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LSB Industries, Inc.

Form 10-Q (6-30-2010)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2010

	OR

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _____________to______________

	Commission file number 1-7677

LSB Industries, Inc.
Exact name of Registrant as specified in its charter

Delaware		73-1015226
State or other jurisdiction of incorporation or organization		I.R.S. Employer Identification No.

16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107
Address of principal executive offices (Zip Code)

(405) 235-4546
Registrant's telephone number, including area code

__ None _ ___
Former name, former address and former fiscal year, if changed since last report.

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. [X] Yes [ ] No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). [ ] Yes [ ] No

(Facing Sheet Continued)

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

Large accelerated filer [ ] Accelerated filer [X]

Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

The number of shares outstanding of the Registrant's voting common stock, as of July 30, 2010 was 21,093,683 shares, excluding 4,320,462 shares held as treasury stock.

FORM 10-Q OF LSB INDUSTRIES, INC.

TABLE OF CONTENTS



	PART I – Financial Information	Page

Item 1.	Financial Statements	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4.	Controls and Procedures	64

Special Note	Regarding Forward-Looking Statements	65

	PART II – Other Information

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	70

Item 4.	( Reserved)	70

Item 5.	Other Information	70

Item 6.	Exhibits	71

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Information at June 30, 2010 is unaudited)

June 30,

2010

December 31,

2009

(In Thousands)

Assets
Current assets:
Cash and cash equivalents	$	65,285	$	61,739
Restricted cash		276		30
Short-term investments		-		10,051
Accounts receivable, net		73,759		57,762
Inventories:
Finished goods		23,084		25,753
Work in process		2,778		2,466
Raw materials		21,347		22,794
Total inventories		47,209		51,013
Supplies, prepaid items and other:
Prepaid income taxes		-		1,642
Prepaid insurance		2,086		4,136
Precious metals		11,422		13,083
Supplies		5,976		4,886
Other		2,299		1,626
Total supplies, prepaid items and other		21,783		25,373
Deferred income taxes		5,680		5,527
Total current assets		213,992		211,495

Property, plant and equipment, net		121,317		117,962

Other assets:
Debt issuance costs, net		1,342		1,652
Investment in affiliate		4,126		3,838
Goodwill		1,724		1,724
Other, net		2,274		1,962
Total other assets		9,466		9,176
	$	344,775	$	338,633

(Continued on following page)

Table of Contents

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Information at June 30, 2010 is unaudited)

June 30,

2010

December 31,

2009

(In Thousands)

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	38,297	$	37,553
Short-term financing		955		3,017
Accrued and other liabilities		23,390		23,054
Current portion of long-term debt		3,456		3,205
Total current liabilities		66,098		66,829

Long-term debt		98,459		98,596

Noncurrent accrued and other liabilities		11,252		10,626

Deferred income taxes		12,467		11,975

Commitments and contingencies (Note 11)

Stockholders' equity:
Series B 12% cumulative, convertible preferred stock, $100 par value; 20,000 shares issued and outstanding		2,000		2,000
Series D 6% cumulative, convertible Class C preferred stock, no par value; 1,000,000 shares issued		1,000		1,000
Common stock, $.10 par value; 75,000,000 shares authorized, 25,413,145 shares issued (25,369,095 at December 31, 2009)		2,541		2,537
Capital in excess of par value		130,828		129,941
Retained earnings		48,504		41,082
		184,873		176,560
Less treasury stock at cost:
Common stock, 4,320,462 shares (4,143,362 at December 31, 2009)		28,374		25,953
Total stockholders' equity		156,499		150,607
	$	344,775	$	338,633

See accompanying notes.

Table of Contents

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Six and Three Months Ended June 30, 2010 and 2009

Six Months

Three Months

2010

2009

2010

2009

(In Thousands, Except Per Share Amounts)

Net sales	$	298,802		$	288,760		$	168,392		$	138,563
Cost of sales		235,388			210,205			133,244			100,736
Gross profit		63,414			78,555			35,148			37,827

Selling, general and administrative expense		46,827			44,421			22,238			23,046
Provision for (recoveries of) losses on accounts receivable		(35	)		28			(44	)		(24	)
Other expense		302			334			244			291
Other income		(906	)		(190	)		(100	)		(28	)
Operating income		17,226			33,962			12,810			14,542

Interest expense		4,079			2,939			1,999			1,028
Losses (gains) on extinguishment of debt		52			(1,743	)		52			(421	)
Non-operating other income, net		(38	)		(34	)		-			(11	)
Income from continuing operations before provisions for income taxes and equity in earnings of affiliate		13,133			32,800			10,759			13,946
Provisions for income taxes		5,891			12,800			4,979			5,451
Equity in earnings of affiliate		(528	)		(488	)		(267	)		(248	)
Income from continuing operations		7,770			20,488			6,047			8,743

Net loss from discontinued operations		43			15			38			13
Net income		7,727			20,473			6,009			8,730

Dividends on preferred stocks		305			306			-			-
Net income applicable to common stock	$	7,422		$	20,167		$	6,009		$	8,730

Weighted-average common shares:
Basic		21,227			21,174			21,229			21,238

Diluted		21,692			23,587			22,377			23,674

Income per common share:
Basic	$	.35		$	.95		$	.28		$	.41

Diluted	$	.35		$	.89		$	.27		$	.38

See accompanying notes.

Table of Contents

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

Six Months Ended June 30, 2010

Common

Stock

Non-

Redeemable

Preferred

Stock

Common

Stock

Par Value

Capital in

Excess of

Par Value

Retained

Earnings

Treasury

Stock-

Common

Total

(In Thousands)

Balance at December 31, 2009	25,369	$	3,000	$	2,537	$	129,941	$	41,082		$	(25,953	)	$	150,607
Net income									7,727						7,727
Dividends paid on preferred stocks									(305	)					(305	)
Stock-based compensation							500								500
Exercise of stock options	43				4		292								296
Excess income tax benefit associated with stock-based compensation							94								94
Acquisition of 177,100 shares of common stock												(2,421	)		(2,421	)
Conversion of 14 shares of redeemable preferred stock to common stock	1						1								1
Balance at June 30, 2010	25,413	$	3,000	$	2,541	$	130,828	$	48,504		$	(28,374	)	$	156,499

Note: For the six and three months ended June 30, 2010, total comprehensive income was $7,727,000 and $6,009,000, respectively. For the six and three months ended June 30, 2009, total comprehensive income was $20,593,000 and $8,778,000, respectively.

See accompanying notes.

Table of Contents

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30, 2010 and 2009

2010

2009

(In Thousands)

Cash flows from continuing operating activities:
Net income	$	7,727		$	20,473
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Net loss from discontinued operations		43			15
Deferred income taxes		244			5,538
Loss (gain) on extinguishment of debt		52			(1,743	)
Losses on sales and disposals of property and equipment		259			220
Gain on property insurance recoveries associated with property, plant and equipment		(495	)		-
Depreciation of property, plant and equipment		8,626			7,684
Amortization		311			451
Stock-based compensation		500			514
Provision for (recovery of) losses on accounts receivable		(35	)		28
Realization of losses on inventory		(324	)		(3,024	)
Provision for (realization of) losses on firm sales commitments		(371	)		514
Equity in earnings of affiliate		(528	)		(488	)
Distributions received from affiliate		240			350
Changes in fair value of commodities contracts		246			969
Changes in fair value of interest rate contracts		348			(649	)
Other		(10	)		-
Cash provided (used) by changes in assets and liabilities:
Accounts receivable		(16,585	)		15,790
Inventories		4,128			12,153
Prepaid and accrued income taxes		2,392			146
Other supplies and prepaid items		1,798			1,315
Accounts payable		2,700			(11,703	)
Customer deposits		(77	)		(2,121	)
Accrued payroll and benefits		(1,054	)		(1,983	)
Commodities contracts		150			(4,112	)
Deferred rent expense		-			(1,424	)
Other current and noncurrent liabilities		2,243			(3,781	)
Net cash provided by continuing operating activities		12,528			35,132

Capital expenditures		(10,861	)		(12,406	)
Proceeds from property insurance recoveries associated with property, plant and equipment		1,670			-
Proceeds from sales of property and equipment		11			3
Proceeds from short-term investments		20,053			-
Purchase of short-term investments		(10,002	)		-
Proceeds from (deposits of) restricted cash		(246	)		518
Other assets		(326	)		(209	)
Net cash provided (used) by continuing investing activities		299			(12,094	)

(Continued on following page)

Table of Contents

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

Six Months Ended June 30, 2010 and 2009

2010

2009

(In Thousands)

Cash flows from continuing financing activities:
Proceeds from revolving debt facilities	$	263,064		$	281,103
Payments on revolving debt facilities		(263,064	)		(281,103	)
Acquisition of 5.5% convertible debentures		(2,494	)		(7,134	)
Proceeds from other long-term debt, net of fees		47			2,565
Payments on other long-term debt		(2,386	)		(687	)
Payments on short-term financing		(2,062	)		(1,776	)
Proceeds from exercise of stock options		296			500
Purchase of treasury stock		(2,421	)		-
Excess income tax benefit associated with stock-based compensation		189			657
Dividends paid on preferred stocks		(305	)		(306	)
Net cash used by continuing financing activities		(9,136	)		(6,181	)

Cash flows of discontinued operations:
Operating cash flows		(145	)		(53	)
Net increase in cash and cash equivalents		3,546			16,804

Cash and cash equivalents at beginning of period		61,739			46,204
Cash and cash equivalents at end of period	$	65,285		$	63,008

Supplemental cash flow information:

Cash payments for income taxes, net of refunds	$	3,093		$	6,459

Noncash investing and financing activities:

Receivable associated with a property insurance claim	$	560		$	1,135
Current other assets, accounts payable and long-term debt associated with property, plant and equipment	$	5,548		$	4,164
Debt issuance costs associated with the acquisition of the 5.5% convertible debentures	$	58		$	323

See accompanying notes.

Table of Contents

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of LSB Industries, Inc. (the “Company”, “We”, “Us”, or “Our”) and its subsidiaries. Through our subsidiaries, we are a manufacturing, marketing and engineering company. Our subsidiaries are primarily engaged in the manufacture and sale of geothermal and water source heat pumps and air handling products (the "Climate Control Business") and the manufacture and sale of chemical products (the “Chemical Business”). The Company is a holding company with no significant operations or assets other than cash, cash equivalents, and our investments in our subsidiaries. Entities that are 20% to 50% owned and for which we have significant influence are accounted for on the equity method. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the unaudited condensed consolidated financial statements of the Company as of June 30, 2010 and for the six and three-month periods ended June 30, 2010 and 2009 include all adjustments and accruals, consisting of normal, recurring accrual adjustments except for an additional income tax provision as discussed in Note 14 – Income Taxes, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”).

Certain reclassifications have been made in our condensed consolidated statement of cash flows for the six months ended June 30, 2009 to conform to our condensed consolidated statement of cash flows presentation for the six months ended June 30, 2010, which reclassifications expanded our continuing operating activity line items. These reclassifications did not impact the total amount of net cash provided by continuing operating activities for the six months ended June 30, 2009.

Note 2: Recently Issued Accounting Pronouncements In January 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring additional disclosures about an entity’s derivative and hedging activities for the purpose of improving the transparency of financial reporting. A portion of the new disclosure requirements became effective for the Company on January 1, 2010 and were applied prospectively. The remaining new disclosure requirements will become effective for the Company on January 1, 2011. See Note 12 - Derivatives, Hedges and Financial Instruments.

Note 3: Short-Term Investments Investments, which consisted of certificates of deposit with an original maturity of 13 weeks, are considered short-term investments. These investments are carried at cost, which approximates fair value. All of these investments were held by financial institutions within the United States and none of these investments were in excess of the federally insured limits.

Table of Contents

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 4: Accounts Receivable, net Our accounts receivable, net, consists of the following:

June 30,

2010

December 31,

2009

(In Thousands)

Trade receivables	$	72,467		$	55,318
Insurance claims		880			1,517
Other		948			1,603
		74,295			58,438
Allowance for doubtful accounts		(536	)		(676	)
	$	73,759		$	57,762

Note 5: Inventories Inventories are priced at the lower of cost or market, with cost being determined using the first-in, first-out (“FIFO”) basis. Finished goods and work-in-process inventories include material, labor, and manufacturing overhead costs. At June 30, 2010 and December 31, 2009, inventory reserves for certain slow-moving inventory items (Climate Control products) were $1,195,000 and $1,198,000, respectively. In addition, inventory reserves for certain nitrogen-based inventories provided by our Chemical Business were $107,000 and $478,000, at June 30, 2010 and December 31, 2009, respectively, because cost exceeded the net realizable value.

Changes in our inventory reserves are as follows:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Balance at beginning of period	$	1,676		$	4,141		$	1,744		$	1,109
Provision for (realization of) losses		(324	)		(3,024	)		(442	)		8
Write-offs/disposals		(50	)		(53	)		-			(53	)
Balance at end of period	$	1,302		$	1,064		$	1,302		$	1,064

The provision for (realization of) losses is included in cost of sales in the accompanying condensed consolidated statements of income.

Note 6: Precious Metals Precious metals are used as a catalyst in the Chemical Business manufacturing process. Precious metals are carried at cost, with cost being determined using the FIFO basis. Because some of the catalyst consumed in the production process cannot be readily recovered and the amount and timing of recoveries are not predictable, we follow the practice of expensing precious metals as they are consumed.

Occasionally, during major maintenance and/or capital projects, we may be able to perform procedures to recover precious metals (previously expensed) which have accumulated over time within our manufacturing equipment. When we accumulate precious metals in excess of our production requirements, we may sell a portion of the excess metals.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 6: Precious Metals (continued)

Precious metals expense, net, consists of the following:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Precious metals expense	$	3,461		$	3,279		$	2,082	$	1,552
Recoveries of precious metals		-			(2,222	)		-		(9	)
Gains on sales of precious metals		(112	)		-			-		-
Precious metals expense, net	$	3,349		$	1,057		$	2,082	$	1,543

Precious metals expense, net, is included in cost of sales in the accompanying condensed consolidated statements of income.

Note 7: Investment in Affiliate Cepolk Holdings, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has a 50% equity interest in Cepolk Limited Partnership (“Partnership”), which is accounted for on the equity method. The Partnership owns an energy savings project located at the Ft. Polk Army base in Louisiana (“Project”). As of June 30, 2010, the Partnership and general partner to the Partnership are indebted to a term lender (“Term Lender”) of the Project for approximately $1,280,000 with a term extending to December 2010. CHI has pledged its limited partnership interest in the Partnership to the Term Lender as part of the Term Lender’s collateral securing all obligations under the loan. This guarantee and pledge is limited to CHI’s limited partnership interest and does not expose CHI or the Company to liability in excess of CHI’s limited partnership interest. In accordance with GAAP, no liability is required to be established for this pledge since it was entered into prior to January 1, 2003. CHI has no recourse provisions or available collateral that would enable CHI to recover its partnership interest should the Term Lender be required to perform under this pledge.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 8: Current and Noncurrent Accrued and Other Liabilities Our current and noncurrent accrued and other liabilities consist of the following:

June 30,

2010

December 31,

2009

(In Thousands)

Deferred revenue on extended warranty contracts	$	5,284	$	4,884
Accrued payroll and benefits		4,846		5,900
Accrued insurance		4,146		3,667
Accrued death benefits		3,703		3,356
Accrued warranty costs		3,129		3,138
Fair value of derivatives		2,523		1,929
Accrued contractual manufacturing obligations		1,687		732
Accrued income taxes		1,358		608
Accrued executive benefits		1,213		1,102
Accrued interest		809		1,593
Accrued commissions		723		1,035
Other		5,221		5,736
		34,642		33,680
Less noncurrent portion		11,252		10,626
Current portion of accrued and other liabilities	$	23,390	$	23,054

Note 9: Accrued Warranty Costs Our Climate Control Business sells equipment that has an expected life, under normal circumstances and use, that extends over several years. As such, we provide warranties after equipment shipment/start up covering defects in materials and workmanship.

