable of producing enough power to meet its internal needs and, to the extent it produces any surplus power, could market excess power to the local grid. By converting the facility, we expect to improve the economic return from its operations. In addition, after conversion the facility is expected to produce an additional 170 tons of ammonia per day, which is the building block for various nitrogen fertilizer products. After completion of Phase 1, the East Dubuque facility is expected to purchase approximately 1,560 tons of coal per day on a fixed contract basis.

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

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

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

Distribution Agreement

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 to which Agrium is obligated to use commercially reasonable efforts to promote the sale of, and to solicit and secure orders from its customers for nitrogen fertilizer products comprising anhydrous ammonia, granular urea, UAN solutions

and nitric acid and related nitrogen-based products manufactured at the East Dubuque Plant and to purchase from REMC all nitrogen fertilizer products manufactured at the facility for prices to be negotiated in good faith from time to time. RDC must pay Agrium a commission for these services. RDC’s rights under the Distribution Agreement include the right to store specified amounts of its ammonia at Agrium’s ammonia terminal in Niota, Illinois for a monthly fee.

Business of Rentech Energy Midwest Corporation.

The following description relates 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, ammonium nitrate solution, liquid and granular urea, nitrogen solutions (urea ammonium nitrate solution, or UAN) and carbon dioxide using natural gas as a feedstock. East Dubuque is located in the northwest corner of Illinois, and the facility is located on a 100 foot bluff above the Mississippi River with access to the river for loading certain products through REMC-owned loading facilities.

The facility operates continuously, except for planned shutdowns for maintenance and efficiency improvements, and has historically operated at full capacity except for temporary cutbacks or shutdowns for maintenance or extraordinary market conditions. The facility can optimize the product mix according to swings in demand and pricing for its various products. In the 12 month period ended September 30, 2006, the facility produced approximately 0.9 million tons of these products, compared to approximately 1.0 million tons in 12 month period ended September 30, 2005. Some products were sold as produced, and others were consumed in the production of upgraded nitrogen products. Final products shipped from the facility during the 12 month period ended September 30, 2006 totaled approximately 415,000 tons of ammonia and upgraded nitrogen products, compared to approximately 439,000 tons in the 12 month period ended September 30, 2005. Carbon dioxide shipments totaled approximately 111,000 tons and 94,000 tons in the 12 month periods ended September 30, 2006 and 2005, respectively.

The following table sets forth the East Dubuque facility’s current rated production capacity 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 toward anhydrous ammonia and UAN, which typically make up over 80% of total revenues. Products sold include anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea. All of its products are sold through the Distribution Agreement with Agrium with the exception of carbon dioxide which is sold to industrial customers, generally on a contract basis. Although anhydrous ammonia and UAN are often interchangeable, each has its own characteristics, and customer product preferences vary according to the crop planted, soil and weather conditions, regional

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

Anhydrous Ammonia. REMC produces anhydrous ammonia (often referred to simply as “ammonia”), the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers. Ammonia is produced by reacting natural gas with steam and air at high temperatures and pressures in the presence of catalysts. The ammonia processing unit has a current rated capacity of 830 tons per day. Ammonia product storage consists of two 20,000 ton tanks. Ammonia is used in the production of all other products produced by the facility, except for carbon dioxide.

Ammonia contains 82% nitrogen by weight and is generally 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 fertilizer products and must be applied in the fall during cool weather after harvest, in the spring just before planting or as side dress after the plant emerges. When used as a fertilizer, ammonia must be injected into the soil by specialized equipment, and soil conditions can limit its application.

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

As a liquid, UAN has many advantages over solid fertilizers and ammonia. UAN may be applied more uniformly than non-liquid products and may be mixed with various crop protection products or other nutrients, permitting the farmer to apply several materials simultaneously, thus reducing energy and labor costs. In addition, UAN, unlike ammonia, may be applied from ordinary tanks and trucks and can be applied to the soil either through spraying, injecting or through irrigation systems throughout the growing season. Moreover, due to its stable nature, UAN can be a preferred fertilizer choice for crops requiring soil surface applications (such as no-till row crops).

Urea. Urea product is produced through the reaction of ammonia with carbon dioxide at high pressure and temperatures creating a molten product called Urea solution at a concentration of approximately 70%. Urea solution can be further processed through the urea granulation plant to create dry granular urea (46% nitrogen concentration) for sale to trade, used for the production of UAN or sold directly to trade customers in its state as a urea solution. The facility has a 12,000 ton capacity bulk warehouse which may be used for dry bulk granular urea storage.

Nitric Acid. REMC produces nitric acid through two separate nitric acid plants. Nitric acid is produced through the catalytic combustion of ammonia vapor in air over a platinum-rhodium (precious metals) catalyst gauze and absorption of the nitric oxide in weak acid. Nitric acid is either sold to third parties or used within the facility for the production of ammonium nitrate solution, as an intermediate from which UAN is produced. Limited storage capacity is currently available at the facility, 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 the manufacture of ammonia (approximately 1.1 tons of CO2 per ton of ammonia). Most plants vent the gas from their ammonia production to the atmosphere. The East Dubuque facility has developed a market for the CO2 through conversion to a purified food grade liquid carbon dioxide. The CO2 is purified, compressed and chilled to condensing conditions. It is stored as a saturated liquid for later sale to various industrial customers. The facility is a certified producer of food grade liquid CO2 for the soft drink industry. The

facility has storage 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 storage capacity is adequate.

Marketing and Distribution

REMC sells approximately 99% of its final products, with the exception of CO2, to Agrium pursuant to the Distribution Agreement. Agrium sells the products to either wholesale or retail agricultural customers or in the case of industrial nitrogen products, primarily nitric acid, 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 the planting, growing and harvesting cycles. Inventories must be accumulated to allow for uninterrupted customer deliveries, and require significant storage capacity. The accumulation of inventory to be available for seasonal sales is financed though use of REMC’s revolving credit facility and by customer prepayments. This seasonality generally results in higher fertilizer prices during peak periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the fall as depleted inventories are restored. Another seasonal factor affecting REMC is the ability to transport product via barges on the Mississippi River. During the winter, the Mississippi River is closed due to river blockage from ice formations. The river closure affects how REMC can transport its products and can impact profitability due to differences in transportation costs.

Nitrogen fertilizer price levels are influenced by world supply and demand for ammonia and nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Shorter-term demand is affected by world economic conditions and international trade decisions. Supply is affected by increasing worldwide capacity and the availability of nitrogen product imports from major producing regions such as the former Soviet Union, the Middle East, South America and Trinidad. During the period 2002-2003, favorable nitrogen prices in the industry spurred capacity additions in the form of new and expanded production facilities. These production changes and escalation of natural gas prices in 2005 negatively impacted profitability of nitrogen manufacturing and resulted in some curtailments or shutdowns of North American nitrogen manufacturing capacity. Many of these shutdowns are expected to be permanent. Natural gas prices in 2006 have trended down from the record highs prices in 2005.

Raw Materials

The principal raw material used to produce manufactured nitrogen products is natural gas. REMC has historically purchased natural gas for use in the facility in the spot market, through the use of forward purchase contracts, or a combination of both. Forward purchase contracts have historically been used to lock in pricing for a portion of the facility’s natural gas requirements. These forward purchase contracts are generally either fixed-price or index-priced, short term in nature and for a fixed supply quantity. REMC is able to purchase natural gas at competitive prices due to its connection to the Northern Illinois Gas Company, or NICOR, distribution system and its proximity to the Northern Natural Gas pipeline. Natural gas purchases used in production were approximately 9.9 billion cubic feet and 9.3 billion cubic feet in the 12 month periods ended 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, including the increasing overall demand for natural gas from industrial users, which is affected, in part, by the general conditions of the United States economy, and other factors. In 2006 natural gas prices have decreased from the record highs of 2005. Seasonal fluctuations exist within each year resulting from various supply and demand factors, such as the severity of winters affecting consumers’ consumption for

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

Transportation

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

Environmental Matters

Rentech’s and REMC’s facilities and operations must comply with a variety of United States federal, state and local environmental laws, regulations and ordinances, including those governing and imposing liability for the discharge of pollutants into the air and water, the management and on-site and off-site disposal of chemicals, byproducts, including wastewater and spent catalyst, and hazardous wastes, worker health and safety, the investigation and cleanup of contamination at currently and formerly owned or operated sites, as well as third party sites that may have been impacted by Rentech’s or REMC’s operations, and for natural resource damages related to any releases of hazardous substances. For example, under CERCLA, we could be held strictly, jointly and severally liable for the removal and remediation of any hazardous substance contamination at our currently or formerly owned or operated facilities, at off-site properties (where migration of contamination from our facilities occurred) and at third party waste disposal sites at which our wastes were disposed. Because of Rentech’s and REMC’s operations, the history of industrial or commercial uses at Rentech’s and REMC’s currently and formerly owned and operated facilities, and the use, production, disposal and possible release of hazardous substances and wastes at or from those facilities, we may be subject to liability under environmental laws. We could also be subject to liability for personal injury based on human exposure to or natural resource damages from hazardous substances or wastes released or disposed of at or from Rentech’s or REMC’s currently or formerly owned or operated facilities.

In addition, some of Rentech’s and REMC’s operations require environmental permits and controls to prevent or limit pollution to the environment. We could incur substantial costs, including cleanup costs, civil or criminal fines, penalties or sanctions and third party claims for property damage or personal injury as a result of violations of or liabilities under environmental laws and regulations or non-compliance with environmental permits. The East Dubuque facility has experienced some level of regulatory scrutiny 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 as changes in existing laws and regulations or their interpretation, the discovery of previously unknown environmental conditions or contamination or the imposition of new cleanup requirements, may give rise to additional compliance costs or liabilities that could have a material adverse effect on our business, financial condition or results of operations. Compliance with more stringent laws or regulations, as well as stricter or different interpretations of existing laws, may require additional expenditures by us that could be material.

Competition

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

Intellectual Property and Patents

We own 21 issued United States utility patents pertaining to the Rentech Process, which includes our Fischer-Tropsch processes, applications of our processes and the products produced, and the materials used in the Rentech Process. We also have four issued foreign patents. Our patents claim the overall Rentech conversion process; a method for cracking produced waxes; a method of making and activating a promoted iron FT catalyst for use in slurry synthesis reactors; production of a synthetic oxygenated diesel fuel; use of our oxygenated diesel fuel as an additive to conventional diesel fuel; control of the tail gas from our process to maximize either the production of electricity from our tail gas, FT products or a near-pure form of carbon dioxide; and integration of the Rentech Process with nitrogen fertilizer facilities to enable them to co-produce nitrogen fertilizers, FT fuels, and electricity.

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

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

The term of a utility patent is generally twenty years from the date of filing an application with the United States Patent and Trademark Office. If priority of an earlier application or applications is claimed, the term can end twenty years from the filing date of the earliest of such earlier applications. Patents that are in force on or that will issue on an application that is filed before June 8, 1995 have a term that is the greater of the “twenty year term” noted above or seventeen years from the patent grant. Our first patent matured from an application that was filed in 1992 and expires seventeen years from grant. Our most recent application was filed in 2006.

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

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

Regulation

The ownership and operation of nitrogen fertilizer and alternative 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 of pollutants into the air and water, the management and on-site and off-site disposal of chemicals, byproducts, including waste water and spent catalyst, and hazardous wastes, worker health and safety, the investigation and cleanup of contamination at currently and formerly owned or operated sites, as well as third party sites that may have been impacted by Rentech’s or RCN’s operations, and for natural resource damages related to any releases of hazardous substances. For example, under CERCLA, we could be held strictly, jointly and severally liable for the removal and remediation of any hazardous substance contamination at our currently or formerly owned or operated facilities, at off-site properties (where migration of contamination from our facilities occurred) and at third party waste disposal sites at which our wastes were disposed. Because of Rentech’s and RCN’s operations, the history of industrial or commercial uses at Rentech’s and RCN’s currently and formerly owned and operated facilities, and the use, production, disposal and possible release of hazardous substances and wastes at or from those facilities, we may be subject to liability under environmental laws. We could also be subject to liability for personal injury based on human exposure to or natural resource damages from hazardous substances or wastes released or disposed of at or from Rentech’s or RCN’s currently or formerly owned or operated facilities.

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

Although we do not believe that compliance with environmental and health and safety laws and regulations and applicable environmental permit requirements in connection with our current operations or the operation of RCN’s East Dubuque facility will have a material adverse effect on us, we cannot predict with certainty the future costs of complying with environmental laws, regulations and permit requirements or the costs that may be associated with investigation, remediating contamination or monitoring. RCN’s East Dubuque facility has experienced some level of regulatory scrutiny 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. In the future, we could incur material liabilities or costs related to environmental matters, and these environmental liabilities or costs (including fines or other sanctions) could have a material adverse effect on our business, operating results and financial condition.

In addition, the engineering design and technical services we provide to our licensees are subject to governmental licensing requirements, which require that such services comply with certain professional standards and other requirements. We believe we have all required licenses to conduct our operations and are in substantial compliance with applicable regulatory requirements. However, the loss or revocation of any license or the limitation on any services thereunder could prevent us from conducting such services and could subject us to substantial fines. In addition, changes in these requirements could adversely affect us.

Petroleum Mud Logging, LLC Divestiture

In June 1999, we entered into the business of providing well logging services to the oil and gas industry through our purchase of the assets of two established and related companies that have been providing services in these fields since 1964. We continued these businesses through our wholly-owned subsidiary,

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

Employees and Labor Relations

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

Available Information

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

ITEM 1A—RISK FACTORS

Set forth below are certain risk factors related to the Company’s business. The risk factors described below may not include all of the risk factors that could affect future results. Actual results could differ materially from those anticipated as a result of these and various other factors, and those set forth in the Company’s other periodic and current reports filed with the Commission from time to time.

Risks Related to Our Liquidity, Financial Condition, and Results of Operations

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

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

We have never operated at a profit. If we do not achieve significant amounts of additional revenues and become profitable, we may be unable to continue our operations.

We have a history of operating 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 the fiscal year ended September 30, 2006, we had a net loss of $38,647,682. If we do not achieve significant amounts of additional revenues and operate at a profit in the future, we may be unable to continue our operations at their current level. Ultimately, our ability to remain in business will depend upon earning a profit from commercialization of the Rentech Process. We have not been 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 financial position, results of operations and prospects.

REMC’s operations have not been profitable and require substantial working capital financing.

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

We do not expect our historical operating results to be indicative of future performance.

Historically, our business focused on the development and licensing of our technology, the business of our former wholly-owned subsidiary, Petroleum Mud Logging, LLC, which provided well logging services to the oil and gas industry, and other operations which have been discontinued. In the future, we expect to continue to operate and convert the East Dubuque Plant and develop additional FT fuels production facilities using the Rentech Process. We expect to finance a substantial part of the cost of these projects with indebtedness and the sale of equity securities. Accordingly, our operating expenses, interest expense, and depreciation and amortization are all expected to increase materially if we continue to develop such projects and affect such financings. As a result, we do not expect that historical operating results will be indicative of future performance.

We most likely will have to record higher compensation expense as a result of the implementation of SFAS 123(R).

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee and director services received in exchange for an award of equity instruments based on the grant-date fair value of the award. We adopted SFAS No. 123(R) on October 1, 2005, using the modified prospective method for the adoption of its provisions, which results in the recognition of compensation expense for all share-based awards granted after the effective date and the recognition of compensation expense for all previously granted share-based awards that remain unvested at the effective date. However, because we previously accounted for share-based payments to employees and directors using the intrinsic value method, our results of operations have not included the recognition of compensation expense for the issuance of stock option awards. As a result

of adopting SFAS 123(R), we recognized $8,899,841 of compensation expense for the fiscal year ended September 30, 2006. We believe that compensation expense recorded in periods after the implementation of SFAS No. 123(R) may be significantly higher than the amounts that would have been recorded in years prior to its adoption.

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

We have documented and tested our internal control over financial reporting procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires management assessment of the effectiveness of our internal control over financial reporting and an audit and report of such internal control over financial reporting by our independent auditors addressing these assessments. This assessment may be complicated by any changes to our business operations and as such standards are modified, supplemented or amended from time to time. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We continue to dedicate resources and management time to ensuring that we have effective internal control over financial reporting. However, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the market’s perception of our business and our ability to raise capital.

We need to incur significant costs and other resources to modify REMC’s financial reporting systems 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 effectiveness of internal control over financial reporting for up to one year from the date of closing of an acquisition. However, REMC’s current financial reporting systems are insufficient to meet our specific future needs and need to be replaced as soon as practicable. In addition, following the completion of the update, we intend to integrate REMC’s financial reporting systems into our financial reporting systems. Until the integration has been completed, the operation of the two separate financial reporting systems could result in additional costs and difficulties that would not exist if one system were in place. In addition, while we have based our estimates of the costs and time it will take to complete the update and integration of such systems on our best estimates to date, we could encounter difficulties in the replacement or integration processes and incur significant costs and expend important resources in excess of our estimates.

Risks Related to the Rentech Process

We and our licensees may be unable to successfully implement use of the Rentech Process at commercial scale Fischer-Tropsch plants, including the East Dubuque Plant.

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

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

· shorter than anticipated catalyst life, which would require more frequent catalyst regeneration, catalyst purchases, or both;

· insufficient catalyst separation from the crude wax product stream could impair the operation of the product upgrading unit;

· product upgrading catalyst sensitivities to impurities in the crude FT products, which would impair the efficiency and economics of the product upgrade unit and require design revisions; and

· higher than anticipated capital and operating costs to design, construct or reconfigure and operate a Fischer-Tropsch plant.

If any of the foregoing were to occur, our capital and operating costs would increase. In addition, our plants or those of our licensees could experience mechanical difficulties, either related or unrelated to elements of the Rentech Process. Our failure to construct and operate a commercial scale, Fischer-Tropsch plant based on the Rentech Process could, and any such failure at the East Dubuque Plant would, materially and adversely affect our business, results of operation, financial condition and prospects.

Our receipt of revenues 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 Rentech Process, and have one active licensee at this time - the Master License Agreement we entered into with DKRW-Advanced Fuels LLC and Site License Agreement with its wholly-owned subsidiary, Medicine Bow Fuels & Power, LLC, in January 2006. Under the license agreements, a licensee would be responsible for, among other things, obtaining governmental approvals and permits and sufficient financing for the large capital expenditures required. The ability of any licensee to accomplish these requirements, and the efforts, resources and timing schedules to be applied by a licensee, will be controlled by the licensee. Whether licensees are willing to expend the resources necessary to construct Fischer-Tropsch plant(s) using the Rentech 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 may generally be terminated by the licensee with cause. Furthermore, our potential licensees may not be restricted from pursuing alternative Fischer-Tropsch technologies on their own or in collaboration with others, including our competitors, for projects other than the ones we might license in the future.

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

Plants that would use the Rentech Process rely upon complex gas process systems. This creates risks of fire and explosions, which could cause severe damage and injuries, create liabilities for us, and materially and adversely affect our business.

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

We could have potential indemnification liabilities to licensees relating to the operation of Fischer-Tropsch plants based on the Rentech Process and to intellectual property disputes.

We anticipate that our license agreements will require us to indemnify the licensee against specified losses relating to, among other things:

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

· acts or omissions by us in connection with our preparation of preliminary and final design packages for the licensee’s plant and approval of the licensee’s construction plans.

Our indemnification obligations could result in substantial expenses and liabilities to us if intellectual property rights claims were to be made against us or our licensees, or if Fischer-Tropsch plants based on the Rentech Process were to fail to operate according to the preliminary plans.

Industry rejection of our Fischer-Tropsch technology would adversely affect our ability to receive future license fees.