Generally, the base warranty coverage for most of the manufactured equipment in the Climate Control Business is limited to eighteen months from the date of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days for spare parts. The warranty provides that most equipment is required to be returned to the factory or an authorized representative and the warranty is limited to the repair and replacement of the defective product, with a maximum warranty of the refund of the purchase price. Furthermore, companies within the Climate Control Business generally disclaim and exclude warranties related to merchantability or fitness for any particular purpose and disclaim and exclude any liability for consequential or incidental damages. In some cases, the customer may purchase or a specific product may be sold with an extended warranty. The above discussion is generally applicable to such extended warranties, but variations do occur depending upon specific contractual obligations, certain system components, and local laws.

Our accounting policy and methodology for warranty arrangements is to measure and recognize the expense and liability for such warranty obligations using a percentage of net sales, based upon our historical warranty costs. We also recognize the additional warranty expense and liability to cover atypical costs associated with a specific product, or component thereof, or project installation, when such costs are probable and reasonably estimable. It is possible that future warranty costs could exceed our estimates.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9: Accrued Warranty Costs (continued)

Changes in our product warranty obligation (accrued warranty costs) are as follows:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Balance at beginning of period	$	3,138		$	2,820		$	2,991		$	2,864
Charged to costs and expenses		1,643			3,146			645			1,288
Costs and expenses incurred		(1,652	)		(2,928	)		(507	)		(1,114	)
Balance at end of period	$	3,129		$	3,038		$	3,129		$	3,038

Note 10: Long-Term Debt Our long-term debt consists of the following:

	June 30,		December 31,
	2010		2009

(In Thousands)

Working Capital Revolver Loan due 2012 (A)	$	-	$	-
5.5% Convertible Senior Subordinated Notes due 2012 (B)		26,900		29,400
Secured Term Loan due 2012 (C)		49,151		50,000
Other, with a current weighted-average interest rate of 6.42%, most of which is secured by machinery, equipment and real estate		25,864		22,401
		101,915		101,801
Less current portion of long-term debt		3,456		3,205
Long-term debt due after one year	$	98,459	$	98,596

(A) Our wholly-owned subsidiary, ThermaClime, LLC, formerly ThermaClime, Inc., (“ThermaClime”) and its subsidiaries (collectively, the “Borrowers”) are parties to a $50 million revolving credit facility (the “Working Capital Revolver Loan”) that provides for advances based on specified percentages of eligible accounts receivable and inventories for ThermaClime, and its subsidiaries. The Working Capital Revolver Loan, as amended, accrues interest at a base rate (generally equivalent to the prime rate) plus .50% or LIBOR plus 1.75% and matures on April 13, 2012. The interest rate at June 30, 2010 was 3.75%. Interest is paid monthly, if applicable.

The facility provides for up to $8.5 million of letters of credit. All letters of credit outstanding reduce availability under the facility. As of June 30, 2010, amounts available for borrowing under the Working Capital Revolver Loan were approximately $49.2 million. Under the Working Capital Revolver Loan, as amended, the lender also requires the Borrowers to pay a letter of credit fee equal to 1% per annum of the undrawn amount of all outstanding letters of credit, an unused line fee equal to .375% per annum for the excess amount available under the facility not drawn and various other audit, appraisal and valuation charges.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 10: Long-Term Debt (continued)

The lender may, upon an event of default, as defined, terminate the Working Capital Revolver Loan and make the balance outstanding, if any, due and payable in full. The Working Capital Revolver Loan is secured by the assets of all the ThermaClime entities other than El Dorado Nitric Company and its subsidiaries (“EDN”) but excluding the assets securing the Secured Term Loan discussed in (C) below, certain production equipment and facilities utilized by the Climate Control Business, and certain distribution-related assets of El Dorado Chemical Company (“EDC”). In addition, EDN is neither a borrower under, nor guarantor of, the Working Capital Revolver Loan. The carrying value of the pledged assets is approximately $194 million at June 30, 2010.

The Working Capital Revolver Loan, as amended, requires ThermaClime to meet certain financial covenants, including an EBITDA requirement of greater than $25 million, a minimum fixed charge coverage ratio of not less than 1.10 to 1, and a maximum senior leverage coverage ratio of not greater than 4.50 to 1. These requirements are measured quarterly on a trailing twelve-month basis and as defined in the agreement. ThermaClime was in compliance with those covenants for the twelve-month period ended June 30, 2010. The Working Capital Revolver Loan also contains covenants that, among other things, limit the Borrowers’ (which does not include the Company) ability, without consent of the lender and with certain exceptions, to:

·	incur additional indebtedness,

·	incur liens,

·	make restricted payments or loans to affiliates who are not Borrowers,

·	engage in mergers, consolidations or other forms of recapitalization, or

·	dispose assets.

The Working Capital Revolver Loan also requires all collections on accounts receivable be made through a bank account in the name of the lender or their agent.

(B) In June 2007, we entered into a purchase agreement with each of twenty two qualified institutional buyers (“QIBs”), pursuant to which we sold $60 million aggregate principal amount of debentures (the “2007 Debentures”) in a private placement to the QIBs pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Act”), afforded by Section 4(2) of the Act and Regulation D promulgated under the Act. We received net proceeds of approximately $57 million, after discounts and commissions. In connection with the closing, we entered into an indenture (the “Indenture”) with UMB Bank, as trustee, governing the 2007 Debentures. UMB Bank receives customary compensation from us for such services.

The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012. Interest is payable in arrears on January 1 and July 1 of each year.

The 2007 Debentures are unsecured obligations and are subordinated in right of payment to all of our existing and future senior indebtedness, including indebtedness under our revolving debt facilities. The 2007 Debentures are effectively subordinated to all present and future liabilities, including trade payables, of our subsidiaries.

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Note 10: Long-Term Debt (continued)

During the six and three months ended June 30, 2010, we acquired $2,500,000 aggregate principal amount of the 2007 Debentures for $2,494,000, with each purchase being negotiated. As a result, we recognized a loss on extinguishment of debt of approximately $52,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

During the six and three months ended June 30, 2009, we acquired $9,200,000 and $3,500,000, respectively, aggregate principal amount of the 2007 Debentures for approximately $7,134,000 and $2,960,000, respectively, with each purchase being negotiated. As a result, we recognized a gain on extinguishment of debt of $1,743,000 and $421,000, respectively, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

As the result of acquisitions, only $26.9 million of the 2007 Debentures remain outstanding at June 30, 2010. In addition, see discussion concerning $5.0 million of the 2007 Debentures being held by Jack E. Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members of his immediate family (spouse and children), entities owned by them and trusts for which they possess voting or dispositive power as trustee (collectively, the “Golsen Group”) in Note 18 - Related Party Transactions.

The 2007 Debentures are convertible by the holders in whole or in part into shares of our common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders electing to convert all or any portion of a debenture is 36.4 shares of our common stock per $1,000 principal amount of debentures (representing a conversion price of $27.47 per share of common stock), subject to adjustment under certain conditions as set forth in the Indenture.

Beginning July 2, 2010, we may redeem some or all of the 2007 Debentures at a price equal to 100% of the principal amount of the 2007 Debentures, plus accrued and unpaid interest, all as set forth in the Indenture. The redemption price will be payable at our option in cash or, subject to certain conditions, shares of our common stock (valued at 95% of the weighted average of the closing sale prices of the common stock for the 20 consecutive trading days ending on the fifth trading day prior to the redemption date), subject to certain conditions being met on the date we mail the notice of redemption.

If a designated event (as defined in the Indenture) occurs prior to maturity, holders of the 2007 Debentures may require us to repurchase all or a portion of their 2007 Debentures for cash at a repurchase price equal to 101% of the principal amount of the 2007 Debentures plus any accrued and unpaid interest, as set forth in the Indenture.

At maturity, we may elect, subject to certain conditions as set forth in the Indenture, to pay up to 50% of the principal amount of the outstanding 2007 Debentures, plus all accrued and unpaid interest thereon to, but excluding, the maturity date, in shares of our common stock (valued at 95% of the weighted average of the closing sale prices of the common stock for the 20 consecutive trading days ending on the fifth trading day prior to the maturity date), if the common stock is then listed on an eligible market, the shares used to pay the 2007 Debentures and any interest thereon are freely tradable, and certain required opinions of counsel are received.

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Note 10: Long-Term Debt (continued)

(C) ThermaClime and certain of its subsidiaries entered into a $50 million loan agreement (the “Secured Term Loan”) with a certain lender. The Secured Term Loan matures on November 2, 2012 and accrues interest at a defined LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at June 30, 2010 was approximately 3.34%. The Secured Term Loan requires only quarterly interest payments with the final payment of interest and principal at maturity. During the first six months of 2010, we received proceeds from our insurance carrier as a partial payment on an insurance claim, of which we used approximately $0.8 million to pay down the Secured Term Loan. As a result, approximately $49.2 million remains outstanding at June 30, 2010.

The Secured Term Loan is secured by the real property and equipment located at our El Dorado, Arkansas chemical production facility (the “El Dorado Facility”) and at our Cherokee, Alabama chemical production facility (the “Cherokee Facility”). The carrying value of the pledged assets is approximately $61million at June 30, 2010.

The Secured Term Loan borrowers are subject to numerous covenants under the agreement including, but not limited to, limitation on the incurrence of certain additional indebtedness and liens, limitations on mergers, acquisitions, dissolution and sale of assets, and limitations on declaration of dividends and distributions to us, all with certain exceptions. At June 30, 2010, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was approximately $67 million. As defined in the agreement, the Secured Term Loan borrowers are also subject to a minimum fixed charge coverage ratio of not less than 1.10 to 1 and a maximum leverage ratio of not greater than 4.50 to 1. Both of these requirements are measured quarterly on a trailing twelve-month basis. The Secured Term Loan borrowers were in compliance with these financial covenants for the twelve-month period ended June 30, 2010.

The maturity date of the Secured Term Loan can be accelerated by the lender upon the occurrence of a continuing event of default, as defined.

The Working Capital Revolver Loan agreement (discussed in (A) above) and the Secured Term Loan contain cross-default provisions. If ThermaClime fails to meet the financial covenants of either of these agreements, the lenders may declare an event of default.

Note 11: Commitments and Contingencies

Purchase and Sales Commitments - We entered into the following significant purchase and sales commitments during the six months ended June 30, 2010:

During February 2010, EDC signed an extension of EDC’s anhydrous ammonia purchase agreement with Koch Nitrogen International Sarl (“Koch”). Under the extension, Koch agrees to supply certain of EDC’s requirements of anhydrous ammonia through December 31, 2012.

During February 2010, EDC entered into a cost-plus supply agreement with Orica International Pte Ltd. (“Orica International”) to supply Orica International with 250,000 tons per year of industrial grade ammonium nitrate through December 2014. This new agreement, which became

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effective January 1, 2010, replaced EDC’s previous agreement to supply 210,000 tons per year of industrial grade ammonium nitrate (“AN”) to Orica USA, Inc.

Contingencies - We accrue for contingent losses when such losses are probable and reasonably estimable. In addition, we recognize contingent gains when such gains are realizable or realizable and earned.

Legal Matters - Following is a summary of certain legal matters involving the Company.

A.	Environmental Matters

Our operations are subject to numerous environmental laws (“Environmental Laws”) and to other federal, state and local laws regarding health and safety matters (“Health Laws”). In particular, the manufacture and distribution of chemical products are activities which entail environmental risks and impose obligations under the Environmental Laws and the Health Laws, many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. There can be no assurance that material costs or liabilities will not be incurred by us in complying with such laws or in paying fines or penalties for violation of such laws. The Environmental Laws and Health Laws and enforcement policies thereunder relating to our Chemical Business have in the past resulted, and could in the future result, in compliance expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of effluents at or from our facilities or the use or disposal of certain of its chemical products. Historically, significant expenditures have been incurred by subsidiaries within our Chemical Business in order to comply with the Environmental Laws and Health Laws and are reasonably expected to be incurred in the future.

We will recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. We are obligated to monitor certain discharge water outlets at our Chemical Business facilities should we discontinue the operations of a facility. We also have certain facilities in our Chemical Business that contain asbestos insulation around certain piping and heated surfaces, which we plan to maintain or replace, as needed, with non-asbestos insulation through our standard repair and maintenance activities to prevent deterioration. Since we currently have no plans to discontinue the use of these facilities and the remaining life of the facilities is indeterminable, an asset retirement liability has not been recognized. Currently, there is insufficient information to estimate the fair value of the asset retirement obligations. However, we will continue to review these obligations and record a liability when a reasonable estimate of the fair value can be made.

1. Discharge Water Matters

The El Dorado Facility owned by EDC generates process wastewater, which includes cooling tower and boiler blowdowns, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by a state National Pollutant Discharge Elimination System (“NPDES”) water discharge permit issued by the Arkansas Department of Environmental Quality (“ADEQ”),

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which permit is to be renewed every five years. The ADEQ issued to EDC a NPDES water discharge permit in 2004, and the El Dorado Facility had until June 1, 2007 to meet the compliance deadline for the more restrictive limits under the 2004 NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits, the El Dorado Facility has significantly reduced the contaminant levels of its wastewater.

The El Dorado Facility has generally demonstrated its ability to comply with the more restrictive permit limits, and believes that if it is required to meet the more restrictive dissolved minerals permit levels, it should be able to do so. The El Dorado Facility has been having discussions with the ADEQ to modify and reduce the permit levels as to dissolved minerals, but, although the rule is a state rule, any revisions must also be approved by the United States Environmental Protection Agency (“EPA”) before it can become effective. Additional information has been provided to the EPA regarding the dissolved mineral issue. Once the rule change is complete, the permit limits can be modified to incorporate reasonably achievable dissolved minerals permit levels. The ADEQ has agreed to reopen the rule making to modify the permit limit as to dissolved minerals, which is subject to public notice and public hearings. The ADEQ and the El Dorado Facility also entered into a Consent Administrative Order (“CAO”) which authorized the El Dorado Facility to continue operating through December 31, 2009, without incurring permit violations pending the modification of the permit to implement the revised rule. The ADEQ did not extend the CAO due to the above mentioned dissolved minerals issue; however, in the interim, the El Dorado Facility is currently in compliance with the more restrictive permit limits under the 2004 NPDES permit.

In March 2009, the EPA notified the ADEQ that it disapproved the dissolved mineral rulemaking due to insufficient documentation. Representatives of EDC, ADEQ and the EPA have met to determine what additional information was required by the EPA. During January 2010, EDC received an Administrative Order from the EPA noting certain violations of the permit and requesting EDC to demonstrate compliance with the permit or provide a plan and schedule for returning to compliance. EDC has provided the EPA a response which states that the El Dorado Facility is now in compliance with the permit, that the El Dorado Facility expects to maintain compliance and that all but fifteen of the alleged violations were resolved through the CAO with the ADEQ. During the meeting with the EPA prior to the issuance of the Administrative Order, the EPA advised EDC that its primary objective was to bring the El Dorado Facility into compliance with the permit requirements, but reserved the right to assess penalties for past and continuing violations of the permit. As a result, it is unknown whether the EPA might elect to pursue civil penalties against EDC. Therefore, no liability has been established at June 30, 2010 as a result of the Administrative Order.

In addition, EDC has entered into a CAO that recognizes the presence of nitrate contamination in the shallow groundwater at the El Dorado Facility. EDC is addressing the shallow groundwater contamination. The CAO requires the El Dorado Facility to continue semi-annual groundwater monitoring, to continue operation of a groundwater recovery system and to submit a human health and ecological risk assessment to the ADEQ. The required risk assessment was submitted in August 2007. The final remedy for shallow groundwater contamination, should any remediation be required, will be selected pursuant to the new CAO and based upon the risk

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assessment. The cost of any additional remediation that may be required will be determined based on the results of the investigation and risk assessment and cannot currently be reasonably estimated. Therefore, no liability has been established at June 30, 2010, in connection with this matter.

2. Air Matters

The EPA has sent information requests to most, if not all, of the nitric acid plants in the United States, including to us relating to our El Dorado and Cherokee Facilities and the Baytown, Texas facility (the “Baytown Facility”), requesting information under Section 114 of the Clean Air Act as to construction and modification activities at each of these facilities over a period of years to enable the EPA to determine whether these facilities are in compliance with certain provisions of the Clean Air Act. In connection with a review by our Chemical Business of these facilities in obtaining information for the EPA pursuant to the EPA’s request, our Chemical Business management believes, subject to further review, investigation and discussion with the EPA, that certain facilities within our Chemical Business may be required to make certain capital improvements to certain emission equipment in order to comply with the requirements of the Clean Air Act. If changes to the production equipment at these facilities are required in order to bring this equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial.