As is typical in the case of new and/or rapidly evolving technologies, demand and industry acceptance of the Rentech Process is highly uncertain. Historically, most applications of FT processes have not produced fuels that were economical compared to the price of conventional fuel sources. Failure by the industry to accept the Rentech Process, whether due to unsuccessful use, results that are not economical, the novelty of our technology, the lower price of alternatively sourced fuels, or for other reasons, or if acceptance develops more slowly than expected, would materially and adversely affect our business, operating results, financial condition and prospects.

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

If our competitors introduce new technology, new legislation or regulations are adopted, or new industry standards emerge, our technologies and products could become obsolete and unmarketable.

The markets for our services and products are characterized by rapidly changing competition, new legislation and regulations, and evolving industry standards. If we do not anticipate these changes and successfully develop and introduce improvements on a timely basis, our products and services could become obsolete and unmarketable, which would have a material adverse effect on our business, financial condition, results of operations and prospects.

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

We expect mechanical completion of our PDU by the third calendar quarter of 2007 at a construction cost of approximately $40 million. Our success in designing, constructing, developing and operating a PDU on a timely basis is essential to our successful deployment of the Rentech FT technology as well as fulfilling our contractual obligations to DKRW Advanced Fuels LLC. Under our agreement with DKRW-AF, we are required to satisfy certain testing procedures for the licensed technology at the PDU. We must also obtain governmental approvals and permits as well as procure equipment and materials on a timely basis for the PDU and a delay or failure in securing such governmental approvals, equipment and/or materials may cause significant harm to the Company. A variety of results necessary for successful operation of our

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

Our success depends on the performance of our management team, project development team and technology group. The loss of key individuals within these groups would disrupt our business operations.

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

Our success depends in part on our ability to protect our intellectual property rights, which involves complexities and uncertainties.

We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual restrictions to protect our proprietary rights. Our business and prospects depend largely upon our ability to maintain control of rights to exploit our intellectual property. Our published and issued patents both foreign and domestic provide us certain exclusive rights (subject to licenses we have granted to others) to exploit our Fischer-Tropsch process. Our existing patents might be infringed upon, invalidated or circumvented by others. The availability of patents in foreign markets, and the nature of any protection against competition that may be afforded by those patents, is often difficult to predict and varies significantly from country to country. We, or our licensees, may choose not to seek, or may be unable to obtain, patent protection in a country that could potentially be an important market for our Fischer-Tropsch technology. The confidentiality agreements that are designed to protect our trade secrets could be breached, and we might not have adequate remedies for the breach. Additionally, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others.

We may not become aware of patents or rights of others that may have applicability in our Fischer-Tropsch technology until after we have made a substantial investment in the development and commercialization of our technologies. Third parties may claim that we have infringed upon past, present or future Fischer-Tropsch technologies. Legal actions could be brought against us, our co-venturers or our licensees claiming damages and seeking an injunction that would prevent us, our co-venturers or our licensees from testing, marketing or commercializing the affected technologies. If an infringement action were successful, in addition to potential liability for damages by our joint venturers or our licensees, we could be subject to an injunction or required to obtain a license from a third party in order to continue to test, market or commercialize our affected technologies. Any required license might not be made available or, if available, might not be available on acceptable terms, and we could be prevented entirely from testing, marketing or commercializing the affected technology. We may have to expend substantial resources in litigation, in enforcing our patents or defending against the infringement claims of others, or both. If we are unable to successfully maintain our technology, including the Rentech Process, against claims by others, our competitive position would be harmed and our revenues could be substantially reduced, and our business, operating results and financial condition could be materially and adversely affected.

The Rentech Process may not compete successfully against Fischer-Tropsch technology developed by our competitors, many of whom have significantly more resources.

The development of Fischer-Tropsch technology for the production of liquid hydrocarbon products like ours is highly competitive. The Rentech Process is based on Fischer-Tropsch processes that have been known for almost 80 years and used in synthetic fuel projects for almost 50 years. Several major integrated oil companies, as well as several smaller companies, have developed or are developing competing technologies that they may offer to license to our potential customers or use as the basis for a competing development project. Each of these companies, especially the major oil companies, have significantly more financial and other resources than we do to spend on developing, promoting, marketing and using their Fischer-Tropsch technology. The United States Department of Energy has also sponsored a number of research programs in Fischer-Tropsch technology. Advances by others in their Fischer-Tropsch technology might lower the cost of processes that compete with the Rentech Process. As our competitors continue to develop Fischer-Tropsch technologies, some part or all of our current technology could become obsolete. Our ability to create and maintain technological advantages is critical to our future success. As new technologies develop, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. We may not be able to successfully develop or expend the financial resources necessary to acquire new technology.

Our processes (including the Rentech Process) incorporate technologies and processes developed by third parties the failure of which could harm our prospects for success.

We incorporate processes and technologies developed by third parties into the processes used in our business, including the Rentech Process. Although we believe the incorporated processes and technologies are reliable, in some cases we have limited or no control over ensuring that such processes and technologies will perform as expected. If one or more of them were to fail, the failure could cause our processes to fall short of providing the results that we or our licensees desire, which would have a material adverse effect on our business, financial condition, results of operations and prospects.

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

We expect that the use of our Rentech Process may occur in foreign countries. The additional risks of foreign operations include rapid changes in political and economic climates; changes in foreign and domestic taxation; lack of stable systems of law in some countries; susceptibility to loss of protection of patent rights and other intellectual property rights; expatriation laws adversely affecting removal of funds; 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 by laws and policies of the United States affecting foreign trade, investment and taxation. If any one or more of these events occurs, our revenues from overseas customers could be severely reduced or ended.

Risks Related to Possible Inability to Complete Project Developments and the Financing Required for Construction and Subsequent Operation

We are pursing alternative fuels projects, including one at Natchez, Mississippi, that will involve substantial expense and risk.

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

significant risks, and our failure to successfully develop these projects, or failure to operate them successfully after we have developed them, could have a material adverse effect on our financial position and results of operations.

The conversion of the East Dubuque Plant and the development of other alternative fuel projects will require several years and very substantial further financing, and may not be successful.

The engineering, design, procurement of materials, and construction necessary to convert the East Dubuque Plant to use coal as a feedstock and to include the Rentech Process is estimated to take several years and to require approximately $810 million of additional debt and equity financing. We cannot make assurances that we will be able to obtain this financing at all, or in the time required, and our failure to do so would prevent us from implementing our business plan as expected. Further, acquisition and development of other alternative fuels projects could involve comparable or greater time commitments of capital, time and other resources. Moreover, we have never undertaken any such projects, and the duration, cost, and eventual success of our efforts are all uncertain.

If we do not receive funds from additional financing or other sources of working capital for our business activities and future transactions, we will not be able to execute our business plan.

We need additional financing to maintain our operations, and substantially increased financing, revenues and cash flow to accomplish our goal of developing, converting or building process plants. We will continue to expend substantial funds to research and develop our technologies, to market licenses of the Rentech Process, and to convert or develop process plants. We intend to finance the conversion and development of plants primarily through non-recourse debt financing at the project level. Additionally, we might obtain additional funds through joint ventures or other collaborative arrangements, and through debt and equity financing in the capital markets.

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

The level of indebtedness we expect to incur could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.

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

Our substantial debt could have important consequences, including:

· increasing our vulnerability to general economic and industry conditions;

· requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

· limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

· limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Failure to pay our indebtedness on time would constitute an event of default under the agreements governing our indebtedness, which would give rise to our lenders’ ability to accelerate the obligations and seek other remedies against us.

The Revolving Credit Facility includes restrictive covenants 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. The Revolving Credit Facility is secured by a lien on substantially all of REMC’s current assets, and imposes various restrictions and covenants on us, which could limit our ability to respond to changing business conditions that may affect our financial condition. In addition, our failure to comply with the restrictions and covenants would result in an event of default giving rise to the revolving facility lender’s right to accelerate our obligations under the revolving facility.

The Revolving Credit Facility 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 of management or similar fees to affiliates, a minimum fixed charge coverage ratio and a minimum tangible net worth covenant.

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

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

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

Risks Related to Our Operations of Plants

Miscalculations in our assessment of operating the East Dubuque Plant may lead to us not having adequately evaluated the operating results and risks associated with the plant and could have a material adverse effect on our business, results of operations and financial condition.

Prior to our acquisition of RCN, we had never owned, converted, or operated a fertilizer plant. The success of our operation of the plant requires us to successfully manage risks relating to:

· unanticipated costs for the natural gas initially used and the subsequent coal feedstock at economical prices;

· problems integrating the purchased operations, personnel or technologies;

· delayed or defective engineering plans for the conversion of the facility to use coal as a feedstock and the Rentech Process;

· cost overruns or delays in construction;

· diversion of resources and management attention from our other efforts;

· entry into markets in which we have limited or no experience;

· potential environmental liabilities, including hazardous waste contamination;

· potential governmental limitations on application of nitrogen fertilizers;

· potential labor disputes resulting from REMC’s labor contracts;

· potential work stoppages and other labor relations matters; and

· potential loss of key employees.

The results of our assessments of operating the plant are necessarily inexact and their accuracy is inherently uncertain. These assessments may not have revealed all existing or potential problems, nor have they necessarily permitted us to become sufficiently familiar with the plant to fully assess its merits and deficiencies. The acquisition of the plant poses numerous additional risks to our operations and financial results, including incurring substantial liabilities and lower revenues than we expected. These risks include:

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

· problems integrating the purchased operations, personnel or technologies;

· delayed or defective engineering plans for the conversion of the facility to use coal as a feedstock and the Rentech Process;

· cost overruns or delays in construction;

· diversion of resources and management attention from our other efforts;

· entry into markets in which we have limited or no experience;

· potential governmental limitations on application of nitrogen fertilizers; and

· potential loss of key employees, particularly those of the acquired organization.

Construction of Fischer-Tropsch plants incorporating the Rentech Process, including conversion of the East Dubuque Plant to use coal and our Rentech Process, will be subject to risks of delay and cost overruns.

The construction of Fischer-Tropsch plants incorporating the Rentech Process, and our conversion of an existing plant to use coal and our Rentech Process, will be subject to risks of delay or cost overruns resulting from numerous factors, including the following:

· inability to obtain sufficient financing;

· inability to obtain timely issuance of additional permits, licenses and approvals by governmental agencies and third parties;

· inadequate engineering plans or delays, including those relating to the commissioning of newly designed equipment;

· inability to obtain the coal gasification and product upgrading systems for the plant on a timely basis from third parties;

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

· shortages of equipment, materials or skilled labor;

· labor disputes;

· environmental conditions and requirements;

· unforeseen events, such as explosions, fires and product spills;

· increased costs or delays in manufacturing and delivering critical equipment;

· resistance in the local community; and

· unfavorable local and general economic conditions.

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

The market for natural gas has been volatile. If prices for natural gas increase significantly, we may not be able to economically operate the East Dubuque Plant during the conversion phase while we continue to use natural gas as the feedstock. 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 to operate the East Dubuque Plant with natural gas as the feedstock until we complete the conversion of the plant to use coal to produce the required synthesis gas. That will expose us to market risk due to increases in natural gas prices. There has been a generally increasing trend in natural gas prices during the last three years with prices reaching record highs in 2005 and then reducing in 2006 due to various supply and demand factors, including the increasing overall demand for natural gas from industrial users, which is affected, in part, by the general conditions of the United States economy, and other factors. The profitability of operating the facility is significantly dependant on the cost of natural gas as feedstock and the facility has operated in the past, and may operate in the future, at a net loss. Since we expect to purchase natural gas for use in the plant on the spot market we remain susceptible to fluctuations in the price of natural gas. We expect to also use short-term, fixed supply, fixed price forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These may not protect us from increases in the cost of our feedstock. A hypothetical increase of $0.10 per MMBTU of natural gas could

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

Lower prices for nitrogen fertilizers or downturns in market demands could reduce the revenues and profitability of the East Dubuque Plant’s nitrogen fertilizer business.

Nitrogen fertilizer is a global commodity that experiences often unpredictable fluctuations in demand and an increasing supply on the world-wide market. In the recent past, nitrogen fertilizer prices have been volatile, often experiencing price changes from one growing season to the next. A downturn in nitrogen prices could have a depressing effect on the prices of most of the fertilizer products that we sell, and might materially and adversely affect our ability to economically operate the East Dubuque Plant.

Weather conditions may materially impact the demand for REMC products.

Weather conditions can have a significant impact on the farming economy and, consequently, on demand for 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 even the cancellation of, planting, reducing the demand for fertilizer. Adverse weather conditions can also impact the financial position of the farmers who will buy our nitrogen fertilizer products. This, in turn, may adversely affect the ability of those farmers to meet their obligations in a timely manner, or at 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 highly seasonal.

Sales of nitrogen fertilizer products from the East Dubuque Plant are seasonal, based upon the planting, growing and harvesting cycles. Most of the East Dubuque Plant’s annual sales have occurred between March and July of each year due to the condensed nature of the planting season. Since interim period operating results reflect the seasonal nature of our business, they are not indicative of results expected for the full fiscal year. In addition, quarterly results can vary significantly from one year to the next due primarily to weather-related shifts in planting schedules and purchase patterns. We expect to incur substantial expenditures for fixed costs for the East Dubuque Plant throughout the year and substantial expenditures for inventory in advance of the spring planting season. Seasonality also relates to the limited windows of opportunity that nitrogen fertilizer customers have to complete required tasks at each stage of crop cultivation. Should events such as adverse weather or transportation interruptions occur during these seasonal windows, we would face the possibility of reduced revenue without the opportunity to recover until the following season. In addition, because of the seasonality of agriculture, we expect to face the risk of significant inventory carrying costs should our customers’ activities be curtailed during their normal seasons. The seasonality can negatively impact accounts receivable collections and bad debt.

The operations of the East Dubuque Plant are subject to risks and hazards that may result in monetary losses and liabilities.

The East Dubuque Plant’s business is generally subject to a number of risks and hazards, changes in the regulatory environment, explosions and fires. We are not currently insured for certain of these risks and insurance may not be available to us at reasonable rates in the future. Any significant interruption in our operations could adversely affect us.

A reduction in government incentives for FT fuels, or the relaxation of clean air requirements, could materially reduce the demand for FT fuels or the Rentech Process.

Federal law provides incentives for FT fuels, and technologies that produce the FT fuels, such as the Rentech Process. For instance, the Energy Policy Act of 2005, or EPACT 2005, provides for tax credits, grants, loan guarantees and other incentives to stimulate coal gasification to Fischer-Tropsch fuels and chemicals. The Highway Reauthorization 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 the incentives under EPACT 2005 and that FT fuels produced with the Rentech Process would qualify for the Highway Act’s tax credit. In addition, certain federal regulations that restrict air pollution provide an incentive for the use of FT fuels because they comply with the regulations in cases where conventional fuels might not. Changes in federal law or policy could result in a reduction or elimination in the incentives that apply to us or our ability to take advantage of them, or a relaxation of the requirements with respect to airpollutants created by conventional fuels. As a result, the reduction or elimination of government incentives or the relaxation of air pollution requirements could have a material adverse effect on our financial condition, results of operations and prospects.

Changes in existing laws and regulations, or their interpretation, or the imposition of new restrictions relating to emissions of carbon dioxide may give rise to additional compliance costs or liabilities and could materially reduce the demand for FT fuels or the Rentech Process which could, in turn, have a material adverse effect on our business, financial condition or results of operations.

The application of the Rentech Process in CTL projects relies on coal gasification technology to create the syngas that is used to produce FT fuels and other hydrocarbon products. Coal gasification breaks down coal into its components by subjecting it to high temperature and pressure, using steam and measured amounts of oxygen, which leads to the production gaseous compounds, including carbon dioxide. Although the United States does not currently maintain comprehensive regulation of carbon dioxide emissions, various legislative and regulatory measures to address green house gas emissions (such as carbon dioxide) are currently in various phases of discussion or implementation. These include the Kyoto Protocol as well as proposed federal legislation and state actions to develop statewide or regional programs, each of which have imposed or would impose reductions in green house gas emissions. Although the United States has not ratified the emissions standards called for under the Kyoto Protocol, or adopted other comprehensive regulations for green has gas emissions, the Kyoto Protocol’s specific emission targets for the United States would require the reduction of green house gas emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Future restrictions on green house gas emissions could result in increased costs or liabilities associated with complying with such restrictions, or materially reduce the demand for FT fuels and the Rentech Process which, in turn, could have a material adverse effect on our business, financial condition or results of operations.

Changes in United States government regulations and agricultural policy that affect the demand for products made at the East Dubuque Plant could materially and adversely affect its operations.

Because the application of fertilizer has been identified as a significant source of ground water pollution and can also result in the emissions of nitrogen compounds and particulate matter into the air, regulations may lead to decreases in the quantity of fertilizer applied to crops. Further, United States governmental policies may directly or indirectly influence factors affecting the East Dubuque Plant’s business, such as the number of acres planted, the mix of crops planted, crop prices, the level of grain inventories and the amounts of and locations where fertilizer may be applied. Changes in government programs that provide financial support to farmers could affect demand for the facility’s products. The market for our products could also be affected by challenges brought under the United States Federal

Endangered Species Act and changes in regulatory policies affecting biotechnologically developed seed. We cannot predict the future government policy and regulatory framework affecting our business.

We could be subject to claims and liabilities under environmental, health and safety laws and regulations arising from the production and distribution of nitrogen fertilizers and alternative fuel products at our facilities.

The production and distribution of nitrogen fertilizers at the East Dubuque Plant, and alternative fuel products at that and any other alternative fuel facilities we may operate in the future, are subject to compliance with United States federal, state and local environmental, health and safety laws and regulations. These regulations govern operations and use, storage, handling, discharge and disposal of a variety of substances. For instance, under CERCLA, we could be held jointly and severally responsible for the removal and remediation of any hazardous substance contamination at our facilities, at neighboring properties (where migration from our facilities occurred) and at third party waste disposal sites. We could also be held liable for any consequences arising out of human exposure to these substances or other environmental damage. We may incur substantial costs to comply with these environmental, health and safety law requirements. We may also incur substantial costs for liabilities arising from past releases of, or exposure to, hazardous substances. In addition, we may discover currently unknown environmental problems or conditions. The discovery of currently unknown environmental problems or conditions, changes in environmental, health and safety laws and regulations or other unanticipated events could give rise to claims that may involve material expenditures or liabilities for us.

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

Nitrogen-based agricultural materials such as ammonia, ammonium nitrate and urea have the potential for misuse by domestic or international terrorists, and the facilities where these materials are produced or stored and the transportation network through which they are distributed could be targeted. In addition, various crop protection products are hazardous and could be used in terrorist acts such as water supply contamination. The East Dubuque plant could be targeted or materials distributed by it misused. Should such events occur, our business could be adversely affected and the limits of our insurance policies could be exceeded such that our ability to meet our financial obligations would be impaired. Further, instability in oil producing regions of the world could have the effect of driving up energy prices which could, in turn, affect natural gas prices and the economics of nitrogen-based fertilizers. Mechanized farming as currently practiced by our customers is energy intensive and sharp increases in fuel prices could limit their funds available for other inputs and thus adversely affect the demand for the products that we sell.

The nitrogen fertilizer industry is very competitive and the actions of our competitors could materially affect the results of operations and financial position of the Company.

REMC operates in a highly competitive industry, particularly with respect to price. Its’ principal competitors in the distribution of crop production inputs include agricultural co-operatives (which have the largest market share in many of the locations that it serves), national fertilizer producers, major grain companies and independent distributors and brokers. Some of these competitors have greater financial, marketing and research and development resources than we do, or better name recognition, and can better withstand adverse economic or market conditions. In addition, as a result of increased pricing pressures caused by competition, REMC may in the future experience reductions in the profit margins on sales, or may be unable to pass future material price increases on to customers.