Further, if it is determined that the equipment at any of our chemical facilities have not met the requirements of the Clean Air Act, our Chemical Business could be subject to penalties in an amount not to exceed $27,500 per day as to each facility not in compliance and require such facility to be retrofitted with the “best available control technology.” We believe this technology is already employed at the Baytown Facility. Currently, we believe that certain facilities within our Chemical Business may be required to pay certain penalties as a result of the above described matter; however, we are currently unable to determine the amount of any penalties that may be assessed by the EPA. Therefore no liability has been established at June 30, 2010, in connection with this matter.

3. Other Environmental Matters

In December 2002, two of our subsidiaries within our Chemical Business, sold substantially all of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained ownership of the real property. At December 31, 2002, even though we continued to own the real property, we did not assess our continuing involvement with our former Hallowell Facility to be significant and therefore accounted for the sale as discontinued operations. In connection with this sale, our subsidiary leased the real property to the buyer under a triple net long-term lease agreement. However, our subsidiary retained the obligation to be responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property and a corrective action strategy based on the investigation. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters. The successor (“Chevron”) of a prior owner of the Hallowell Facility

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Note 11: Commitments and Contingencies (continued)

has agreed, within certain limitations, to pay and has been paying one-half of the costs of the interim measures relating to this matter as approved by the Kansas Department of Environmental Quality, subject to reallocation.

Our subsidiary and Chevron are pursuing a course with the state of Kansas of long-term surface and groundwater monitoring to track the natural decline in contamination. Our subsidiary and Chevron submitted their final report on the groundwater monitoring and an addendum to the Mitigation Work Plan to the state of Kansas. The data from the monitoring program is being evaluated by the state of Kansas. On June 29, 2010, representatives of our subsidiary and Chevron met with the Kansas Department of Health and Environment (“KDHE”). As a result of this meeting, our subsidiary and Chevron have agreed to perform additional surface and groundwater testing. In addition, the KDHE notified our subsidiary and Chevron that this site has been referred to the KDHE’s Natural Resources Trustee, who is to consider and recommend restoration, replacement and/or whether to seek compensation. KDHE will consider the recommendations in their evaluation. Currently, it is unknown what damages, if any, the KDHE will claim. We have accrued for our allocable portion of costs for the additional testing, monitoring and risk assessments that could be reasonably estimated; however, the nature and extent of a portion of the requirements are not currently defined and the associated costs are not reasonably estimable. The ultimate required remediation, if any, is unknown.

At June 30, 2010, our estimated allocable portion of the total estimated liability (which is included in current and noncurrent accrued and other liabilities) related to this matter is $195,000. This amount is not discounted to its present value. It is reasonably possible that a change in the estimate of our liability will occur in the near term.

B. Other Pending, Threatened or Settled Litigation

The Jayhawk Group

In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC, Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the manager and sole member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the Jayhawk Group agreed, among other things, that if we undertook, in our sole discretion, within one year from the date of agreement a tender offer for our Series 2 $3.25 convertible exchangeable Class C preferred stock (“Series 2 Preferred”) or to issue our common stock for a portion of our Series 2 Preferred pursuant to a private exchange, that they would tender or exchange an aggregate of no more than 180,450 shares of the 340,900 shares of the Series 2 Preferred beneficially owned by the Jayhawk Group, subject to, among other things, the entities owned and controlled by Jack E. Golsen, our Chairman and Chief Executive Officer (“Golsen”), and his immediate family, that beneficially own Series 2 Preferred only being able to exchange or tender approximately the same percentage of shares of Series 2 Preferred beneficially owned by them as the Jayhawk Group was able to tender or exchange under the terms of the agreement. In addition, under the agreement, the Jayhawk Group agreed to vote its shares of our common stock and Series 2 Preferred “for” an amendment to the Certificate of Designation covering the Series 2 Preferred to allow us:

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Note 11: Commitments and Contingencies (continued)

·	for a period of five years from the completion of an exchange or tender to repurchase, redeem or otherwise acquire shares of our common stock, without approval of the outstanding Series 2 Preferred irrespective that dividends are accrued and unpaid with respect to the Series 2 Preferred; or

·	to provide that holders of Series 2 Preferred may not elect two directors to our board of directors when dividends are unpaid on the Series 2 Preferred if less than 140,000 shares of Series 2 Preferred remain outstanding.

During 2007, we made a tender offer for our outstanding Series 2 Preferred at the rate of 7.4 shares of our common stock for each share of Series 2 Preferred so tendered. In July 2007, we redeemed the balance of our outstanding shares of Series 2 Preferred. Pursuant to its terms, the Series 2 Preferred was convertible into 4.329 shares of our common stock for each share of Series 2 Preferred. As a result of the redemption, the Jayhawk Group converted the balance of its Series 2 Preferred pursuant to the terms of the Series 2 Preferred in lieu of having its shares redeemed.

During November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit styled Jayhawk Capital Management, LLC, et al. v. LSB Industries, Inc., et al., in the United States District Court for the District of Kansas at Kansas City. During March 2009, the Jayhawk Group amended its complaint alleging that the Jayhawk Group should have been able to tender all of its Series 2 Preferred pursuant to the tender offer, notwithstanding the above-described agreement, based on the following claims against us and Golsen:

·	fraudulent inducement and fraud,

·	violation of 10(b) of the Exchange Act and Rule 10b-5,

·	violation of 17-12A501 of the Kansas Uniform Securities Act, and

·	breach of contract.

The Jayhawk Group seeks damages in an unspecified amount based on the additional number of common shares it allegedly would have received on conversion of all of its Series 2 Preferred through the February 2007 tender offer, plus punitive damages. In addition, the amended complaint seeks damages of approximately $4,000,000 for accrued and unpaid dividends it purports are owed as a result of Jayhawk’s July 2007 conversion of its remaining shares of Series 2 Preferred. In May 2008, the General Counsel for the Jayhawk Group offered to settle its claims against us and Golsen in return for a payment of $100,000, representing the approximate legal fees it had incurred investigating the claims at that time. Through counsel, we verbally agreed to the settlement offer and confirmed the agreement by e-mail. Afterward, the Jayhawk Group’s General Counsel purported to withdraw the settlement offer, and asserted that Jayhawk is not bound by any settlement agreement. We contend that the settlement agreement is binding on the Jayhawk Group. Both Golsen and we have filed motions to dismiss the plaintiff’s complaint in the federal court, and such motions to dismiss are pending. We intend to contest the lawsuit vigorously, and will assert that Jayhawk is bound by an agreement to settle the claims for $100,000. Our insurer, Chartis, a subsidiary of AIG, has agreed to defend this lawsuit on our behalf and on behalf of Golsen and to indemnify under a reservation of rights to deny liability under certain conditions. We have incurred expenses associated with this matter up to our

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Note 11: Commitments and Contingencies (continued)

insurance deductible of $250,000, and our insurer is paying defense cost in excess of our deductible in this matter. Although our insurer is defending this matter under a reservation of rights, we are not currently aware of any material issue in this case that would result in our insurer denying coverage. Therefore, no liability has been established at June 30, 2010 as a result of this matter.

Other Claims and Legal Actions

We are also involved in various other claims and legal actions including claims for damages resulting from water leaks related to our Climate Control products and other product liability occurrences. Most of the product liability claims are covered by our general liability insurance, which generally includes a deductible of $250,000 per claim. For any claims or legal actions that we have assessed the likelihood of our liability as probable, we have recognized our estimated liability up to the applicable deductible.

In the opinion of management, after consultation with legal counsel, if those claims for which we have not recognized a liability were determined adversely to us, it would not have a material effect on our business, financial condition or results of operations.

Note 12: Derivatives, Hedges and Financial Instruments Derivatives are recognized in the balance sheet and are measured at fair value. Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply or hedge accounting is elected.

We have three classes of contracts that are accounted for on a fair value basis, which are commodities futures/forward contracts (“commodities contracts”), foreign exchange contracts and interest rate contracts as discussed below. All of these contracts are used as economic hedges for risk management purposes but are not designated as hedging instruments. The valuation of these contracts was determined based on quoted market prices or, in instances where market quotes are not available, other valuation techniques or models used to estimate fair values.

The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At June 30, 2010, the valuations of contracts classified as Level 2 related to the interest rate swap contracts discussed below. For the interest rate swap contracts, we utilize valuation software and market data from a third-party provider. These interest rate contracts are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the contracts and using market information for forward interest-rate yield curves. The valuation inputs included the total contractual weighted-average pay rate of 3.42% and the total estimated market weighted-average receive rate of 0.94%. No valuation input adjustments were considered necessary relating to nonperformance risk for the contracts discussed above. There were no valuations of contracts classified as Level 3 at June 30, 2010. At December 31, 2008, the valuations of contracts classified as Level 3 were based on the average ask/bid prices obtained from a broker relating to a low volume market.

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Note 12: Derivatives, Hedges and Financial Instruments (continued)

Commodities Contracts

Raw materials for use in our manufacturing processes include copper used by our Climate Control Business and anhydrous ammonia and natural gas used by our Chemical Business. As part of our raw material price risk management, we periodically enter into futures/forward contracts for these materials, which contracts are generally accounted for on a mark-to-market basis. At December 31, 2009, our futures/forward copper contracts were for 750,000 pounds of copper through May 2010 at a weighted-average cost of $3.19 per pound. At June 30, 2010, our futures/forward copper contracts were for 750,000 pounds of copper through December 2010 at a weighted-average cost of $3.24 per pound. At December 31, 2009, we also had contractual rights under natural gas call contracts for approximately 150,000 MMBtu of natural gas through February 2010 at a weighted-average price of $6.00 per MMBtu. At June 30, 2010, our futures/forward natural gas contracts were for 140,000 MMBtu of natural gas through September 2010 at a weighted-average cost of $4.95 per MMBtu. The cash flows relating to these contracts are included in cash flows from continuing operating activities.

Foreign Exchange Contracts

One of our business operations purchases industrial machinery and related components from vendors outside of the United States. As part of our foreign currency risk management, we periodically enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange rates. These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. At December 31, 2009, our foreign exchange contracts were for the receipt of approximately 336,000 Euros through April 2010 at a weighted-average contract exchange rate of 1.44 (U.S. Dollar/Euro). At June 30, 2010, we had no outstanding foreign exchange contracts. The cash flows relating to these contracts are included in cash flows from continuing operating activities.

Interest Rate Contracts

As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. In March 2005, we purchased two interest rate cap contracts for a cost of $590,000, which matured in March 2009. In April 2008, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. In September 2008, we acquired an interest rate swap at a cost basis of $354,000, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012.

These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. Although no purchases occurred during the six months ended June 30, 2010 and 2009, the cash flows relating to the purchase of interest rate contracts are included in cash flows from continuing investing activities. In addition, the cash flows associated with the interest rate swap payments are included in cash flows from continuing operating activities.

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(Unaudited)

Note 12: Derivatives, Hedges and Financial Instruments (continued)

The following details our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009:

Fair Value Measurements at

June 30, 2010 Using

Description

Total Fair

Value at

June 30,

2010

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Total Fair

Value at

December 31,

2009

(In Thousands)

Assets - Supplies, prepaid items and other:
Commodities contracts	$	-	$	-	$	-	$	-	$	150
Total	$	-	$	-	$	-	$	-	$	150

Liabilities - Current and noncurrent accrued and other liabilities:
Commodities contracts	$	246	$	246	$	-	$	-	$	-
Interest rate contracts		2,277		-		2,277		-		1,929
Total	$	2,523	$	246	$	2,277	$	-	$	1,929

During the six months ended June 30, 2010, none of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and Level 2 classifications. In addition, the following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2009 (not applicable for the six months ended June 30, 2010 and the three months ended June 30, 2010 and 2009):

Commodities

Contracts

(In Thousands)

Beginning balance	$	(1,388	)
Total realized and unrealized gain included in earnings		493
Purchases, issuances, and settlements		895
Transfers in and/or out of Level 3		-
Ending balance	$	-

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Note 12: Derivatives, Hedges and Financial Instruments (continued)

Realized and unrealized net gains (losses) included in earnings and the income statement classifications are as follows:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Total net gains (losses) included in earnings:
Cost of sales – Commodities contracts	$	(904	)	$	(1,148	)	$	(216	)	$	8
Cost of sales – Foreign exchange contracts		(24	)		(31	)		-			(1	)
Interest expense – Interest rate contracts		(1,137	)		158			(523	)		427
	$	(2,065	)	$	(1,021	)	$	(739	)	$	434

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Change in unrealized gains and losses relating to contracts still held at period end:
Cost of sales – Commodities contracts	$	(246	)	$	(969	)	$	(313	)	$	30
Interest expense – Interest rate contracts		(348	)		649			(128	)		719
	$	(594	)	$	(320	)	$	(441	)	$	749

The following discussion of fair values is not indicative of the overall fair value of our assets and liabilities since it does not include all assets, including intangibles.

Our long-term debt agreements are the only financial instruments with fair values significantly different from their carrying amounts. At June 30, 2010 and December 31, 2009, the fair value for variable debt, excluding the Secured Term Loan, was believed to approximate their carrying value. At June 30, 2010 and December 31, 2009, the estimated fair value of the Secured Term Loan is based on defined LIBOR rates plus 7% utilizing information obtained from the lender. The fair values of fixed rate borrowings, other than the 2007 Debentures, are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding while also taking into consideration our current credit worthiness. At June 30, 2010 and December 31, 2009, the estimated fair value of the 2007 Debentures is based on quoted prices obtained from a broker for these debentures. The estimated fair value and carrying value of our long-term debt are as follows:

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 12: Derivatives, Hedges and Financial Instruments (continued)

June 30, 2010

December 31, 2009

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

Carrying

Value

(In Thousands)

Variable Rate:
Secured Term Loan	$	24,518	$	49,151	$	27,640	$	50,000
Working Capital Revolver Loan		-		-		-		-
Other debt		2,495		2,495		2,553		2,553

Fixed Rate:
5.5% Convertible Senior Subordinated Notes		26,833		26,900		29,106		29,400
Other bank debt and equipment financing		24,015		23,369		20,231		19,848
	$	77,861	$	101,915	$	79,530	$	101,801

Note 13: Income Per Common Share Net income applicable to common stock is computed by adjusting net income by the amount of preferred stock dividends. Basic income per common share is based upon net income applicable to common stock and the weighted-average number of common shares outstanding during each period.

Diluted income per share is based on net income applicable to common stock plus preferred stock dividends on preferred stock assumed to be converted, if dilutive, and interest expense including amortization of debt issuance cost, net of income taxes, on convertible debt assumed to be converted, if dilutive, and the weighted-average number of common shares and dilutive common equivalent shares outstanding, and the assumed conversion of dilutive convertible securities outstanding.

The following is a summary of certain transactions which affected basic income per share or diluted income per share, if dilutive:

During the six months ended June 30, 2010,

·	we purchased 177,100 shares of treasury stock;

·	we issued 43,510 shares of our common stock as the result of the exercise of stock options;

·	we acquired $2,500,000 aggregate principle amount of the 2007 Debentures; and

we paid cash dividends on our Series B 12% cumulative, convertible preferred stock (“Series B Preferred”), Series D 6% cumulative, convertible Class C preferred stock (“Series D Preferred”) and noncumulative redeemable preferred stock (“Noncumulative Preferred”) totaling approximately $240,000, $60,000 and $5,000, respectively.

During the six months ended June 30, 2009,

·	we issued 389,000 shares of our common stock as the result of the exercise of stock options;

·	we acquired $9,200,000 aggregate principle amount of the 2007 Debentures; and

·	we paid cash dividends on our Series B Preferred, Series D Preferred and Noncumulative Preferred totaling approximately $240,000, $60,000 and $6,000, respectively.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 13: Income Per Common Share (continued)

At June 30, 2010, there were no dividends in arrears.