We need to rely on Royster-Clark as exclusive distributor of the nitrogen fertilizer products we would produce at the East Dubuque Plant.

We have a limited sales force for the distribution of the nitrogen fertilizer products that are produced at the East Dubuque Plant. As a result, we need to rely on Royster-Clark as exclusive distributor of such products, pursuant to the Distribution Agreement executed on April 26, 2006. However, to the extent Royster-Clark and we are not able to reach an agreement with respect to the purchase and sale of products, we cannot assure that we would be able to find other buyers for them. Our inability to sell the nitrogen fertilizer products produced at the East Dubuque Plant could result in significant losses and materially and adversely affect our business.

We may not be able to successfully manage our growing business.

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

Risks Related to the Market for Rentech Common Stock

We have a very substantial overhang of common stock and future sales of our common stock will cause substantial dilution and may negatively affect the market price of our shares.

As of September 30, 2006, there were 141,792,787 shares of our common stock outstanding. As of that date, we also had an aggregate of 31,801,700 shares of common stock that may be issued upon exercise or conversion of outstanding convertible notes, restricted stock units, options and warrants. In April 2006, we issued an aggregate of 18,400,000 shares of our common stock and $57,500,000 in convertible senior notes, which are initially convertible into up to 14,332,003 shares of our common stock upon the satisfaction of certain conditions. In addition, we have two shelf registration statements; the first covering $29,940,000 aggregate offering price of securities (up to all of which could be issued as shares of common stock) and the second covering $44,097,200 in shares of our common stock for issuance in future financing transactions, in each case as of September 30, 2006. At our annual meeting of shareholders on April 13, 2006, our shareholders authorized the Company to issue up to 40,000,000 shares of our common stock (or securities convertible into or exercisable or exchangeable common stock) for up to 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 of common stock and common stock equivalents in material amounts will be necessary to finance the progress of our business plan and facilitate our licensing business. Certain holders of our securities have, and certain future holders are expected to be granted, rights to participate in or to require us to file registration statements with the SEC for resale of common stock.

We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options and warrants or conversion of convertible promissory notes), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.

Protection provisions in our Amended and Restated Articles of Incorporation and our shareholder rights plan may deter a third party from seeking to acquire control of us, which may reduce the market price of our stock.

Our Amended and Restated Articles of Incorporation include provisions that may make it more difficult for a third party to acquire control of the Company. These provisions include grouping of the board of directors into three classes with staggered terms; a requirement that directors may be removed without cause only with the approval of the holders of 662¤3% of the outstanding voting power of our capital stock; and a requirement that the holders of not less than 662¤3% of the voting power of our outstanding capital stock approve certain business combinations of the Company with any holder of more than 10% of the voting power or an affiliate of any such holder unless the transaction is either approved by at least a majority of the uninterested and unaffiliated members of the board of directors or unless certain minimum price and procedural requirements are met. We also have a shareholder rights plan that authorizes issuance to existing shareholders of substantial numbers of preferred share rights or shares of common stock in the event a third party seeks to acquire control of a substantial block of our common stock. These provisions could deter a third party from tendering for the purchase of some or all of our stock and could have the effect of entrenching management and reducing the market price of our common stock.

The market price of Rentech common stock may decline.

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

· the conversion of the East Dubuque Plant or other process plants is not completed in a timely and efficient manner;

· the acquisition and conversion of REMC or construction of other process plants does not yield the expected benefits to our revenues as rapidly or to the extent that may be anticipated by financial or industry analysts, stockholders or other investors;

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

· significant shareholders of Rentech decide to dispose of their shares of common stock because of any of the above or other reasons; or

· any of the other risks referred to in this section materialize.

ITEM 1B. UNRESOLVED STAFF 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 expires in June 2010. Total rent was approximately $102,000 during fiscal 2006. We believe that our existing space is adequate to meet our current needs and to accommodate anticipated growth.

Our other principal leased offices are located in Denver, Colorado, and consist of 7,885 square feet of office space. The lease expires in October 2009 and includes an option to extend for another five-year term. Total rent was approximately $126,000 during fiscal 2006.

Development And Testing Laboratory

We own a development and testing laboratory located in Denver that we use for our Fischer-Tropsch technologies. The facility consists of an 11,000 square foot laboratory located within our 20,000 square foot industrial building. The remainder of the building is rented to a tenant and constitutes potential expansion space for the laboratory. We renovated the building, laboratory and lab equipment in fiscal 1999 to provide a state-of-the-art laboratory and support facilities for FT technologies. We believe that our laboratory is one of the most comprehensive Fischer-Tropsch facilities in the field today.

Sand Creek Site

We own the Sand Creek site located in the Denver metropolitan area. The site consists of 17 acres located in 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 to build and operate on the site what we believe will be the first fully-integrated Fischer-Tropsch coal-to-liquids product development unit research facility in the United States.

Petroleum Mud Logging Properties

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

Rentech Energy Midwest Corporation Properties

Our subsidiary Rentech Energy Midwest Corporation operates an 830 ton per day ammonia fertilizer plant and related improvements on a 320 acre site in East Dubuque, Illinois adjacent to 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 of Royster-Clark Nitrogen, Inc. We changed that entity’s legal name to Rentech Energy Midwest Corporation. This plant’s principal product is liquid ammonia fertilizer but we also manufacture related products including nitric acid, ammonium nitrate and liquid carbon dioxide. All of REMC’s East Dubuque factory properties and equipment are owned; these include land, roads, buildings, several special purpose structures, equipment, storage tanks, and specialized truck, rail and river barge loading facilities. Natural gas is currently the main raw material used in REMC’s manufacturing process. The planned conversion of this plant to replace natural gas with coal as its feedstock is currently in the engineering stage and investment in new processes and related equipment that significantly enlarge the production facility is anticipated to begin within the next 12 months. See Item 1—Business—Acquisition of Royster-Clark Nitrogen, Inc.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, we are party to litigation from time to time. We maintain insurance to cover certain actions and believe that resolution of such litigation will not have a material adverse effect on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The American Stock Exchange under the symbol RTK. The following table sets forth the range of high and low closing prices for the common stock as reported by AMEX. The quotations reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily 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 of our common stock as of October 31, 2006 was 535. Based upon the securities position listings maintained for our common stock by registered clearing agencies, we estimate the number of beneficial owners is not less than 8,500.

We have never paid cash dividends on our common stock. We currently expect that we will retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Company Purchases of Equity Securities

The following table provides information about purchases by the Company during the quarter ended September 30, 2006 of equity securities registered by the Company 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

(1) Includes 30,000 shares of common stock purchased by the Company in connection with the rescission of an option exercise.

ITEM 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data has been derived from the historical consolidated financial statements and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 8, “Financial Statements and Supplementary Data,” and our consolidated financial statements and the notes appearing 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	)

(1) The weighted average number of basic and dilutive shares 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 year ended September 30, 2006.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the information provided here in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we believe that in order to more fully understand our discussion in this section, you should read our consolidated financial statements and the notes thereto and the other disclosures herein, including the discussion of our business and the risk factors.

OVERVIEW OF OUR BUSINESS

Rentech offers energy independence technologies utilizing domestic resources to economically produce ultra-clean synthetic fuels. We were incorporated in 1981 to develop technologies that transform under-utilized energy resources into valuable and clean alternative fuels, chemicals and power. We have developed an advanced derivative of the well-established Fischer-Tropsch, or FT, process for manufacturing diesel fuel 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 into liquid hydrocarbon products, including ultra high-quality diesel fuel and other fuel products.

Our business has historically focused on research and development of our FT technology and licensing it to third parties. During 2004, we decided to directly deploy our technology in select domestic projects in order to demonstrate commercial operation of the Rentech Process. We have begun to implement this strategy through the acquisition of Royster-Clark Nitrogen, Inc. on April 26, 2006 for the purchase price of $50 million, plus an amount equal to net working capital of RCN, which was approximately $20 million. REMC owns and operates a natural gas-fed nitrogen fertilizer production facility in East Dubuque, Illinois. We plan to convert the existing nitrogen fertilizer complex from natural gas to an integrated fertilizer and FT fuels production facility using coal gasification. We are also pursuing the development of other alternative fuels projects, including one in Natchez, Mississippi that we and potentially a partner or partners would construct to produce FT liquid hydrocarbon and other products using the Rentech Process. In addition, we are discussing proposals with owners of energy feedstocks for the joint development of alternative fuels projects and the use of the Rentech Process under licensing arrangements. We have entered into a Joint Development Agreement with Peabody Energy Corporation (“Peabody”), for the co-development of two coal-to-liquids projects, which would be located on Peabody coal reserves. The projects would convert coal into ultra-clean transportation fuels using the Company’s proprietary FT CTL process. We currently have one active license arrangement with DKRW-AF for the use of our coal-to-liquids technology in its proposed Medicine Bow Project in Wyoming.

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

OVERVIEW OF OUR FINANCIAL 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 our equity securities and borrowings. We have a history of operating losses, have never operated at a profit, and for the year ended September 30, 2006, had a net loss of $38,647,682.

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

potential sale of assets and other plans, which could include additional debt or equity financing, will be sufficient to meet our cash operating needs through the fiscal year ending September 30, 2007.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to: inventories, the valuation of long-lived assets, intangible assets and goodwill, investment in advanced technology companies, accounting for fixed price contracts, stock based compensation and the realization of deferred income taxes. Actual amounts could differ significantly from these estimates.

Inventories. The Company’s inventory is stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. The Company performs a quarterly analysis of its inventory balances to determine if the carrying amount of inventories exceeds their net realizable value. The analysis of estimated net realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. The Company allocates fixed production overhead costs based on the normal capacity of its production facilities.

Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We must assess the realizable value of long-lived assets, intangible assets and goodwill for potential impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. In addition, we must make assumptions regarding the useful lives of these assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Effective October 1, 2001, we elected early adoption of SFAS No. 142, and were required to analyze goodwill for impairment.