The following table sets forth the computation of basic and diluted net income per common share:

(Dollars In Thousands, Except Per Share Amounts)

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

Numerator:
Net income	$	7,727		$	20,473		$	6,009	$	8,730
Dividends on Series B Preferred		(240	)		(240	)		-		-
Dividends on Series D Preferred		(60	)		(60	)		-		-
Dividends on Noncumulative Preferred		(5	)		(6	)		-		-
Total dividends on preferred stock		(305	)		(306	)		-		-
Numerator for basic net income per common share - net income applicable to common stock		7,422			20,167			6,009		8,730
Dividends on preferred stock assumed to be converted, if dilutive		65			306			-		-
Interest expense including amortization of debt issuance costs, net of income taxes, on convertible debt assumed to be converted, if dilutive		-			627			-		314
Numerator for diluted net income per common share	$	7,487		$	21,100		$	6,009	$	9,044

Denominator:
Denominator for basic net income per common share - weighted-average shares		21,227,411			21,174,210			21,228,918		21,237,904
Effect of dilutive securities:
Convertible preferred stock		270,425			938,006			936,566		937,825
Stock options		190,332			331,607			207,849		354,899
Convertible notes payable		4,000			1,143,320			4,000		1,143,320
Dilutive potential common shares		464,757			2,412,933			1,148,415		2,436,044
Denominator for diluted net income per common share - adjusted weighted-average shares and assumed conversions		21,692,168			23,587,143			22,377,333		23,673,948

Basic net income per common share	$	.35		$	.95		$	.28	$	.41

Diluted net income per common share	$	.35		$	.89		$	.27	$	.38

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 13: Income Per Common Share (continued)

The following weighted-average shares of securities were not included in the computation of diluted net income per common share as their effect would have been antidilutive:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009


Convertible notes payable	979,160	-	979,160	-
Convertible preferred stock	666,666	-	-	-
Stock options	373,619	766,646	372,253	412,363
	2,019,445	766,646	1,351,413	412,363

Note 14: Income Taxes Provisions for income taxes are as follows:

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Current:
Federal	$	4,473	$	6,490	$	3,957	$	1,682
State		1,174		772		967		182
Total current provisions	$	5,647	$	7,262	$	4,924	$	1,864

Deferred:
Federal	$	226	$	4,970	$	49	$	3,219
State		18		568		6		368
Total deferred provisions		244		5,538		55		3,587
Provisions for income taxes	$	5,891	$	12,800	$	4,979	$	5,451

For the six and three months ended June 30, 2010 and 2009, the current provision for federal income taxes shown above includes regular federal income tax after the consideration of permanent and temporary differences between income for GAAP and tax purposes. For the six and three months ended June 30, 2010 and 2009, the current provision for state income taxes shown above includes regular state income tax and provisions for uncertain state income tax positions. At December 31, 2009, we had state net operating loss (“NOL”) carryforwards totaling approximately $12,900,000, which begin expiring in 2010.

Our annual estimated effective tax rate for 2010 is reduced by permanent tax differences, including the domestic manufacturer’s deduction and other permanent items.

The tax provision for the six months ended June 30, 2010 was $5,891,000 or 43.3% of pre-tax income and included the impact of the increased domestic manufacturer’s deduction available in 2010, the advanced energy credits and the additional income tax provision related to nondeductible expenses in prior years.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 14: Income Taxes (continued)

During June 2010, we determined that certain nondeductible expenses had not been properly identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional income tax provision of approximately $800,000 for the six and three months ended June 30, 2010. For the six and three months ended June 30, 2010, the effect of this adjustment decreased basic net income per share by $.04 and decreased diluted net income per share by $.03.

Management of the Company evaluated the impact of this accounting error and concluded the effect of this adjustment was immaterial to the Company’s 2007-2009 consolidated financial statements as well as the projected consolidated financial statements for the year ending December 31, 2010.

For the six months ended June 30, 2009, the tax provision was $12,800,000 or 38.5% of pre-tax income and included the impact of the domestic manufacturer’s deduction and other permanent items.

Our accounting for income taxes includes utilizing the accounting principle that the realization of an uncertain income tax position must be “more likely than not” (i.e., greater than 50% likelihood) that the position will be sustained upon examination by taxing authorities before it can be recognized in the financial statements.

We believe that we do not have any material uncertain tax positions other than the failure to file state income tax returns in some jurisdictions where we or some of our subsidiaries may have a filing responsibility (i.e, nexus). We had approximately $665,000 and $608,000 accrued for uncertain tax liabilities at June 30, 2010 and December 31, 2009, respectively, which are included in current and noncurrent accrued and other liabilities.

We and certain of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The federal tax returns for 1997 through 2005 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. With few exceptions, the 2006-2008 years remain open for all purposes of examination by the IRS and other major tax jurisdictions.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 15: Other Expense, Other Income and Non-Operating Other Income, net

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Other expense:
Losses on sales and disposals of property and equipment	$	259		$	220		$	256		$	207
Other miscellaneous expense (1)		43			114			(12	)		84
Total other expense (1)	$	302		$	334		$	244		$	291

Other income:
Property insurance recoveries in excess of losses incurred	$	739		$	-		$	-		$	-
Miscellaneous income (1)		167			190			100			28
Total other income	$	906		$	190		$	100		$	28

Non-operating other income, net:
Interest income	$	77		$	78		$	21		$	33
Miscellaneous expense (1)		(39	)		(44	)		(21	)		(22	)
Total non-operating other income, net	$	38		$	34		$	-		$	11

(1)	Amounts represent numerous unrelated transactions, none of which are individually significant requiring separate disclosure.

Note 16: Business Interruption and Property Insurance Claims If an insurance claim relates to a recovery of our losses, we recognize the recovery when it is probable and reasonably estimable. If our insurance claim relates to a contingent gain, we recognize the recovery when it is realized or realizable and earned.

Cherokee Facility - In February 2009, a small nitric acid plant located at the Cherokee Facility suffered damage due to a fire. The fire was immediately extinguished and there were no injuries. The extent of the damage to the nitric acid plant has been determined. We have no immediate plans to rebuild the damaged plant. The nitric acid plant that suffered the fire, with a current 182 ton per day capacity, is the smaller of the two nitric acid plants at the Cherokee Facility. The Cherokee Facility continues production with the larger of the nitric acid plants. Our property insurance policy provides for replacement cost coverage relating to property damage with a $1,000,000 property loss deductible. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but we recorded a property insurance claim receivable relating to this event. During the first six months of 2010, our insurance claim receivable decreased by a net $849,000. The activity during the six months of 2010 included the receipt of approximately $1,021,000 from our insurance carrier as a partial payment on our insurance claim, all of which relates to property, plant and equipment (“PP&E”). In addition, the activity included payments of $172,000 relating to payables (approved by our insurance carrier) to unrelated third parties. As a result, the balance of the insurance claim receivable relating to this event was $326,000 at June 30, 2010.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 16: Business Interruption and Property Insurance Claims (continued)

Bryan Distribution Center - In July 2009, one of our fifteen agricultural distribution centers operated by our Chemical Business was destroyed by fire, resulting in the cessation of operations at this center, which is located in Bryan, Texas (“Bryan Center”). The Bryan Center stored and sold agricultural chemical products, including fertilizer grade ammonium nitrate, potash and certain other fertilizer products. During the first six months of 2010, the project to rebuild the Bryan Center was substantially completed. Our general liability insurance policy provides for coverage against third party damages with a $250,000 loss deductible. Our property insurance policy provides for replacement cost coverage relating to property damage and for business interruption coverage for certain lost profits and extra expense with a total $100,000 loss deductible for both coverages. As of June 30, 2010, the third party general liability claims have exceeded our $250,000 deductible. We have recognized the $250,000 general liability deductible and the insurance company has been paying directly most of the third party general liability claims. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. A recovery, if any, from our business interruption coverage has not been recognized. During the fourth quarter of 2009, we received $545,000 from our insurance carrier as a partial payment on our insurance claim, which amount was applied against our insurance claim receivable. During the first six months of 2010, our insurance claim receivable decreased by a net $31,000. The activity during the six months of 2010 included the receipt of additional partial payments totaling $1,039,000 ($649,000 relates to PP&E) from our insurance carrier, of which $300,000 was applied against our insurance claim receivable and the remaining balance of $739,000 ($495,000 relates to PP&E) was classified as other income. In addition, the activity included payments of $148,000 relating to payables (approved by our insurance carrier) to unrelated third parties and payments of $121,000 to our insurance carrier associated with the general liability deductible. As a result, the balance of the insurance claim receivable relating to this event was $4,000 at June 30, 2010.

Pryor Facility – In June 2010, a pipe failure in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged the ammonia plant. The fire was immediately extinguished and there were no injuries. As a result of this damage, the Pryor Facility is unable to produce anhydrous ammonia or UAN. Based on our current assessment, the estimated costs to rebuild the ammonia reformer are approximately $8.0 million and should be completed toward the end of September 2010. Our property insurance policy provides for replacement cost coverage relating to property damage with a total $1,000,000 loss deductible and for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period and a minimum $250,000 deductible. As of June 30, 2010, because our replacement cost claim for property damages is estimated to exceed our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. A recovery, if any, from our business interruption coverage has not been recognized. At June 30, 2010, the balance of the insurance claim receivable relating to this event was $447,000.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 17: Segment Information

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Net sales:
Climate Control	$	113,499		$	139,030		$	59,828		$	66,982
Chemical		181,250			144,371			106,378			69,893
Other		4,053			5,359			2,186			1,688
	$	298,802		$	288,760		$	168,392		$	138,563

Gross profit: (1)
Climate Control (2)	$	37,231		$	47,426		$	18,832		$	24,998
Chemical (3)		24,760			29,429			15,602			12,281
Other		1,423			1,700			714			548
	$	63,414		$	78,555		$	35,148		$	37,827

Operating income: (4)
Climate Control (2)	$	12,520		$	21,204		$	6,993		$	12,226
Chemical (3) (5)		11,063			18,835			9,178			6,197
General corporate expenses and other business operations, net (6)		(6,357	)		(6,077	)		(3,361	)		(3,881	)
		17,226			33,962			12,810			14,542
Interest expense		(4,079	)		(2,939	)		(1,999	)		(1,028	)
Gains (losses) on extinguishment of debt		(52	)		1,743			(52	)		421
Non-operating other income, net:
Climate Control		1			-			-			-
Chemical		5			6			3			3
Corporate and other business operations		32			28			(3	)		8
Provisions for income taxes		(5,891	)		(12,800	)		(4,979	)		(5,451	)
Equity in earnings of affiliate-Climate Control		528			488			267			248
Income from continuing operations	$	7,770		$	20,488		$	6,047		$	8,743

(1)	Gross profit by industry segment represents net sales less cost of sales. Gross profit classified as “Other” relates to the sales of industrial machinery and related components.

(2)

During the six and three months ended June 30, 2010, we recognized losses totaling $315,000 and $465,000, respectively, on our futures contracts for copper compared to gains totaling $789,000 and $326,000 during the six and three months ended June 30, 2009, respectively. The impact of these losses decreased (gains increased) gross profit and operating income for each respective period.

(3)

As the result of entering into sales commitments with higher firm sales prices during 2008, we recognized sales with a gross profit of $761,000 higher than our comparable product sales made at lower market prices available during the six months ended June 30, 2010, (not applicable for the second quarter of 2010) compared to sales with a gross profit of $3,558,000 and $1,058,000 higher than our comparable product sales made at lower market prices available during the six and three months ended June 30, 2009, respectively. In addition, during the six months ended June 30, 2010, we recognized gains on sales and

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 17: Segment Information (continued)

recoveries of precious metals totaling $112,000 (not applicable for the second quarter of 2010) compared to gains totaling $2,222,000 and $9,000 during the six and three months ended June 30, 2009, respectively. The impact of these transactions increased gross profit and operating income for each respective period. During the six and three months ended June 30, 2010, we incurred expenses of $2,696,000 and $1,264,000, respectively, relating to planned major maintenance activities compared to expenses totaling $604,000 and $484,000 during the six and three months ended June 30, 2009, respectively. During the six and three months ended June 30, 2010, we recognized losses totaling $589,000 and gains totaling $249,000, respectively, on our futures/forward contracts for natural gas and ammonia compared to losses totaling $1,937,000 and $318,000 during the six and three months ended June 30, 2009, respectively. The impact of these expenses and losses decreased (gains increased) gross profit and operating income for each respective period.

(4)

Our chief operating decision makers use operating income by industry segment for purposes of making decisions, which include resource allocations and performance evaluations. Operating income by industry segment represents gross profit by industry segment less selling, general and administration expense (“SG&A”) incurred by each industry segment plus other income and other expense earned/incurred by each industry segment before general corporate expenses and other business operations, net. General corporate expenses and other business operations, net, consist of unallocated portions of gross profit, SG&A, other income and other expense.

(5)

During the first six months of 2010, we began limited production and sales of anhydrous ammonia and urea ammonium nitrate (“UAN”) at our previously idled chemical facility located in Pryor, Oklahoma (the “Pryor Facility”). However the production was at rates lower than our targeted production rates. As a result, we incurred operating losses of $8,030,000 and $1,993,000 for the six and three months ended June 30, 2010, respectively. During the six and three months ended June 30, 2009, we incurred start up expenses of $5,213,000 and $3,217,000, respectively, relating to the Pryor Facility. Excluding the impact of gross profit recognized during the first half of 2010, these expenses are primarily included in SG&A for each respective period. Also see Note 16 – Business Interruption and Property Insurance Claims concerning a fire within the Pryor Facility.

(6)	The amounts included are not allocated to our Climate Control and Chemical Businesses since these items are not included in the operating results reviewed by our chief operating decision makers for purposes of making decisions as discussed above. A detail of these amounts are as follows:

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 17: Segment Information (continued)

Six Months Ended

June 30,

Three Months Ended

June 30,

2010

2009

2010

2009

(In Thousands)

Gross profit-Other	$	1,423		$	1,700		$	714		$	548
Selling, general and administrative:
Personnel costs		(4,267	)		(4,326	)		(2,520	)		(2,601	)
Professional fees		(1,925	)		(1,818	)		(755	)		(834	)
Office overhead		(323	)		(345	)		(160	)		(157	)
Maintenance and repairs		(38	)		(174	)		(26	)		(152	)
Property, franchise and other taxes		(170	)		(160	)		(84	)		(77	)
Advertising		(121	)		(132	)		(55	)		(62	)
All other		(999	)		(733	)		(508	)		(370	)
Total selling, general and administrative		(7,843	)		(7,688	)		(4,108	)		(4,253	)

Other income		70			133			30			23
Other expense		(7	)		(222	)		3			(199	)
Total general corporate expenses and other business operations, net	$	(6,357	)	$	(6,077	)	$	(3,361	)	$	(3,881	)

Information about our total assets by industry segment is as follows:

June 30,

2010

December 31,

2009

(In Thousands)

Climate Control	$	109,606	$	102,029
Chemical		151,624		143,800
Corporate assets and other		83,330		92,804
Total assets	$	344,560	$	338,633

Note 18: Related Party Transactions

Golsen Group

During November 2008, the Golsen Group acquired from an unrelated third party $5,000,000 of the 2007 Debentures. As a result in January 2009, we paid interest of $137,500 relating to the debentures held by the Golsen Group that was accrued at December 31, 2008. In March 2009, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group. During the six months ended June 30, 2009, we incurred interest expense of $137,500 relating to the debentures held by the Golsen Group, which amount was paid in June 2009.

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LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 18: Related Party Transactions (continued)

In January 2010, we paid interest of $137,500 relating to the 2007 Debentures held by the Golsen Group that was accrued at December 31, 2009. In March 2010, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group. During the six months ended June 30, 2010, we incurred interest expense of $137,500 relating to the debentures held by the Golsen Group, which amount was paid in June 2010.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our June 30, 2010 condensed consolidated financial statements. Certain statements contained in this MD&A may be deemed forward-looking statements. See "Special Note Regarding Forward-Looking Statements".

Overview

General

We are a manufacturing, marketing and engineering company operating through our subsidiaries. Our wholly-owned subsidiaries own the following core businesses:

Climate Control Business manufactures and sells a broad range of air conditioning and heating products in the niche markets we serve consisting of geothermal and water source heat pumps, hydronic fan coils, large custom air handlers and other related products used to control the environment in commercial and residential new building construction, renovation of existing buildings and replacement of existing systems. For the first six months of 2010, approximately 38% of our consolidated net sales relates to the Climate Control Business.