Investment In Advanced Technology Companies. The Company has an investment in certain advanced technology companies. The investment is stated at the estimated net realizable value and is evaluated periodically for impairment and is carried at the lower of cost or estimated net realizable value. The evaluation that we perform is based upon estimates. The actual value that we realize from this investment may be more or less than its carrying value. We will recognize gains on these investments, if any, when realized.

Accounting for Fixed Price Contracts. Our alternative fuels segment recognizes revenues from fixed price contracts on the percentage-of-completion method of accounting. Under this method of accounting, the amount of revenue recognized is the percentage of the contract price that the costs expended to date bear to the total estimated costs of the contract, based upon current estimates of the costs to complete the contract. Project managers make significant assumptions concerning cost estimates for materials and labor. Due to the uncertainties inherent in the estimation process, as well as the potential changes in customer needs as these contracts progress, it is at least reasonably possible that completion costs for uncompleted contracts may be revised in the future, and that such revisions could be material.

Stock Based Compensation. In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to Statement of Financial Accounting Standards 123, “Share-Based Payment”

(“SFAS 123(R)”). The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. SFAS 123(R) eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board Opinion No. 25 (“APB 25”). In April 2005, the FASB delayed the effective date of SFAS 123(R) to fiscal 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 in accordance with the provisions of SFAS 123(R). Refer to footnote 15 in the Notes to Condensed Consolidated Financial Statements.

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

RESULTS OF OPERATIONS

More detailed information about our financial statements is provided in the following portions of this section. On April 26, 2006, we acquired all of the outstanding stock of Royster-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’s consolidated results since the acquisition date. As a result, the fluctuations in the operating results of Rentech for the fiscal year ended September 30 2006, as compared to the fiscal years ended September 30, 2005 and 2004 are due in part to the acquisition of REMC. The following discussions should be read in conjunction with our consolidated financial statements and the notes thereto.

Selected Business Segment Information

The revenue and operating income (loss) amounts in this report are presented in accordance with accounting principles generally accepted in the United States of America. Segment information appearing in Note 17 of the Notes to the Consolidated Financial Statements is presented in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information.

The following table provides revenues, operating income (loss) from operations and net loss applicable to common stockholders by each of our business segments for the 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	)

Comparison of Changes Between Periods

The following table sets forth, for the years ended September 30, 2006, 2005 and 2004, a comparison of changes between the periods in the components of our Consolidated 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	)%

FISCAL YEAR 2006 COMPARED TO FISCAL YEAR 2005

Continuing Operations:

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

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

Service Revenues. Service revenues are provided by the scientists and technicians who staff our development and testing laboratory in our alternative fuels segment. In addition, the alternative fuels segment includes rental income earned by leasing a portion of the development and testing laboratory building to third parties.

Our alternative fuels segment has historically provided service revenues, including revenue earned for technical services provided to certain customers with regard to the Rentech Process. These technical services were performed at our development and testing laboratory. We had no technical services revenue during fiscal 2006 as compared to $465,265 during fiscal 2005. During fiscal 2005, we recognized $307,280 of revenue related to our technical services agreement with the Wyoming Business Council and $35,747 related to our technical services agreement with RCN. We had no such revenue during fiscal 2006 as our engineering and research and development teams continued to focus on the PDU and certain development projects including the conversion of our East Dubuque Plant.

Rental Income is also included in our service revenue. We leased part of our development and testing laboratory building to a tenant. Rental income from this tenant contributed $119,013 in revenue during fiscal 2006 as compared to $123,422 during fiscal 2005. Rental income is included in our alternative fuels segment because the rental income is generated from the laboratory building that houses our development and testing laboratory, which is part of the alternative fuels segment.

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

Cost of sales for nitrogen products manufacturing was $44,076,514 (which includes $661,465 of costs associated with natural gas sales) for the fiscal year ended September 30, 2006. Of these product costs, 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 Company purchases natural gas on the open market and through the use of fixed priced contracts. The use of fixed price contracts allows the Company to lock in its gas costs in advance. As the nitrogen products manufacturing segment was acquired in April 2006, we had no such product costs in the prior comparison periods.

Costs of sales for technical services was zero during fiscal 2006, down from $616,895 during fiscal 2005. Of the amounts in the fiscal year ended September 30, 2005, $289,452 related to costs incurred under the technical services agreement with the Wyoming Business Council and $101,748 related to the technical services agreement with RCN. There were no such technical services agreements 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, as compared to gross loss of $28,208 for fiscal 2005. The increase of $468,226, or 1660% resulted primarily from inclusion of the nitrogen products manufacturing segment.

Gross profit for nitrogen products manufacturing was $321,005 (which includes $65,385 of gross profit associated with natural gas sales) for the fiscal year ended September 30, 2006. As the nitrogen products manufacturing segment was acquired in April 2006, there was no gross profit or loss for this segment in the prior comparison periods. The gross profit for nitrogen products manufacturing segment resulted from a market price decline for nitrogen products and the high cost of purchased inventory (inventory acquired from Royster-Clark, Inc.). The average market value of our nitrogen products manufactured during our fiscal year ended September 30, 2006 was 15.6% below the purchased inventory value. As a result, while

products produced and sold during our ownership of the plant were sold at a gross profit, products sold from purchased inventory were sold at a gross loss of $1,560,150. Adverse wet weather conditions in the remaining planting season of late April through early June resulted in farmers reducing their fertilizer inputs or changing to alternative crops that use less fertilizer. These conditions led to lower prices and nitrogen sales as well as increased storage costs.

Gross profit for technical services was zero during fiscal 2006, up from a negative $151,630 during fiscal year 2005, an increase of $151,630. The negative gross profit in fiscal year 2005 was due to the fact that the majority of revenue was derived from feasibility studies, which do not generate significant 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 and administrative expense, depreciation and amortization and research and development. Our operating expenses have historically been grouped into several categories of major expenses. These include research and development related to the Rentech Process through operation of pilot plants and the Synhytech plant in Pueblo, Colorado; management time and other costs related to acquiring and funding the subsidiaries that constitute our other business segments in efforts to bring them to profitable operations; marketing our technology; other general and administrative expenses; and the costs of financing our operations.

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

We expect to experience operating costs on a much larger scale than in the past for the East Dubuque nitrogen fertilizer plant that we acquired on April 26, 2006. We plan to make substantial capital investments to reconfigure the plant to improve its economic results and to use our Fischer-Tropsch technology for additional revenues. If we make substantial capital investments in plants in the East Dubuque plant, or in plants which we may acquire an equity interest in, we would incur significant depreciation and amortization expenses in the future.

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

by $8,377,472, when such expenses were $5,972,788 after deducting one time charges recorded in fiscal 2005 of $4,978,802, which was comprised of salaries related to the retirement packages of our former CEO and COO of $1,894,382 and aborted acquisition, offering and debt issue cost of $3,084,420. Of the increase from fiscal 2005, $1,640,785 related to our nitrogen products manufacturing segment. Of the remaining balance of $6,736,687, after excluding the general and administrative expenses of our nitrogen products manufacturing segment, salaries and benefits, contract salaries and consulting charges included in general and administrative expenses increased by $3,611,381, or by 99%, legal expenses increased by $806,150 or 262%, travel and entertainment costs increased by $513,933 or 195%, and public relations charges increased by $747,680 or 137%, during the fiscal year ended September 30, 2006 compared to fiscal 2005.

Salaries and benefits, contract salaries and consulting expenses increased $3,611,381 as a result of hiring new employees to prepare the Company for its acquisition and integration of RCN and for the construction of the PDU and other project development, as well as for increases in executive compensation and bonus accruals. Legal expenses increased by $806,150 during the fiscal year ended September 30, 2006 as we incurred significant external legal costs related to the preparation of our Form 10-K and Proxy as well as project development activities and other general corporate matters in the fiscal year ended September 30, 2006, while the majority of legal expense incurred in the fiscal year ended September 30, 2005 was written off to abandoned acquisition costs. Travel and entertainment costs increased by $513,933 during the fiscal year ended September 30, 2006. The increase in the fiscal year ended September 30, 2006 was due to additional travel requirements relating to the RCN acquisition, the potential project in Natchez, Mississippi and the development of other potential projects. Public relations charges increased by $747,680 during the fiscal year ended September 30, 2006 due to increased costs for shareholder reporting, and board expenses. Many other general and administrative expenses experienced increases and decreases during the fiscal year ended September 30, 2006, none of which were individually significant.

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

Research and Development. Research and development expenses were $12,053,707 during fiscal 2006. These expenses were all from our alternative fuels segment. This expense increased by $11,557,788 from fiscal 2005, when this expense was $495,919. Of the increase in research and development expenses 87% is directly attributable to expenses incurred for the design and procurement of equipment for the Product Development Unit (“PDU”). The Company is constructing and plans to operate a fully integrated Fischer-Tropsch, coal-to-liquids PDU facility at the Sand Creek site. This plant would produce fuels and naphtha from various domestic coals, petroleum coke and biomass feedstocks on a demonstration scale, utilizing Rentech’s FT technology. With the PDU in operation, Rentech would be able to demonstrate production of hydrocarbon products from various feedstocks. The products from the plant would be used to supply test quantities of these fuels to groups which have expressed an interest in using the Rentech Process. Also, in fiscal 2006, we continued work on advanced catalysts and separation, process optimization, and product upgrading.

Total Operating Expenses. Total operating 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 in total operating expenses for the fiscal year ended September 30, 2006 as compared to the prior fiscal year is a result of an increase in general and administrative expenses of $16,337,563, an increase in depreciation and amortization expense of $2,839,433 and an increase in research and development expenses 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 $11,880,027 during fiscal 2005. The increased loss resulted from an increase in total operating expenses of $28,007,069 during fiscal 2006 partially offset by an increase in gross profit of $468,226.