Chemical Business manufactures and sells nitrogen based chemical products produced from three plants located in Arkansas, Alabama and Texas for the industrial, mining and agricultural markets. In addition, we are continuing with the development of our previously idled Pryor Facility located in Pryor, Oklahoma. Our products include industrial and fertilizer grade AN, UAN, anhydrous ammonia, sulfuric acids, nitric acids in various concentrations, nitrogen solutions and various other products. For the first six months of 2010, approximately 61% of our consolidated net sales relates to the Chemical Business.

The Pryor Facility began limited production of anhydrous ammonia and UAN in the first quarter of 2010 until a pipe failure and fire in June damaged the ammonia plant’s primary reformer within the Pryor Facility. As a result, all production at the Pryor Facility has ceased until repairs can be completed, which is expected toward the end of September 2010.

Economic Conditions

Our two main business segments serve several diverse markets. We consider market fundamentals for each market individually as we evaluate economic conditions.

Climate Control Business - The downturn in commercial and residential construction continued to have a significant adverse effect on our Climate Control Business’ product order level and sales in the first half of 2010. Based upon published reports of leading indicators, including the Construction Market Forecasting Service published by McGraw-Hill, and the national architecture billings index published by American Institute of Architects (“AIA”), the overall commercial construction sector is not expected to recover during 2010. On the other hand, McGraw-Hill has projected an increase in both single-family residential and multi-family

construction during 2010. Another factor that may affect product order rates going forward is the potential for growth in our highly energy-efficient geothermal water-source heat pumps, which could benefit significantly from government stimulus programs, including various tax incentives, although we cannot predict the impact these programs will have on our business.

The Chemical Business – Our Chemical Business’ primary markets are industrial, mining and agricultural. We believe that the sales in all three sectors for the remainder of 2010 will continue to be affected by the overall economic conditions. During the first half of 2010, approximately 58% of our Chemical Business’ sales were into industrial and mining markets. Approximately 72% of these sales are to customers that have contractual obligations to purchase a minimum quantity or allow us to recover our cost plus a profit, irrespective of the volume of product sold. It is unclear to us how these markets will respond for the remainder of 2010, but we anticipate modest increased demand from certain of our large industrial customers and from our mining customers.

The remaining 42% of our Chemical Business’ sales in the first half of 2010 were made into the agricultural fertilizer markets to customers that do not purchase pursuant to contractual arrangements. Our agricultural sales volumes and margins depend upon the supply of and the demand for fertilizer, which in turn depends on the market fundamentals for crops including corn, wheat and forage. During the first half of 2010, anhydrous ammonia increased in cost while natural gas costs declined, resulting in a competitive cost disadvantage for agricultural grade AN produced from purchased ammonia at our El Dorado Facility compared to competitors that produce from natural gas. Our Cherokee Facility produces approximately 170,000 tons of anhydrous ammonia annually from natural gas. The current outlook according to most market indicators, including reports in Green Markets, Fertilizer Week and other industry publications, point to positive supply and demand fundamentals for the types of nitrogen fertilizer products we produce and sell. However, it is possible that the fertilizer outlook could be adversely affected by lower grain production, unanticipated changes in commodity prices, or unfavorable weather conditions.

Results for Second Quarter 2010

Our consolidated net sales for the second quarter of 2010 were $168.4 million compared to $138.6 million for the same period in 2009. The sales increase of $29.8 million includes an increase of $36.5 million in our Chemical Business partially offset by a decrease of $7.2 million in our Climate Control Business. The increase in our Chemical Business’ sales was primarily a result of improved customer demand for agricultural and industrial products and an increase of selling prices partially driven by higher raw material input costs. The decrease in our Climate Control Business’ sales is due primarily to a lower beginning backlog of customer product orders due to the economic downturn.

Our consolidated operating income was $12.8 million for the second quarter of 2010 compared to $14.5 million for the same period in 2009. The decrease in operating income of $1.7 million included a $5.2 million decrease in our Climate Control Business operating income partially offset by an increase of $3.0 million in our Chemical Business. Our general corporate expense and other business operations net expenses decreased $0.5 million.

As discussed below under “Results of Operations”, the disproportionately higher decline in our Climate Control’s operating income of 43% compared to the 11% decline in sales was primarily attributable to increases in raw material costs as a percentage of sales, lower overhead absorption at our manufacturing facilities, and changes in our commercial product mix.

Our resulting effective income tax rate for the second quarter of 2010 was approximately 45.3% compared to 38.4% for the second quarter of 2009. During June 2010, we determined that certain nondeductible expenses had not been properly identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional income tax provision of approximately $800,000 in the second quarter of 2010.

Climate Control Business

Our Climate Control sales for the second quarter of 2010 were $59.8 million or 11% below the second quarter of 2009. The decrease in net sales resulted from a 29% decline in sales of our fan coil products, a 6% decline in our geothermal and water source heat pump products and a 9% decline in other HVAC products.

We continue to closely follow economic indicators and have attempted to assess the impact on the commercial and residential construction sectors that we serve, including, but not limited to, new construction and/or renovation of facilities in the following sectors:

·	Multi-Family Residential (apartments and condominiums)

·	Single-Family Residential

Lodging

Education

·	Healthcare

Offices

·	Manufacturing

During the second quarter of 2010, approximately 75% of our Climate Control Business’ sales were to the commercial and multi-family construction markets, and the remaining 25% were sales of geothermal heat pumps (“GHPs”) to the single-family residential market.

For the second quarter of 2010, the product order intake level was $71.7 million as compared to $54.7 million for the same period in 2009 and compared to $54.2 million for the first quarter of 2010 and $48.5 million for the fourth quarter of 2009. Product orders for residential and commercial products increased 48% and 26%, respectively, as compared to the same period in 2009. Our product order level consists of confirmed purchase orders from customers that have been accepted and received credit approval.

Our order backlog was $48.2 million at June 30, 2010 as compared to $36.0 million at March 31, 2010, $32.2 million at December 31, 2009 and $49.5 at June 30, 2009. The backlog consists of confirmed customer orders for product to be shipped at a future date. Historically, we have not experienced significant cancellations relating to our backlog of confirmed customer product orders, and we expect to ship substantially all of these orders within the next twelve months; however, due to the current economic conditions in the markets we serve, it is possible that some of our customers could cancel a portion of our backlog or extend the shipment terms beyond

twelve months. During the second quarter of 2010, one order for $3.2 million was cancelled by a customer due to their inability to refinance their project and the reported order backlog as of June 30, 2010 was reduced accordingly. For July 2010, our new orders received were approximately $19.5 million and our backlog was approximately $48.2 million at July 31, 2010.

Our GHPs use a form of renewable energy and, under certain conditions, can reduce energy costs up to 80% compared to conventional all-electric and gas HVAC systems. The American Recovery and Reinvestment Act of 2009 (“Act”) provides a 30% tax credit for homeowners who install GHPs. For businesses that install GHPs, the Act includes a 10% tax credit and five year accelerated depreciation for the balance of the system cost.

Although we expect to see continued slowness in our Climate Control Business’ results in the short-term, we have significantly increased our sales and marketing efforts for all of our Climate Control products, primarily to expand the market for our products, including GHPs. Over time, we believe that the recently enacted federal tax credits for GHPs should have a positive impact on sales of those highly energy efficient and green products.

Chemical Business

Our Chemical Business operates the El Dorado Facility, the Cherokee Facility, the Baytown Facility and the Pryor Facility. The El Dorado and Baytown Facilities produce nitrogen products from anhydrous ammonia that is delivered by pipeline. The El Dorado Facility also produces sulfuric acid from recovered elemental sulfur delivered by truck and rail. The Cherokee and Pryor Facilities produce anhydrous ammonia and nitrogen products from natural gas that is delivered by pipeline but can also receive supplemental anhydrous ammonia by truck, rail or barge.

During the second quarter of 2010, the Pryor Facility intermittently produced anhydrous ammonia and UAN on a limited basis at production rates lower than our targeted rates. The UAN produced was sold to a customer and the anhydrous ammonia produced was either sold to customers or utilized by our other Chemical facilities.

Operating expenses at the Pryor Facility for the second quarter were $6.2 million. The operating expenses during this period of $3.0 million identifiable with production were included in cost of sales or capitalized to inventory and the remaining $3.2 million of expenses were included in SG&A, which is below the gross profit line.

Due to a pipe failure and fire in June 2010 that damaged the ammonia plant’s primary reformer within the facility, the Pryor Facility is unable to produce anhydrous ammonia or UAN. Based upon our current assessment, we anticipate, due to lead times for replacement parts, the repairs will be completed toward the end of September 2010. As discussed below under “Liquidity and Capital Resources-Recognition of Insurance Recoveries,” we have notified our insurer of this event.

As indicated above, all production at the Pryor Facility has ceased for an estimated 90 days while repairs are being completed. During this rebuild and repair phase in the third quarter of 2010, all operating expenses and losses will primarily be classified as SG&A. We continue to fund the Pryor Facility from our available cash on hand and working capital.

Our primary raw material feedstocks (anhydrous ammonia, natural gas and sulfur) are commodities subject to significant price fluctuations, and are generally purchased at prices in effect at the time of purchase. During second quarter of 2010, the average prices for those commodities compared to same period in 2009 were as follows:

2010

2009

Natural gas average price per MMBtu based upon Tennessee 500 pipeline pricing point	$	4.46	$	3.91
Ammonia average price based upon low Tampa metric price per ton	$	390	$	261
Sulfur price based upon Tampa average quarterly price per long ton	$	145		See (1)

(1)	The average quarterly price was negligible for the second quarter of 2009.

Most of our Chemical Business sales in the industrial and mining markets were pursuant to sales contracts and/or pricing arrangements on terms that include the cost of raw material feedstock as a pass through component in the sales price. Our Chemical Business sales in the agricultural markets primarily were sold at the market price in effect at the time of sale or at a negotiated future price.

The percentage change in sales (volume and dollars) for the second quarter of 2010 compared to the second quarter of 2009 is as follows:

Percentage Change of

Tons

Dollars

	Increase
Chemical products:

Agricultural	45	%	48	%
Industrial acids and other	44	%	53	%
Mining	33	%	61	%
Total weighted-average change	45	%	52	%

The increase in agricultural sales both in tons and dollars represent higher unit prices and a shift in volume from the first quarter 2010 to the second quarter 2010 due to a late start of the spring fertilizer season in 2010.

The disproportionately higher increase in industrial and mining sales dollars compared to the increase in tons shipped is primarily due to higher ammonia feedstock cost in 2010 that was passed through in the selling price pursuant to pricing arrangements with certain customers.

Liquidity and Capital Resources

The following is our cash and cash equivalents, short-term investments, total interest bearing debt and stockholders’ equity:

	June 30, 2010		December 31, 2009
	(In Millions)

Cash and cash equivalents	$	65.3	$	61.7
Short-term investments		-		10.1
	$	65.3	$	71.8

Long-term debt:
2007 Debentures due 2012	$	26.9	$	29.4
Secured Term Loan due 2012		49.2		50.0
Other		25.8		22.4
Total long-term debt, including current portion	$	101.9	$	101.8

Total stockholders’ equity	$	156.5	$	150.6

At June 30, 2010, our cash and cash equivalents totaled $65.3 million and our $50 million Working Capital Revolver Loan was undrawn and available to fund operations, if needed, subject to the amount of our eligible collateral and outstanding letters of credit. At June 30, 2010 and December 31, 2009, the ratio between long-term debt, before the use of cash on hand to pay down debt, and stockholders’ equity was approximately 0.7 to 1.

For the remainder of 2010, we expect our primary cash needs will be for working capital and capital expenditures. We and our subsidiaries plan to rely upon internally generated cash flows, cash, secured property and equipment financing, and the borrowing availability under the Working Capital Revolver Loan to fund operations and pay obligations. Also see discussion below concerning our universal shelf registration statement. Our internally generated cash flows and our liquidity could be affected by possible declines in sales volumes resulting from the uncertainty relative to the current economic conditions.

Our 2007 Debentures bear interest at the annual rate of 5.5% and mature on July 1, 2012. Interest is payable in arrears on January 1 and July 1 of each year.

The Secured Term Loan matures on November 2, 2012 and accrues interest at a defined LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at June 30, 2010 was approximately 3.34%. The Secured Term Loan requires only quarterly interest payments with the final payment of interest and principal at maturity. The Secured Term Loan is secured by the real property and equipment located at the El Dorado and Cherokee Facilities.

Since the 2007 Debentures and the Secured Term Loan both mature in 2012, we are currently reviewing various alternatives for the retirement of these obligations, as they become due.

Certain of our subsidiaries are subject to numerous covenants under the Secured Term Loan including, but not limited to, limitation on the incurrence of certain additional indebtedness and liens, limitations on mergers, acquisitions, dissolution and sale of assets, and limitations on declaration of dividends and distributions to us, all with certain exceptions.

The Working Capital Revolver Loan, which certain of our subsidiaries are parties to, is available to fund these subsidiaries working capital requirements, if necessary, through April 13, 2012. Under the Working Capital Revolver Loan, these subsidiaries (the “Borrowers”) may borrow on a revolving basis up to $50.0 million based on specific percentages of eligible accounts receivable and inventories. At June 30, 2010, we had approximately $49.2 million of borrowing availability under the Working Capital Revolver Loan based on eligible collateral and outstanding letters of credit.

The Working Capital Revolver Loan and the Secured Term Loan have financial covenants that are discussed below under “Subordinated Debentures and Loan Agreements - Terms and Conditions”. The Borrowers’ ability to maintain borrowing availability under the Working Capital Revolver Loan depends on their ability to comply with the terms and conditions of the loan agreements and their ability to generate cash flow from operations. The Borrowers are restricted under their credit agreements as to the funds they may transfer to the Company and our subsidiaries that are not parties to the loan agreement. This limitation does not prohibit payment to the Company of amounts due under a Services Agreement, Management Agreement and a Tax Sharing Agreement with ThermaClime. Based upon our current projections, we believe that cash and borrowing availability under our Working Capital Revolver Loan is adequate to fund operations during the remainder of 2010.

Although we do not have any current plans to offer or sell any securities, in September 2009, we filed a universal shelf registration statement on Form S-3, with the SEC, which was declared effective by the SEC in November 2009. The shelf registration statement provides that we could offer and sell up to $200 million of our securities consisting of equity (common and preferred), debt (senior and subordinated), warrants and units, or a combination thereof. This disclosure shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

Income Taxes

We are recognizing and paying federal income taxes at regular corporate tax rates. The federal tax returns for 1997 through 2005 remain subject to examination for the purpose of determining the amount of tax NOL and other carryforwards. With few exceptions, the 2006-2008 years remain open for all purposes of examination by the IRS and other major tax jurisdictions.

Capital Expenditures

Capital Expenditures-First Six Months of 2010

Cash used for capital expenditures during the first six months of 2010 was $10.9 million, including $1.1 million primarily for production equipment and other upgrades for additional capacity in our Climate Control Business and $9.7 million for our Chemical Business, primarily

for process and reliability improvements of our operating facilities, including $3.0 million associated with the Pryor Facility and approximately $0.2 million to maintain compliance with environmental laws, regulations and guidelines. These capital expenditures were primarily funded from working capital. In addition, one of our subsidiaries exercised its option, pursuant to the terms of the underlying operating lease, to purchase its production facility for approximately $4.9 million, which was financed by a third party.

Committed and Planned Capital Expenditures-Remainder of 2010

At June 30, 2010, we had committed capital expenditures of approximately $8.4 million for the remainder of 2010, excluding costs to rebuild the ammonia reformer at our Pryor Facility as discussed below. The committed expenditures included $7.8 million for process and reliability improvements in our Chemical Business, including $1.5 million relating to the Pryor Facility and approximately $0.2 million to maintain compliance with environmental laws, regulations and guidelines. In addition, our commitments included $0.6 million primarily for upgrades and production equipment in our Climate Control Business. We plan to fund these expenditures from working capital, which may include utilizing our Working Capital Revolver Loan, and financing arrangements.

In addition to committed capital expenditures at June 30, 2010, we had additional planned capital expenditures for the remainder of 2010 in our Chemical Business of approximately $16.2 million (including $12.8 million relating to the Pryor Facility discussed below) and in our Climate Control Business of approximately $4.9 million.

Due to the damages incurred as the result of the pipe failure and fire in June within the ammonia reformer of the Pryor Facility as discussed above under “Overview”, we have planned capital expenditures of $8.0 million to replace the damaged equipment. These expenditures will primarily be funded from proceeds received from our insurance carrier. Additionally at the Pryor Facility, we have $4.8 million of planned capital expenditures for process and reliability improvements.

The planned capital expenditures are subject to economic conditions and approval by senior management. If these capital expenditures are approved, most of the Chemical Business’ expenditures other than the rebuild of the Pryor ammonia reformer will likely be funded from internal cash flows and the Climate Control’s expenditures will likely be financed. Also see discussion below under “Information Request from EPA” that may require additional capital improvement to certain emission equipment not currently included in our committed and planned capital expenditures for the remainder of 2010.

Advanced Manufacturing Energy Credits

On January 8, 2010, two of our subsidiaries within the Climate Control Business were awarded Internal Revenue Code § 48C tax credits (also referred to as “Advanced Manufacturing Energy Credits”) of approximately $9.6 million. The award is based on anticipated capital expenditures made from February 2009 through February 2013 for machinery that will be used to produce geothermal heat pumps and green modular chillers. As these subsidiaries invest in the qualifying machinery, we will be entitled to an income tax credit equal to 30% of the machinery cost, up to the total credit amount awarded.

Information Request from EPA

The EPA has sent information requests to most, if not all, of the nitric acid plants in the United States, including to us relating to our El Dorado, Cherokee and Baytown Facilities, requesting information under Section 114 of the Clean Air Act as to construction and modification activities at each of these facilities over a period of years to enable the EPA to determine whether these facilities are in compliance with certain provisions of the Clean Air Act. In connection with a review by our Chemical Business of these facilities in obtaining information for the EPA pursuant to the EPA’s request, our Chemical Business management believes, subject to further review, investigation and discussion with the EPA, that certain facilities within our Chemical Business may be required to make certain capital improvements to certain emission equipment in order to comply with the requirements of the Clean Air Act. If changes to the production equipment at these facilities are required in order to bring this equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial.

Tentative Collective Bargaining Agreement

EDC and the negotiating committee completed negotiations and reached a tentative agreement on all terms of a three-year collective bargaining agreement at the El Dorado Facility to commence August 1, 2010 and run through July 31, 2013. The negotiated agreement was ratified by the bargaining unit members on July 22, 2010 and executed by the local union and the Company thereafter. The United Steelworkers of America International Union (“International”) is a party to the agreement and International must approve the negotiated terms and execute the final agreement. According to International’s chief spokesperson, approval from International is anticipated. In the meantime, all negotiated terms were implemented on August 1, 2010.

Recognition of Insurance Recoveries

Cherokee Facility - As previously reported, in February 2009, a small nitric acid plant located at the Cherokee Facility suffered damage due to a fire. Our property insurance policy provides for replacement cost coverage relating to property damage with a $1,000,000 property loss deductible. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but we recorded a property insurance claim receivable relating to this event. During the first six months of 2010, our insurance claim receivable decreased by a net $849,000. The activity during the six months of 2010 included the receipt of approximately $1,021,000, from our insurance carrier as a partial payment on our insurance claim, all of which relates to property, plant and equipment (“PP&E”). In addition, the activity included payments

of $172,000 relating to payables (approved by our insurance carrier) to unrelated third parties. As a result, the balance of the insurance claim receivable relating to this event was $326,000 at June 30, 2010. We used approximately $849,000 of the insurance proceeds to pay down the Secured Term Loan.

Bryan Distribution Center - As previously reported, in July 2009, one of our fifteen agricultural distribution centers operated by our Chemical Business was destroyed by fire, which is located in Bryan, Texas (“Bryan Center”). Our general liability insurance policy provides for coverage with a $250,000 loss deductible. Our property insurance policy provides for replacement cost coverage relating to property damage and for business interruption coverage for certain lost profits and extra expense with a total $100,000 loss deductible for both coverages. As of June 30, 2010, the third party general liability claims have exceeded our $250,000 deductible. We have recognized the $250,000 general liability deductible and the insurance company has been paying directly most of the third party general liability claims. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. A recovery, if any, from our business interruption coverage has not been recognized. During the fourth quarter of 2009, we received $545,000 from our insurance carrier as a partial payment on our insurance claim, which amount was applied against our insurance claim receivable. During the first six months of 2010, our insurance claim receivable decreased by a net $31,000. The activity during the six months of 2010 included the receipt of additional partial payments totaling $1,039,000 ($649,000 relates to PP&E) from our insurance carrier, of which $300,000 was applied against our insurance claim receivable and the remaining balance of $739,000 ($495,000 relates to PP&E) was classified as other income. In addition, the activity included payments of $148,000 relating to payables (approved by our insurance carrier) to unrelated third parties and payments of $121,000 to our insurance carrier associated with the general liability deductible. As a result, the balance of the insurance claim receivable relating to this event was $4,000 at June 30, 2010.

Pryor Facility – In June 2010, a pipe failure in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged the ammonia plant. The fire was immediately extinguished and there were no injuries. As a result of this damage, the Pryor Facility is unable to produce anhydrous ammonia or UAN. Based on our current assessment, the estimated costs to rebuild the ammonia reformer are approximately $8.0 million and should be completed toward the end of September 2010. As of June 30, 2010, because our replacement cost claim for property damages is estimated to exceed our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. Our property insurance policy provides for replacement cost coverage relating to property damage with a total $1,000,000 loss deductible and for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period and a minimum $250,000 deductible. At June 30, 2010, the balance of the insurance claim receivable relating to this event was $447,000.

Estimated Plant Turnaround Costs- Remainder of 2010

Our Chemical Business expenses the costs of planned major maintenance activities (“Turnarounds”) as they are incurred. Based on our current plan for Turnarounds to be performed during the remainder of 2010, we currently estimate that we will incur approximately $2.5 million to $3.5 million of Turnaround costs, which we plan to fund from our available

working capital. However, it is possible that the actual costs could be significantly different than our estimates.

Expenses Associated with Environmental Regulatory Compliance

Our Chemical Business is subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, our Chemical Business incurred expenses of $1.4 million in the first six months of 2010 in connection with environmental regulatory issues. For the remainder of 2010, we expect to incur expenses ranging from $1.5 million to $2.5 million in connection with environmental regulatory issues. However, it is possible that the actual costs could be significantly different than our estimates.

Proposed Legislation and Regulations Concerning Greenhouse Gas Emissions

Certain of the manufacturing facilities within our Chemical Business use significant amounts of electricity, natural gas and other raw materials necessary for the production of their chemical products that result, or could result, in certain greenhouse gas emissions into the environment. Federal and state courts and administrative agencies are considering the scope and scale of greenhouse gas emission regulation. There are bills pending in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to either install abatement systems where feasible or buy allowances for offsets of emissions of greenhouse gas. In addition, the EPA has announced its determination that greenhouse gases threaten the public’s health and welfare and thus could make them subject to regulation under the Clean Air Act. However this determination is being contested. The EPA has instituted a mandatory greenhouse gas reporting requirement beginning in 2010, which will impact all of our chemical manufacturing sites. Greenhouse gas regulation could increase the price of the electricity purchased by these chemical facilities and increase costs for our use of natural gas, other raw materials (such as anhydrous ammonia), and other energy sources, potentially restrict access to or the use of natural gas and certain other raw materials necessary to produce certain of our chemical products and require us to incur substantial expenditures to retrofit these chemical facilities to comply with the proposed new laws and regulations regulating greenhouse gas emissions, if adopted. Federal, state and local governments may also pass laws mandating the use of alternative energy sources, such as wind power and solar energy, which may increase the cost of energy use in certain of our chemical and other manufacturing operations. While future emission regulations or new laws appear likely, it is too early to predict how these regulations, if and when adopted, will affect our businesses, operations, liquidity or financial results.

Potential Increase of Imported UAN

A large percentage of the domestic UAN market is supplied by imports. Significant additional UAN production began in the Caribbean during 2010, and we believe that some of this additional UAN production could be marketed in the United States. Generally, foreign production of UAN is produced at a lower cost of production than UAN produced in the United States. During 2009 and the first six months of 2010, revenues from the sale of UAN by our Chemical Business were approximately $28 million and $20 million, respectively. Additionally, UAN is the primary product to be produced and sold by the Pryor Facility. This potential additional import of UAN beginning in 2010 could have an adverse impact on our revenues and profits from the sale of UAN and fertilizer products.

Authorization to Repurchase 2007 Debentures and Stock

Our board of directors has granted management the authority to repurchase our 2007 Debentures on terms that management deems favorable to us if an opportunity is presented. Under this authority, we acquired in unsolicited transactions $2,500,000 aggregate principal face during the first half of 2010, using $2,494,000 of our working capital to purchase this portion of the 2007 Debentures. As a result, $26,900,000 remains outstanding at June 30, 2010.

In addition, our board of directors enacted a stock repurchase authorization for an unstipulated number of shares for an indefinite period of time. The stock repurchase authorization will remain in effect until such time as of our board of directors decides to end it. During the first six months of 2010, we repurchased 177,100 shares of our common stock at a weighted-average price of $13.67 per share using funds from our working capital.

If we should repurchase an additional portion of our 2007 Debentures or stock, we currently intend to fund any repurchases from our available working capital; however, our plan could change.

Dividends

We are a holding company and, accordingly, our ability to pay cash dividends on our preferred stock and our common stock depends in large part on our ability to obtain funds from our subsidiaries. The ability of ThermaClime (which owns substantially all of the companies comprising the Climate Control Business and Chemical Business) and its wholly-owned subsidiaries to pay dividends and to make distributions to us is restricted by certain covenants contained in the $50 million Working Capital Revolver Loan and the $50 million Secured Term Loan. Under the terms of these agreements, ThermaClime cannot transfer funds to us in the form of cash dividends or other distributions or advances, except for:

·	the amount of income taxes that ThermaClime would be required to pay if they were not consolidated with us;

·	an amount not to exceed fifty percent (50%) of ThermaClime's consolidated net income during each fiscal year determined in accordance with generally accepted accounting principles plus amounts paid to us within the first bullet above, provided that certain other conditions are met;

·	the amount of direct and indirect costs and expenses incurred by us on behalf of ThermaClime pursuant to a certain services agreement;

·	the amount under a certain management agreement between us and ThermaClime, provided certain conditions are met, and

·	outstanding loans entered into subsequent to November 2, 2007 not to exceed $2.0 million at any time.

We have not paid cash dividends on our outstanding common stock in many years and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future. However, our board of directors has not made a decision whether or not to pay such dividends on our common stock during the remainder of 2010.

During first quarter of 2010, dividends totaling $305,000 were declared and paid on our outstanding preferred stock using funds from our working capital. Each share of preferred stock is entitled to receive an annual dividend, only when declared by our board of directors, payable as follows:

·	Series D Preferred at the rate of $.06 a share, which dividend is cumulative;

·	Series B Preferred at the rate of $12.00 a share, which dividend is cumulative; and

·	Noncumulative Preferred at the rate of $10.00 a share, which is noncumulative.

All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Group. See “Related Party Transactions” of this MD&A for a discussion as to the amount of dividends paid to the Golsen Group in March 2010.

Compliance with Long - Term Debt Covenants

As discussed below under “Subordinated Debentures and Loan Agreements - Terms and Conditions”, the Secured Term Loan and Working Capital Revolver Loan, as amended, of ThermaClime and its subsidiaries require, among other things, that ThermaClime meet certain financial covenants. Currently, ThermaClime's forecast is that ThermaClime will be able to meet all financial covenant requirements for 2010.

Subordinated Debentures and Loan Agreements - Terms and Conditions

5.5% Convertible Senior Subordinated Debentures - On June 28, 2007, we completed a private placement to twenty-two qualified institutional buyers, pursuant to which we sold $60.0 million aggregate principal amount of the 2007 Debentures. Only $26.9 million remains outstanding at June 30, 2010, including $5.0 million owned by the Golsen Group.

The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012. Interest is payable in arrears on January 1 and July 1 of each year, which began on January 1, 2008. In addition, the 2007 Debentures are unsecured obligations and are subordinated in right of payment to all of our existing and future senior indebtedness, including indebtedness under our revolving debt facilities. The 2007 Debentures are effectively subordinated to all present and future liabilities, including trade payables, of our subsidiaries.

Working Capital Revolver Loan - - ThermaClime’s Working Capital Revolver Loan is available to fund its working capital requirements, if necessary, through April 13, 2012. Under the Working Capital Revolver Loan, ThermaClime and its subsidiaries may borrow on a revolving basis up to $50.0 million based on specific percentages of eligible accounts receivable and inventories. At June 30, 2010, there were no outstanding borrowings. In addition, the net credit available for borrowings under our Working Capital Revolver Loan was approximately $49.2 million at June 30, 2010, based on our eligible collateral and outstanding letters of credit

as of that date. The Working Capital Revolver Loan requires that ThermaClime meet certain financial covenants, including an EBITDA requirement of greater than $25 million, a minimum fixed charge coverage ratio of not less than 1.10 to 1, and a maximum senior leverage coverage ratio of not greater than 4.50 to 1. These requirements are measured quarterly on a trailing twelve-month basis and as defined in the agreement. ThermaClime was in compliance with those covenants for the twelve-month period ended June 30, 2010.

Secured Term Loan - In November 2007, ThermaClime and certain of its subsidiaries entered into the $50.0 million Secured Term Loan with a certain lender. Proceeds from the Secured Term Loan were used to repay the previous senior secured loan. The Secured Term Loan matures on November 2, 2012. The Secured Term Loan accrues interest at a defined LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at June 30, 2010 was approximately 3.34%. The Secured Term Loan requires only quarterly interest payments with the final payment of interest and principal at maturity. During the first six months of 2010, we received proceeds from our insurance carrier as a partial payment on an insurance claim, of which we used approximately $0.8 million to pay down the Secured Term Loan. As a result, approximately $49.2 million remain outstanding at June 30, 2010. The Secured Term Loan is secured by the real property and equipment located at the El Dorado and Cherokee Facilities. The carrying value of the pledged assets is approximately $61 million at June 30, 2010.

Cross-Default Provisions - The Working Capital Revolver Loan agreement and the Secured Term Loan contain cross-default provisions. If ThermaClime fails to meet the financial covenants of either of these agreements, the lenders may declare an event of default.

Seasonality

We believe that our only significant seasonal products are fertilizer and related chemical products sold by our Chemical Business to the agricultural industry. The selling seasons for those products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets in which the majority of our agricultural products are distributed. As a result, our Chemical Business increases its inventory of agricultural products prior to the beginning of each planting season. In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control.

Related Party Transactions

Golsen Group

The Golsen Group holds $5,000,000 of the 2007 Debentures. As a result in January 2010, we paid interest of $137,500 relating to the debentures held by the Golsen Group that was accrued at December 31, 2009.

In March 2010, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group.

During the six months ended June 30, 2010, we incurred interest expense of $137,500 relating to the debentures held by the Golsen Group, which amount was paid in June 2010.

Critical Accounting Policies and Estimates

See our discussion on critical accounting policies in Item 7 of our Form 10-K for the year ended December 31, 2009. In addition, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies.

Results of Operations

Six months ended June 30, 2010 compared to Six months ended June 30, 2009

Climate Control Business

The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the six months ended June 30,

2010

2009

Change

Percentage

Change

(Dollars In Thousands)

Net sales:
Geothermal and water source heat pumps	$	78,961		$	95,069		$	(16,108	)		(16.9	) %
Hydronic fan coils		16,205			26,157			(9,952	)		(38.0	) %
Other HVAC products		18,333			17,804			529			3.0	%
Total Climate Control	$	113,499		$	139,030		$	(25,531	)		(18.4	) %

Gross profit – Climate Control	$	37,231		$	47,426		$	(10,195	)		(21.5	) %

Gross profit percentage – Climate Control (1)		32.8	%		34.1	%		(1.3	)	%

Operating income – Climate Control	$	12,520		$	21,204		$	(8,684	)		(41.0	) %

(1) As a percentage of net sales

Net Sales – Climate Control

Net sales of our geothermal and water source heat pump products decreased primarily as a result of a 22% decline in sales of our commercial products due to the slowdown in the construction and renovation activities in the markets we serve and a 5% decline in sales of our residential products. Shipments of residential products during the first half of 2009 were particularly strong due to a larger backlog of customer orders carried forward from 2008. During the first half of 2010, we continued to maintain a market share leadership position of approximately 38%, based on market data supplied by the Air-Conditioning, Heating and Refrigeration Institute (“AHRI”);

Net sales of our hydronic fan coils decreased primarily due to a 25% decline in the number of units sold due to the slowdown in the construction and renovation activities in the markets we serve and a 20% decrease in the average unit sales price due to change in product mix. During the first half of 2010, we continue to have a market share leadership position of approximately 28% based on market data supplied by the AHRI;

·	Net sales of our other HVAC products increased primarily as the result of an increase in the sales of our large custom air handlers and modular chillers partially offset by a decrease in engineering and construction services.