Loss from operations for nitrogen products manufacturing was $1,319,780 for the fiscal year ended September 30, 2006. As the nitrogen products manufacturing segment was acquired in April 2006, there was no income or loss from operations in the prior comparison periods. The loss from operations for the nitrogen products manufacturing segment was due to a market decline for nitrogen products and to the gross profit loss on the purchased product inventory.

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

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	)

Other Income (Expense). Other income (expense) includes impairment of investments, equity in loss of investee, interest income, dividend income, interest expense, and gain (loss) on disposal of fixed assets and other income.

Loss on Investments. During fiscal year 2006, no losses on investments were recognized, compared to a loss of $206,500 recognized in fiscal 2005. The loss on investments recognized in fiscal 2005 was 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 ownership interests in Global Solar Energy and Infinite Power Solutions based upon currently available information. As a result of that assessment, we recorded an impairment of investment of $206,500 in fiscal 2005.

Equity in Loss of Investee. During fiscal 2006, no equity in loss of investee was recognized, as compared to a loss of $735,815 recognized 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 in Sand Creek for a purchase price of $1,400,000 and Sand Creek is now 100% owned by 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 the loss in our joint venture FT Solutions, LLC. This loss represents our share of research and development expenses of FT Solutions incurred in the first two quarters of fiscal year 2005.

On January 11, 2006, the Company and Headwaters Technology Innovation Group, Inc. entered into a termination agreement pursuant to which Rentech and Headwaters agreed to dissolve FT Solutions and terminated all FT Solutions-related agreements between Rentech, Headwaters and FT Solutions. As a result, there was no activity in FT Solutions for the fiscal year ended September 30, 2006.

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

Interest Expense. Interest expense during fiscal 2006 was $2,402,397, decreased from $2,874,661 during fiscal 2005. The $472,264 decrease during the fiscal year ended September 30, 2006 resulted from a decrease in non-cash interest charges offset by interest incurred by REMC as well as on the April 2006 convertible senior notes. Total non-cash interest expense recognized 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. Of the 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 to the amortization of debt issuance costs related to a line of credit and bridge loans that were used to provide working capital and fund acquisition costs related to the purchase of RCN. Additionally, of the non-cash interest expense recognized in the fiscal year ended September 30, 2006 of $1,014,262 or 58% was due to the accrued interest expense recognized stemming from the Company’s 4.00% Convertible Senior Notes Due 2013 issued in April 2006.

Gain (Loss) on Disposal of Fixed Assets. During fiscal 2006 we had a loss on disposal of fixed assets of $205,000 as compared to a gain on disposal of fixed assets during fiscal 2005 of $723. The disposals represent the disposal of out-dated equipment.

Dividend Income. During fiscal 2006 we had $28,508 of dividend income earned from the Company’s investment in marketable equity securities. During fiscal year 2005 there was no dividend income earned.

Other income. During fiscal 2006 we had $87,569 of other income earned by REMC which was primarily comprised of non-recurring storage rental income. During fiscal year 2005 there were no like charges recorded as other income.

Total Other Expenses. Total other expenses decreased to $492,973 during fiscal 2006 from total other expenses of $3,734,893 during fiscal 2005. The decrease of $3,241,920 resulted from an impairment of investments $206,500during fiscal 2005, while no impairment of investments were recognized in fiscal 2006; a decrease in equity in 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; and increase 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 of dividends. The increase of $24,296,923 resulted from an increase in loss from operations of $27,538,843, offset by a decrease in total other expenses of $3,241,920.

Net loss from continuing operations for nitrogen products manufacturing was $1,481,669 for the fiscal year ended September 30, 2006. As the nitrogen products manufacturing segment was acquired in April 2006, there was no income or loss from continuing operations in the prior comparison periods. The net loss from continuing operations for the nitrogen products manufacturing segment was due to a market price decline for nitrogen products and the high cost of purchased inventory.

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

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

Discontinued Operations:

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

OKON, Inc. OKON provided 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 revenue in fiscal 2006.

REN Corporation REN provided service revenues in the amount of $364,190 during fiscal 2005 from contracts for the manufacture of complex microprocessor controlled industrial automation systems. Effective August 1, 2005, the Company sold its 56% ownership interest in REN and hence we recognized no revenue in fiscal 2006.

Petroleum Mud Logging, LLC PML provided service revenues in the amount of $8,291,649 derived from contracts for the oil and gas field services in fiscal 2006. Our oil and gas field service revenues for fiscal year 2006 increased by $1,694,851, or 26%, from the service revenues of $6,596,798 in fiscal 2005. The increase in oil and gas field services revenue was due to an increase in demand for our mud logging services as drilling for new natural gas wells continued to increase in our service market. The increased revenue was partially due to a 5% increase in our manned services, although the number of our manned mud logging vehicles remained constant at 38 for both fiscal 2005 and fiscal 2006. Most of revenue growth was due to the increase in our limited service vehicles from 16 in fiscal 2005 to 34 in fiscal 2006 that provided approximately $1,300,000 of our additional revenue recognized in fiscal 2006 compared to fiscal 2005. On November 15, 2006, we sold all of our interest in 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 includes costs for our OKON products, industrial automation system services and oil and gas field services. During the year ended September 30, 2006, the combined cost 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 an increase in the cost of sales of $1,408,796 in the former oil and gas field service segment offset by a decrease in cost of sales of $718, 869 for product costs and industrial automation services caused by the sale in fiscal year 2005 of OKON and REN.

Costs of sales for product sales are the cost of sales of our former paint business segment for sales of stains, sealers and coatings. On March 8, 2005, prior to fiscal year 2006, the Company sold its interest in OKON Inc., and hence no cost of sales were recognized in fiscal 2006. During fiscal 2005, our costs of sales for the paint segment were $440,467.

Costs of sales for the industrial automation systems segment were $278,402 during fiscal 2005. Effective August 1, 2005, prior to fiscal year 2006, the Company sold its 56% ownership interest in REN, and hence no costs of sales were recognized in fiscal 2006.

Costs of sales for oil and gas field services increased to $6,004,993 during fiscal 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 living expenses. The increase in oil and gas field services costs of sales was due to a continued high level of demand for our mud logging services as drilling for new natural gas wells in our service market. The

increase in the number of units in the field and our higher utilization rates directly led to the increase in field labor and benefits and field living expenses, which makes up 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

Gross profit for product sales is the gross profit of our former paint business segment for sales of stains, sealers and coatings. During fiscal 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 this segment.

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

Gross profit for oil and gas field services increased to $2,286,656 during fiscal 2006, up from $2,000,601 during fiscal 2005. The increase of $286,055 was due to increases in our number of limited service units in service combined with 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 and administrative expense, depreciation and amortization and research and development.

General and Administrative Expenses. General and administrative expenses were $882, 919 and $1,528,372 during fiscal 2006 and 2005, respectively.

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

Research and Development. Research and development expenses were $10,897 during fiscal 2005. These expenses were all from our former paint segment.

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

Total operating expenses of PML increased by $253,411 to $933,694 in fiscal 2006 from $680,283 in fiscal 2005. Of this $253,411 increase, PML’s salaries and benefits charges increased $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

Loss from operations for the industrial automation systems segment was $250,270 during fiscal 2005.

Income from operations for oil and gas field services increased to $1,352,962 during 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 by increases in operational expenses of $253,411. Of the increases in operational expenses, $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 fiscal 2005. 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.

Net Gain (Loss) and Gain on Sale of Discontinued Operations

	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 from discontinued operations of $1,264,161, or $.010 per share, compared to a net gain from discontinued operations of $1,256,023 or $.015 per share, during fiscal 2005.

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

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

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

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, we experienced 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 loss applicable to common stockholders for fiscal 2006 was $74,437 of cash dividends paid on Series A Preferred Stock. Included in net loss applicable to common stockholders for fiscal 2005 was $9,341,475 of dividends on preferred stock, which was comprised of a $9,000,000 deemed dividend related to a beneficial conversion feature and warrants and $341,475 of cash dividends paid on the Series A Preferred Stock.

FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004

Continuing Operations:

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

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

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

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

fuels segment because the rental income is generated from the laboratory building that houses our development and testing laboratory, which is part of the alternative 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 $679,408 during fiscal 2004, a decrease of $62,513. Costs incurred under the technical services agreement with RCN resulted in costs of sales of $101,748 and $369,666 during the years ended September 30, 2005 and 2004. Costs incurred under the technical services agreement with the Wyoming Business Council resulted in costs of sales of $289,452 and $192,720 during the years ended 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 compared to our gross profit of $305,084 for fiscal 2004. The decrease of $333,292, or 109%, resulted from a combination of the contributions from each of our operating segments. The gross profit contribution of our technical services segment decreased, which was partially offset by increases for the rental income segment during fiscal 2005 as compared to fiscal 2004.

Gross loss for technical services was $151,630 during fiscal 2005, down from gross profit of $187,871 during fiscal year 2004, a decrease of $339,501. Gross profit was down in fiscal year 2005 as the majority of revenue was derived from feasibility 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

and other costs related to acquiring and funding the subsidiaries that constitute our other business segments in efforts to bring them to profitable operations; marketing our technology; other general and administrative expenses; and the costs of financing our operations.

We expect to experience operating costs on a much larger scale than in the past for the East Dubuque nitrogen fertilizer plant acquired April 26, 2006. We plan to make substantial capital investments to reconfigure the plant to improve its economic results and to use our Fischer-Tropsch technology for additional revenues and other benefits. If we make substantial capital investments in plants in which we may acquire an equity interest, we would incur significant depreciation and amortization expenses in the future.