Gross Profit – Climate Control

The decline in gross profit in our Climate Control Business was the result of lower sales volume as discussed above and to a lesser extent higher raw material costs. The gross profit as a percentage of sales decreased primarily as a result of higher material costs, lower absorption of fixed costs and changes in our commercial product mix.

Operating Income – Climate Control

Operating income decreased primarily as a result of the decrease in gross profit as discussed above partially offset by a decrease in operating expenses. Significant changes in operating expenses include a decrease in warranty, freight and commission expenses due primarily to the decrease in sales volume ($1.5 million, $1.1 million and $1.0 million, respectively) partially offset by an increase in advertising expenses ($1.5 million) as a result of a marketing program launched by one of our subsidiaries, product liability and damage claims ($0.4 million) primarily relating to two geothermal and water source heat pump projects and one fan coil project.

Chemical Business

The following table contains certain information about our net sales, gross profit and operating income in our Chemical segment for the six months ended June 30,

2010

2009

Change

Percentage

Change

(Dollars In Thousands)

Net sales:
Agricultural products	$	75,496		$	67,171		$	8,325			12.4	%
Industrial acids and other chemical products		63,834			46,697			17,137			36.7	%
Mining products		41,920			30,503			11,417			37.4	%
Total Chemical	$	181,250		$	144,371		$	36,879			25.5	%

Gross profit – Chemical	$	24,760		$	29,429		$	(4,669	)		(15.9	) %

Gross profit percentage – Chemical (1)		13.7	%		20.4	%		(6.7	)	%

Operating income – Chemical	$	11,063		$	18,835		$	(7,772	)		(41.3	) %

(1) As a percentage of net sales

Net Sales - Chemical

The El Dorado and Cherokee Facilities produce all the chemical products described in the table above and the Baytown Facility produces only industrial acids products. Although not fully operational, the Pryor Facility produces agricultural and industrial products. For the first half of 2010, overall sales prices for the Chemical Business increased 2% and the volume of tons sold increased 27%, compared with the same period in 2009, generally as a result of the following;

Sales prices for products produced at the El Dorado Facility increased 10 % related, in part, to the higher cost of anhydrous ammonia, part of which is passed through to certain of our customers pursuant to contracts and/or pricing arrangements that include raw material feedstock as a pass-through component in the sales price. Pricing for agricultural grade AN was 9% higher than the prior year period. However, fertilizer grade AN volume of tons shipped at the El Dorado Facility decreased 15,000 tons primarily due to unfavorable weather conditions in the first quarter of 2010. Industrial acid volumes increased 17,000 tons due to improved economic conditions and spot sales opportunities. Our industrial grade AN is sold to one customer pursuant to a multi-year take or pay supply contract in which the customer

has agreed to purchase, and our El Dorado Facility has agreed to reserve certain minimum volumes of industrial grade AN during the year. Pursuant to the terms of the contract, the customer has been invoiced for the fixed costs and profit associated with the reserved capacity despite not taking the minimum volume requirement. Overall volume of all products sold from the El Dorado Facility increased 7,000 tons, or 2%.

Sales prices at the Cherokee Facility increased 5% compared to the prior year period. Volumes also increased 18% primarily related to higher UAN fertilizer demand. In the first half of 2009, UAN fertilizer sales were affected by high inventory levels in the distribution chain left over from 2008, as well as poor weather conditions. While weather conditions were not optimal in 2010, volumes were not impacted by the supply chain as noted above for the prior year.

Sales prices decreased approximately 9% for products produced at the Baytown Facility due to decreased fixed expenses under the new agreement compared to the prior agreement. These expenses are a pass-through component to Bayer. Overall volumes increased 70% as the result of improved demand from the Baytown site’s customers. The decreased sales prices and increased volumes had only a minimum impact to gross profit and operating income due to certain provisions of the Bayer Agreement.

·	During the first half of 2010, our Pryor Facility recognized net sales of $6.0 million for sales of 14,000 tons of anhydrous ammonia and 16,000 tons of UAN. In addition, the Pryor Facility provided 14,000 tons of anhydrous ammonia to our El Dorado and Cherokee Facilities.

Gross Profit - Chemical

The decrease in gross profit of $4.7 million on higher sales resulted in a decrease in the gross profit as a percent of sales for the six months 2010 as compared to the first half of 2009. Gross profit on UAN fertilizer sales were $2.5 million higher primarily due to increased volume. Gross profit on industrial acids and other products were $3.0 million higher due in part to our industrial grade AN sold per the terms noted above and due to reduced unit costs related to plant efficiencies. Gross profit on fertilizer grade AN were $4.7 million lower due to higher raw material input costs and lower volume as discussed above. Gross profit on our chemical products sold in excess of then current market prices due to firm sales commitments made in 2008 when market prices were higher were $0.8 million in the first half of 2010 compared to $3.6 million in the same period a year ago. We also recognized a $2.2 million gain on recoveries of precious metals in the first half of 2009. We incurred expenses for plant Turnarounds of $2.7 million for the first half of 2010 compared to $0.6 million in the first half of 2009 due to the timing of our Turnarounds. Losses on natural gas and ammonia hedging contracts (both realized and unrealized) were $0.6 million and $1.9 million for the first six months of 2010 and 2009, respectively. Primarily as a result of these items, our overall gross profit as a percentage of sales decreased 7% for the first six months of 2010 compared to the same period of 2009.

Operating Income - Chemical

In addition to the decrease in gross profit of $4.7 million discussed above, our Chemical Business’ operating income includes operating losses associated with the Pryor Facility of approximately $8.0 million for the first half of 2010 compared to $5.2 million for the first half of 2009. This decrease was partially offset by a gain of $0.7 million from insurance recoveries received as discussed above under “Liquidity and Capital Resources – Recognition of Insurance Recoveries”.

Other

The business operation classified as “Other” primarily sells industrial machinery and related components to machine tool dealers and end users. General corporate expenses and other business operations, net consist of unallocated portions of gross profit, SG&A, other income and other expense. The following table contains certain information about our net sales and gross profit classified as “Other” and general corporate expenses and other business operations, net, for the six months ended June 30,

2010

2009

Change

Percentage Change

(Dollars In Thousands)

Net sales – Other	$	4,053			$	5,359			$	(1,306	)		(24.4	)%

Gross profit – Other	$	1,423			$	1,700			$	(277	)		(16.3	)%

Gross profit percentage – Other (1)		35.1		%		31.7		%		3.4		%

General corporate expense and other business operations, net	$	(6,357	)		$	(6,077	)		$	(280	)		4.6	%

(1) As a percentage of net sales

Net Sales - Other

The decrease in net sales classified as “Other” relates primarily to the sale of two large industrial machines during the first six months of 2009 partially offset by an improvement in demand for industrial machinery during the second quarter of 2010.

Gross Profit - Other

The decrease in gross profit classified as “Other” is due primarily to the decrease in sales as discussed above.

General Corporate Expense and Other Business Operations, Net

Our general corporate expense and other business operations, net, increased by $0.3 million primarily as the result of the decrease in gross profit classified as “Other” as discussed above.

Interest Expense

Interest expense was $4.1 million for the first six months of 2010 compared to $2.9 million for the same period in 2009, an increase of approximately $1.2 million. This increase primarily relates to losses (realized and unrealized) of $1.1 million recognized in the first half of 2010 associated with our interest rate contracts compared to net gains (realized and unrealized) of $0.2 million for the same period in 2009.

Loss and Gain on Extinguishment of Debt

During the first six months of 2010, we acquired $2,500,000 aggregate principal amount of the 2007 Debentures for $2,494,000 and recognized a loss on extinguishment of debt of approximately $52,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired. During the first six months of 2009, we acquired $9,200,000 aggregate principal amount of the 2007 Debentures for approximately $7,134,000 and recognized a gain on extinguishment of debt of $1,743,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

Provision For Income Taxes

The provision for income taxes for the first half of 2010 was $5.9 million compared to $12.8 million for the first half of 2009. The resulting effective tax rate for the first six months of 2010 was 43.3% compared to 38.5% for the same period in 2009. As discussed above under “Overview – Results for Second Quarter 2010”, during June 2010, we determined that certain nondeductible expenses had not been properly identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional income tax provision of approximately $800,000 for the six months ended June 30, 2010.

Three months ended June 30, 2010 compared to Three months ended June 30, 2009

Climate Control Business

The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the three months ended June 30,

2010

2009

Change

Percentage

Change

(Dollars In Thousands)

Net sales:
Geothermal and water source heat pumps	$	42,003		$	44,587		$	(2,584	)		(5.8	) %
Hydronic fan coils		8,931			12,591			(3,660	)		(29.1	) %
Other HVAC products		8,894			9,804			(910	)		(9.3	) %
Total Climate Control	$	59,828		$	66,982		$	(7,154	)		(10.7	) %

Gross profit – Climate Control	$	18,832		$	24,998		$	(6,166	)		(24.7	) %

Gross profit percentage – Climate Control (1)		31.5	%		37.3	%		(5.8	)	%

Operating income – Climate Control	$	6,993		$	12,226		$	(5,233	)		(42.8	) %

(1) As a percentage of net sales

Net Sales – Climate Control

Net sales of our geothermal and water source heat pump products decreased primarily as a result of a 15% decline in sales of our commercial products due to the slowdown in the construction and renovation activities in the markets we serve partially offset by a 7% increase in sales of our residential products;

·	Net sales of our hydronic fan coils decreased primarily due to a 21% decline in the number of units sold due to the slowdown in the construction and renovation activities in the markets we serve and an 11% decrease in the average unit sales price primarily due to change in product mix;

·	Net sales of our other HVAC products decreased primarily as the result of a decrease in engineering and construction services.

Gross Profit – Climate Control

The decline in gross profit in our Climate Control Business was the result of lower sales volume as discussed above and higher raw material costs. The disproportionately higher decline in gross profit of 25% compared to the 11% decline in sales is due primarily to increased raw material costs, lower overhead absorption at our manufacturing facilities and changes in commercial product mix resulting in a reduction in our gross profit as a percentage of sales.

Operating Income – Climate Control

Operating income decreased primarily as a result of the decrease in gross profit as discussed above partially offset by a decrease in operating expenses. Significant changes in operating expenses include a decrease in warranty, freight and commission expenses due primarily to the decrease in sales volume ($0.6 million, $0.3 million and $0.3 million, respectively) and personnel costs ($0.5 million) due, in part, to lower employee health insurance claims partially offset by an increase in advertising expenses ($0.8 million) as a result of a marketing program launched by one of our subsidiaries.

Chemical Business

The following table contains certain information about our net sales, gross profit and operating income in our Chemical segment for the three months ended June 30,

2010

2009

Change

Percentage

Change

(Dollars In Thousands)

Net sales:
Agricultural products	$	50,960		$	34,333		$	16,627			48.4	%
Industrial acids and other chemical products		32,773			21,466			11,307			52.7	%
Mining products		22,645			14,094			8,551			60.7	%
Total Chemical	$	106,378		$	69,893		$	36,485			52.2	%

Gross profit – Chemical	$	15,602		$	12,281		$	3,321			27.0	%

Gross profit percentage – Chemical (1)		14.7	%		17.6	%		(2.9	)	%

Operating income – Chemical	$	9,178		$	6,197		$	2,981			48.1	%

(1) As a percentage of net sales

Net Sales - Chemical

The El Dorado and Cherokee Facilities produce all the chemical products described in the table above and the Baytown Facility produces only industrial acids products. Although not fully operational, the Pryor Facility produces agricultural and industrial products. For the second quarter of 2010, overall sales prices for the Chemical Business increased 10% and the volume of tons sold increased 45%, compared with the same period in 2009, generally as a result of the following;

Sales prices for products produced at the El Dorado Facility increased 12% related, in part, to the higher cost of anhydrous ammonia, part of which is passed through to certain of our customers pursuant to contracts and/or pricing arrangements that include raw material feedstock as a pass-through component in the sales price. Pricing for agricultural grade AN was also higher than the prior year quarter. Fertilizer grade AN volume of tons shipped at the El Dorado Facility increased 16,000 tons primarily due to favorable weather conditions. Industrial grade AN volumes were also up 18,000 tons primarily due to increased demand for coal and other mining services. Our industrial grade AN is sold to one customer pursuant to a multi-year take or pay supply contract in which the customer has agreed to purchase, and our El Dorado Facility has agreed to reserve, certain minimum volumes of industrial grade AN during the year. Pursuant to the terms of the contract, the customer has been invoiced for the fixed costs and profit associated with the reserved capacity despite not taking the minimum volume requirement. Industrial acid volumes increased 10,000 tons due to improved economic conditions and spot sales opportunities. Overall volume of all products sold from the El Dorado Facility increased 43,000 tons, or 25% over the prior year second quarter.

Sales prices at the Cherokee Facility increased 14% over the prior year quarter. Volumes for all Cherokee Facility products increased 24% primarily related to higher UAN fertilizer demand. In the second quarter 2009, UAN fertilizer sales were affected by high inventory levels in the distribution chain left over from 2008, as well as poor weather conditions. Volumes in the second quarter 2010 were also somewhat impacted by less than favorable weather conditions.

Sales prices for products produced at the Baytown Facility were approximately the same as the prior year quarter. Overall volumes increased 64% as the result of improved demand from the Baytown site’s customers. The increased volumes had only a minimum impact to gross profit and operating income due to certain provisions of the Bayer Agreement.

·	During the second quarter of 2010, our Pryor Facility recognized net sales of $5.7 million for sales of 12,000 tons of anhydrous ammonia and 14,000 tons of UAN. In addition, the Pryor Facility provided 11,000 tons of anhydrous ammonia to our El Dorado and Cherokee Facilities.

Gross Profit - Chemical

Gross profit of $15.6 million for the second quarter of 2010 was $3.3 million higher than in the same quarter of 2009 due to higher sales volumes in all product lines. The gross profit as a percent of sales was 14.7% compared to 17.6% in 2009 second quarter. The 2.9% reduction in the gross profit percent was primarily due to decreased margins on fertilizer grade AN due to higher anhydrous ammonia feedstock costs and the effect of higher margins in the second quarter of 2009 on firm sales commitments made in 2008. Partially offsetting the lower margins on our

fertilizer grade AN were higher margins on our UAN fertilizer sales and improved plant efficiencies resulting from higher sales volumes in all product lines.Gross profit on UAN fertilizers sales were $1.9 million higher in the second quarter of 2010 than in the same period last year due primarily to increased volumes. Gross profit on industrial acids and other products were $2.1 million higher in the second quarter of 2010 than in the same period a year ago due, in part, to our industrial grade AN sold per the terms noted above, and due to reduced unit costs related to plant efficiencies. Offsetting the above increases were $2.7 million in decreased gross profit on fertilizer grade AN due to higher raw material input costs, and the lower volumes as discussed above. Gross profit on our chemical products sold at prices in excess of then current market prices due to firm sales commitments made in 2008 when market prices were higher were $1.1 million in the second quarter of 2009.

Operating Income - Chemical

Operating income for the second quarter of 2010 increased by $3.0 million primarily from the increase in gross profit as discussed above. The Pryor Facility expenses and losses were approximately $3.2 million in each of the three months ended June 30, 2010 and 2009.

Other

2010

2009

Change

Percentage

Change

(Dollars In Thousands)

Net sales – Other	$	2,186			$	1,688			$	498		29.5	%

Gross profit – Other	$	714			$	548			$	166		30.3	%

Gross profit percentage – Other (1)		32.7		%		32.5		%		0.2	%

General corporate expense and other business operations, net	$	(3,361	)		$	(3,881	)		$	520		(13.4	)%

(1) As a percentage of net sales

Net Sales - Other

The increase in net sales classified as “Other” relates primarily to an overall improvement in demand for industrial machinery.

Gross Profit - Other

The increase in gross profit classified as “Other” is due primarily to the increase in sales as discussed above.

General Corporate Expense and Other Business Operations, Net

Our general corporate expense and other business operations, net, decreased by $0.5 million including the impact from the increase in gross profit classified as “Other” as discussed above.

Interest Expense

Interest expense was $2.0 million for the second quarter of 2010 compared to $1.0 million for the same period in 2009, an increase of $1.0 million. This increase primarily relates to losses (realized and unrealized) of $0.5 million recognized in the second quarter of 2010 associated with our interest rate contracts compared to net gains (realized and unrealized) of $0.4 million for the same period in 2009.

Loss and Gain on Extinguishment of Debt

During the second quarter of 2010, we acquired $2,500,000 aggregate principal amount of the 2007 Debentures for $2,494,000 and recognized a loss on extinguishment of debt of approximately $52,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired. During the second quarter of 2009, we acquired $3,500,000 aggregate principal amount of the 2007 Debentures for approximately $2,960,000 and recognized a gain on extinguishment of debt of $421,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

Provision For Income Taxes

The provision for income taxes for the second quarter of 2010 was $5.0 million compared to $5.5 million for the second quarter of 2009. The resulting effective tax rate for the second quarter of 2010 was 45.3% compared to 38.4% for the same period in 2009. As discussed above under “Overview – Results for Second Quarter 2010”, during June 2010, we determined that certain nondeductible expenses had not been properly identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional income tax provision of approximately $800,000 for the three months ended June 30, 2010.

Cash Flow From Continuing Operating Activities

Historically, our primary cash needs have been for operating expenses, working capital and capital expenditures. We have financed our cash requirements primarily through internally generated cash flow, borrowings under our revolving credit facilities, secured asset financing and the sale of assets. See additional discussions concerning cash flow relating to our Climate Control and Chemical Businesses under “Overview” and “Liquidity and Capital Resources” of this MD&A.

For the first six months of 2010, net cash provided by continuing operating activities was $12.5 million, including net income plus depreciation and amortization and other adjustments and net cash used by the following significant changes in assets and liabilities.

Accounts receivable increased $16.6 million including:

an increase of $12.9 million relating to the Chemical Business as the result of the spring fertilizer seasonality and increased demand at our Baytown Facility and

an increase of $3.8 million relating to the Climate Control Business due primarily to higher in sales in June 2010 compared to December 2009.

Inventories decreased $4.1 million primarily relating to a net decrease of $3.8 million relating to the Chemical Business primarily relating to increased sales volumes at the El Dorado Facility partially offset by the increased production of inventory at our Pryor Facility.

The change in prepaid and accrued income taxes of $2.4 million primarily relates to the recognition of income taxes for the first half of 2010 (including $0.8 million as discussed above under “Overview – Results for Second Quarter 2010”) partially offset by payments made to the taxing authorities.

Other supplies and prepaid items decreased $1.8 million including:

a decrease of $2.1 million of prepaid insurance as the result of recognizing the related insurance expense for the first half of 2010 and

a decrease of $1.7 million relating to lower costs and volume on hand of precious metals used in the manufacturing process of our Chemical Business, partially offset by

an increase of $1.1 million of supplies relating to the Chemical Business due primarily to an increase in the volume on hand as the result of increased production at our Pryor Facility.

Accounts payable increased $2.7 million including:

an increase of $3.8 million in the Chemical Business primarily as the result of increased production at our El Dorado and Baytown Facilities which resulted in increased raw material purchases at increased costs, partially offset by

a decrease of $1.0 million in the Climate Control Business due primarily to a reduction in raw material purchases.

Accrued payroll and benefits decreased $1.1 million including a decrease of $1.0 million in the Climate Control Business primarily due to the payment of bonuses accrued at December 31, 2009.

Cash Flow from Continuing Investing Activities

Net cash provided by continuing investing activities for the first six months of 2010 was $0.3 million that consisted primarily of net cash provided by short-term investments (net of purchases) of $10.1 million and proceeds from property insurances recoveries associated with

property, plant and equipment of $1.7 million partially offset by $10.9 million for capital expenditures of which $1.1 million and $9.7 million are for the benefit of our Climate Control and Chemical Businesses, respectively. The cash used for capital expenditures by our Chemical Business includes $3.0 million relating to the Pryor Facility.

Cash Flow from Continuing Financing Activities

Net cash used by continuing financing activities was $9.1 million that primarily consisted of payments on long-term debt and short-term financing totaling $4.4 million, the acquisition of a portion of the 2007 Debentures for $2.5 million and purchases of treasury stock of $2.4 million.

Performance and Payment Bonds

We are contingently liable to sureties in respect of certain insurance bonds issued by the sureties in connection with certain contracts entered into by our subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As of June 30, 2010, we have agreed to indemnify the sureties for payments, up to $10.8 million, made by them in respect of such bonds. Approximately $7.7 million of these insurances bonds expire in 2010 while the remaining $3.1 million expire in 2011.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended, except for the following:

Cepolk Holdings, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has a 50% equity interest in Cepolk Limited Partnership (“Partnership”) which is accounted for on the equity method. The Partnership owns an energy savings project located at the Ft. Polk Army base in Louisiana (“Project”). At June 30, 2010, our investment was $4,126,000. For the first six months of 2010, distributions received from this Partnership were $240,000 and our equity in earnings was approximately $528,000. As of June 30, 2010, the Partnership and general partner to the Partnership is indebted to a term lender (“Lender”) of the Project for approximately $1,280,000 with a term extending to December 2010 (“Loan”). CHI has pledged its limited partnership interest in the Partnership to the Lender as part of the Lender’s collateral securing all obligations under the Loan. This guarantee and pledge is limited to CHI’s limited partnership interest and does not expose CHI or the Company to liability in excess of CHI’s limited partnership interest. In accordance with GAAP, no liability is required to be established for this pledge since it was entered into prior to January 1, 2003. CHI has no recourse provisions or available collateral that would enable CHI to recover its partnership interest should the Lender be required to perform under this pledge.

Aggregate Contractual Obligations

In the operation of our businesses, we enter into contracts, leases and borrowing arrangements. As discussed in our Form 10-K for the year ended December 31, 2009 and in our Form 10-Q for the quarterly period ended March 31, 2010, we had certain contractual obligations, with various maturity dates, related to the following:

·	long-term debt,

·	interest payments on long-term debt,

·	interest rate contracts,

·	capital expenditures,

·	operating leases,

·	futures/forward contracts,

·	contractual manufacturing obligations,

·	purchase obligations and

·	other contractual obligations.

In addition, under “Liquidity and Capital Resources” of Item 2 and “Commodity Price Risk and Foreign Currency Risk” of Item 3 of this Part I, we discussed the following which occurred during the three months ended June 30, 2010:

·	our contractual obligations relating to futures/forward contracts were $3.1 million as of June 30, 2010 and

·	our committed capital expenditures were approximately $8.4 million for the remainder of 2010.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

General

Our results of operations and operating cash flows are impacted by changes in market prices of copper, steel, anhydrous ammonia and natural gas, changes in market currency exchange rates, and changes in market interest rates.

Forward Sales Commitments Risk

Periodically, our Climate Control and Chemical Businesses enter into forward firm sales commitments for products to be delivered in future periods. As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices. At June 30, 2010, we had no embedded losses associated with sales commitments with firm sales prices.

Commodity Price Risk

Our Climate Control Business purchases substantial quantities of copper and steel for use in manufacturing processes and our Chemical Business purchases substantial quantities of anhydrous ammonia and natural gas as feedstocks generally at market prices. Periodically, as part of our raw material price risk management, our Climate Control Business enters into futures contracts for copper and our Chemical Business enters into futures/forward contracts for anhydrous ammonia and natural gas, which contracts are generally accounted for on a mark-to-market basis. At June 30, 2010, our futures/forward copper contracts were for 750,000 pounds of copper through December 2010 at a weighted-average cost of $3.24 per pound ($2.4 million) and a weighted-average market value of $2.97 per pound ($2.2 million). Also our futures/forward natural gas contracts were for 140,000 MMBtu of natural gas through September 2010 at a weighted-average cost of $4.95 per MMBtu ($0.7 million) and a weighted-average market value of $4.63 per MMBtu ($0.6 million).

Foreign Currency Risk

Interest Rate Risk

Our interest rate risk exposure results from our debt portfolio which is impacted by short-term rates, primarily variable-rate borrowings from commercial banks, and long-term rates, primarily fixed-rate notes, some of which prohibit prepayment or require a substantial premium payment with the prepayment.

As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. At June 30, 2010, we have an interest rate swap, which sets a fixed three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. Also, we have an interest rate swap, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012. These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. At June 30, 2010, the fair value of these contracts (unrealized loss) was $2.3 million.

As of June 30, 2010 and December 31, 2009, the carrying value of our variable rate and fixed rate debt exceeded the debt's estimated fair value by approximately $24.1 million and $22.3 million, respectively.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective. There were no changes to our internal control over financial reporting during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

SPECIAL NOTE REGARDING

FORWARD-LOOKING STATEMENTS

Certain statements contained within this report may be deemed "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this report other than statements of historical fact are Forward-Looking Statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the Company to differ materially from such statements. The words "believe", "expect", "anticipate", "intend", and similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained herein relate to, among other things:

·	all production at the Pryor Facility has ceased until repairs can be completed, which is expected toward the end of September 2010;
·	another factor that may affect product order rates going forward is the potential for growth in our highly energy-efficient geothermal water-source heat pumps, which could benefit significantly from government stimulus programs, including various tax incentives;
·	we anticipate modest increased demand from certain of our large industrial customers and from our mining customers for the remainder of 2010;
·	it is possible that the fertilizer outlook could be adversely affected by lower grain production, unanticipated changes in commodity prices, or unfavorable weather conditions;
·	we expect to ship substantially all of these orders within the next twelve months; however, due to the current economic conditions in the markets we serve, it is possible that some of our customers could cancel a portion of our backlog or extend the shipment terms beyond twelve months;
·	our GHPs use a form of renewable energy and, under certain conditions, can reduce energy costs up to 80% compared to conventional all-electric and gas HVAC systems;
·	we expect to see continued slowness in our Climate Control Business’ results in the short-term; we believe that the recently enacted federal tax credits for GHPs should have a positive impact on sales of those highly energy efficient and green products;
·	based upon current assessment, we anticipate, due to lead times for replacement parts, the repairs will be completed toward the end of September 2010;
·	for the remainder of 2010, we expect our primary cash needs will be for working capital and capital expenditures;
·	we and our subsidiaries plan to rely upon internally generated cash flows, cash, secured property and equipment financing, and the borrowing availability under the Working Capital Revolver Loan to fund operations and pay obligations;
·	based upon our current projections, we believe that cash and borrowing availability under our Working Capital Revolver Loan is adequate to fund operations during the remainder of 2010;
·	based on our current assessment, the repairs should be completed toward the end of September 2010;
·	we plan to fund the committed expenditures from working capital, which may include utilizing our Working Capital Revolver Loan, and financing arrangements;
·	our Chemical Business management believes, subject to further review, investigation and discussion with the EPA, that certain facilities within our Chemical Business may be required to make certain capital improvements to certain emission equipment in order to comply with the requirements of the Clean Air Act;

·	if changes to the production equipment at our chemical facilities are required in order to bring this equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial;
·	we believe that certain facilities within our Chemical Business may be required to pay certain penalties;

·	the amount we will incur for capital expenditures, turnarounds and expenses associated with environmental regulatory compliance for the remainder of 2010;
·	greenhouse gas regulation could increase the price of the electricity purchased by these chemical facilities and increase costs for our use of natural gas, other raw materials (such as anhydrous ammonia), and other energy sources, potentially restrict access to or the use of natural gas and certain other raw materials necessary to produce certain of our chemical products and require us to incur substantial expenditures to retrofit these chemical facilities to comply with the proposed new laws and regulations regulating greenhouse gas emissions, if adopted;
·	we believe that some of this additional UAN production from the Caribbean could be marketed in the United States;
·	we do not currently anticipate paying cash dividends on our outstanding common stock in the near future;
·	meeting all required covenant tests for all the remaining quarters of 2010 and the year ending in 2010;
·	environmental and health laws and enforcement policies thereunder could result, in compliance expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of pollutants or other substances at or from our facilities or the use or disposal of certain of its chemical products;

·	material costs for liabilities could be incurred by us in complying with Environmental Laws and the Healthcare Laws or in paying fines or penalties for violations of such laws;
·	we currently have no plans to discontinue the use of our Chemical Business facilities;
·	we plan to maintain or replace, as needed, certain facilities in our Chemical Business that contain asbestos insulation around piping or heating surfaces, with non-asbestos insulation through our standard repair and maintenance activities;
·	the El Dorado facility believes that if it were required to meet more restrictive dissolved minerals permit levels, it should be able to do so;
·	our internally-generated cash flows and our liquidity could be effected by possible declines in sales volumes resulting from the uncertainty relative to the current economic conditions; and
·	most of the Chemical Business’s expenditures for the remainder of 2010 will likely be funded from internal cash flows and the Climate Control’s expenditures will likely be financed and most of the Pryor Facility's expenditures will primarily be funded from proceeds received from our insurance carrier.

While we believe the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance such expectations will prove to have been correct. There are a variety of factors which could cause future outcomes to differ materially from those described in this report, including, but not limited to,

·	changes in general economic conditions, both domestic and foreign,
·	material reduction in revenues,
·	material changes in interest rates,
·	ability to collect in a timely manner a material amount of receivables,
·	increased competitive pressures,
·	changes in federal, state and local laws and regulations, especially environmental regulations, or in interpretation of such,
·	additional releases (particularly air emissions) into the environment,
·	material increases in equipment, maintenance, operating or labor costs not presently anticipated by us,
·	the requirement to use internally generated funds for purposes not presently anticipated,
·	the inability to pay or secure additional financing for planned capital expenditures,
·	material changes in the cost of certain precious metals, anhydrous ammonia, natural gas, copper and steel,
·	changes in competition,
·	the loss of any significant customer,
·	changes in operating strategy or development plans,
·	inability to fund the working capital and expansion of our businesses,
·	changes in the production efficiency of our facilities,
·	adverse results in any of our pending litigation,
·	activating operations at full production rates at the Pryor Facility,
·	inability to obtain necessary raw materials,

·	other factors described in the MD&A contained in this report, and
·	other factors described in “Risk Factors” of our 2009 Form 10-K and “Special Note Regarding Forward-Looking Statements” contained in our 2009 Form 10-K.

Given these uncertainties, all parties are cautioned not to place undue reliance on such Forward-Looking Statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the Forward-Looking Statements contained herein to reflect future events or developments.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

There are no material legal proceedings or material developments in any such legal proceedings pending against us and/or our subsidiaries not reported in Item 3 of our 10-K for year ended December 31, 2009.

Item 1A. Risk Factors

Reference is made to Item 1A of our Form 10-K for the year ended December 31, 2009 for our discussion concerning risk factors. There are no material changes from the risk factors disclosed in our Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

During the three months ended June 30, 2010, we issued the following unregistered equity securities:

In April 2010, we issued 20 shares of common stock upon the holder’s conversion of 0.5 shares of our Noncumulative Preferred. Pursuant to the terms of the Noncumulative Preferred, the conversion rate was 40 shares of common stock for each share of Noncumulative Preferred. The common stock was issued pursuant to the exemption from the registration of securities afforded by Section 3(a)(9) of the Securities Act. No commissions or other remuneration was paid for this issuance. We did not receive any proceeds upon the conversion of the Noncumulative Preferred.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the three months ended June 30, 2010, the Company and affiliated purchasers, as defined, purchased its equity securities as shown in the following table:

Period

(a) Total

number of

shares of

common

stock

acquired (1)

(b) Average

price paid

per share

of common

stock (1)

shares of common

stock purchased as

part of publicly

announced plans

or programs (2)

(d) Maximum number

(or approximate

dollar value) of shares

of common stock

that may yet

be purchased under

the plans or programs

April 1, 2010 - April 30, 2010	-	$	-

May 1, 2010 - May 31, 2010	-	$	-

June 1, 2010 - June 30, 2010	177,100	$	13.67	177,100
Total	177,100	$	13.67	177,100	See (2)

(1) During the second quarter of 2010, we purchased these shares of common stock at market prices