General and Administrative Expenses. General and administrative 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. Of the increase during fiscal 2005, $2,893,137 related to one-time write-offs of expenses directly related to the acquisition of RCN. These one-time write-off expenses consisted of: $1,807,057 of abandoned acquisition costs, $901,846 of abandoned debt issue costs, and $184,234 of aborted offering costs in fiscal 2005. In addition, the Company issued 540,000 warrants as a breakup fee to other subscribers whose subscriptions for the purchase of preferred stock were not accepted by the Company. These warrants resulted in aborted offering expense 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 CEO and COO. Not including those charges, general and administrative expenses increased $1,594,397 during the year ended 2005. The majority of the increase in general and administrative expenses during fiscal 2005 relates to $324,187 in costs incurred related to the Company’s implementation of the requirements of Section 404 of the 2002 Sarbanes-Oxley Act, and $332,500 of compensation expense related to a warrant issued to the Company’s current President. In addition, salaries and benefits allocated to general and administrative expenses rather than to cost of sales increased by $351,815, or 17%, during the year ended September 30, 2005. This was primarily due to hiring an in-house legal counsel during the third quarter of fiscal 2004 and a cost of living increase received by employees in fiscal year 2005. Contract salaries and consulting expenses increased by $680,274, or 219% during year ended September 30, 2005. The increase was due to additional consulting cost requirements for the design and engineering phase of the conversion of the RCN 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 of obtaining additional coverages in the current fiscal year after assessing our insurance portfolio. Bad debt expense decreased by $125,755, or 100% during the year ended September 30, 2005 due to a write-off in fiscal year 2004. Many other general and administrative expenses experienced increases and decreases during year ended September 30, 2005, none of which were individually significant.

Depreciation and Amortization. Depreciation and amortization expenses during fiscal 2005 and 2004 were $444,032 and $461,530. Of these amounts, $39,722 and $31,199 were included in costs of sales.

Research and Development. Research and development expenses were $495,919 during fiscal 2005. These expenses were all from our alternative fuels segment. This expense decreased by $253,311 from fiscal 2004, when these expenses were $749,230. The decrease in research and development expenses is due to the fact that the majority of our research and development work 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, process optimization,

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

Total Operating Expenses. Total operating 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 a result of an increase in general and administrative expenses of $6,425,038, a decrease in depreciation and amortization charges included in operating expenses 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 $5,401,029 during fiscal 2004. The increased loss resulted from an increase in total operating expenses of $6,145,706 during fiscal 2005 and a decrease in gross profit 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 operations was up in fiscal year 2005 as our operating expenses increased by $6,145,706 and 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	)

Other Income (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.

Loss on Investments. During fiscal year 2005, we recognized $206,500 as loss on investments, compared to $588,500 in fiscal 2004. The decrease in loss on investments related to 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. During the fourth quarter of fiscal 2004, we assessed the value of our minority ownership interests in Global Solar Energy and Infinite Power Solutions based upon currently available information. As a result of that assessment, we recorded an impairment of investment of $588,500 in fiscal 2004. As of September 30, 2005, we assessed the value of our minority ownership interests in Global Solar Energy and Infinite Power Solutions based upon currently available information. As a result of that assessment, we recorded an impairment of investment of $206,500 in fiscal 2005. At September 30, 2005, our investment in the two advanced technology companies was recorded at the estimated net realizable value of $405,000.

The assessment that we performed was based upon estimates. The actual value that we realized from these investments was $405,000.

Equity in Loss of Investee. During fiscal 2005, we recognized $735,815 in equity in loss of investee, as compared to $252,415 during fiscal 2004. In fiscal 2005, $171,202 represented our 50% share of the loss 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 methanol plant. 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 other maintenance costs of the facility. In fiscal 2005, we recognized $564,613 in equity in loss of investee from our 50% share of the loss in our joint venture FT Solutions, LLC, compared to $70,525 in fiscal 2004. FT Solutions, LLC was formed in the fourth quarter of fiscal 2004. This loss represents our share of research and development expenses incurred by FT Solutions, LLC.

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

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

Gain (Loss) on Disposal of Fixed Assets. During fiscal 2005 we had a gain on disposal of fixed assets of $723 as compared to a loss on disposal of fixed assets during fiscal 2004 of $3,444. The disposals represent the disposal of out-dated office furniture and equipment, computer equipment and vehicles.

Total Other Expenses. Total other expenses increased to $3,734,893 during fiscal 2005 from total other expenses of $1,686,287 during fiscal 2004. The increase of $2,048,606 resulted from 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 interest expense 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 per share during fiscal 2004. The increase of $8,527,604 resulted from an increase in loss from operations of $6,478,998, and an increase in total other expenses of $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 from continuing operations was up in

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

Discontinued Operations:

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. OKON product sales from sales of water-based stains, sealers and coatings. These sales produced revenues of $846,141 in fiscal 2005. This compares to revenues from 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 contracts for the manufacture of systems as in the previous year. On March 8, 2005, we sold our entire interest in OKON, Inc.

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

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

Our cost of sales for discontinued operations includes costs for our OKON products, industrial automation system services and oil and gas field services. During the year ended September 30, 2005, the combined cost 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 increase in cost of sales of $1,239,826 experienced by our former oil and gas field services segment offset by a decrease in cost of sales experienced by our former OKON product costs and REN industrial automation systems costs of $726,349 and $316,139, respectively.

Costs of sales for product sales are the cost of sales of 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 the industrial automation systems segment were $278,402 during fiscal 2005 as compared to $594,541 during fiscal 2004. The decrease in costs of $316,139 during fiscal 2005 was directly related to fewer orders for new equipment, and our inability to bill for service contracts 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 related to field labor and benefits and field living expenses, while the remainder was made up of supplies and other miscellaneous costs. The increase in costs of sales resulted from the increase in oil and gas field services revenue which occurred due to an increase in demand for our mud logging services as drilling for new natural gas wells has continued to expand in our service market. The increase in the number of units in the field directly led to the increase in field labor and benefits and field living expenses, which makes up the largest percentage 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 the industrial automation systems segment were $85,788 during fiscal 2005 as compared to $206,729 during fiscal 2004. The decrease in gross profit of $120,941 during fiscal 2005 was directly related to the 55% decrease in revenues from this segment as compared to fiscal 2004. The decrease in revenue occurred because we did not obtain as many contracts for the manufacture of systems as in the previous year.

Gross profit for oil and gas field services increased to $2,000,601 during 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 with our increase in billing rates.

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

General and Administrative Expenses. General and administrative expenses were $1,528,372 during fiscal 2005, down $923,701 from fiscal 2004 when these expenses were $2,452,073. Salaries and benefits expenses decreased $566,566, or 42% during the year ended September 30, 2005 due to the sale of OKON in March 2005 and REN in August 2005. Commissions expense 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 and sold by our former industrial automation systems subsidiary and the sale of both subsidiaries during fiscal 2005. Travel and entertainment decreased by $56,232, or 41% during the year ended September 30, 2005. This was the result of reductions in travel at both subsidiaries as well as the sale of both subsidiaries during fiscal 2005. Many other general and administrative expenses experienced increases and decreases during the year ended September 30, 2005, none of which were individually significant.

Depreciation and Amortization. Depreciation and amortization expenses during fiscal 2005 and 2004 were $224,736 and $286,973. Of these amounts, $177,273 and $175,319 were included in costs of sales.

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

Total Operating Expenses. Total operating 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 a result of a reduction in general and administrative expenses of $923,701, a decrease in depreciation and amortization charges included in operating expenses 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

Loss from operations for product sales is the loss from operations of our former paint business segment for sales of stains, sealers and coatings. During fiscal 2005, our loss from operations for the paint segment increased by $69,157, or 72%, to $164,717, as compared to fiscal 2004. The decrease in loss from operations was due to a decrease of $693,077 in gross profit partially offset by a decrease in operating expenses of $623,920.

Loss from operations for the industrial automation systems segment were $250,270 during fiscal 2005 as compared to $427,235 during fiscal 2004. The decrease in loss from operations of $176,965 during fiscal 2005 was directly related to the decrease of 55% in revenues from this segment as compared to fiscal 2004. The decrease in revenue occurred because we did not obtain as many contracts for the manufacture of systems as in 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 in our 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	)

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

Loss on Investments. During fiscal year 2005, we recognized no loss on investments, compared to $57,867 in fiscal 2004 related to our write-off of a non-compete agreement at REN.

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

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

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

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 in Subsidiary’s Net Loss. The minority interest in subsidiary’s net loss of $0 during fiscal 2005, as compared to $154,269 during fiscal 2004, resulted from the continued operating loss of REN. Minority interests in the net loss of a subsidiary are reflected as an addition to consolidated net loss, reduced by the excess of any losses applicable to the minority interest in a subsidiary that exceed the minority interest in the equity capital of the subsidiary. The Company accounts for the excess loss in accordance with Accounting Research Bulletin No. 51, “Consolidated Financial Statements” as the minority interest shareholders have no obligation to fund such losses. As of September 30, 2005, the Company had a cumulative minority interest excess loss of $255,527, including $120,608 in the year ended September 30, 2005 and $134,919 for the year ended September 30, 2004, which was charged against the majority interest on the Consolidated Statement of Operations as part of discontinued operations, reducing the total minority interest to $0 and $154,269 for the years ended September 30, 2005 and 2004.

Net Gain (Loss) and Gain on Sale of Discontinued Operations

	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 from discontinued operations of $1,256,023, or $.015 per share, compared to a net loss from discontinued operations of $123,377, or $.001 per share, during fiscal 2004.

Net loss from discontinued operations for product sales is the net loss from discontinued operations of our paint business for sales of stains, sealers and coatings. During fiscal 2005, our net loss from discontinued operations for the paint business was $164,821, as compared to fiscal 2004 when we experienced a net loss from discontinued operations of $109,832. In addition, in fiscal 2005, after the sale of OKON, Inc., we accrued $75,000 for potential product liability claims that would be owed to Zinsser, the buyer of OKON, Inc., for product liability claims that occurred prior to the sale date but were not quantified until after the sale date. The $75,000 is included in net loss from product sales for the year ended September 30, 2005.

Net loss 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

operations of $326,999 during 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 were due to certain cost cutting measures at REN as a result of their lack of new contracts.

Net income from discontinued operations for oil and gas field services increased to $1,307,075 during fiscal 2005, up from $594,758 during fiscal 2004. The increase of $712,317 was due to increases in our number of units in service combined with our increase in billing rates.

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

The gain on the sale of OKON was calculated as follows:

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: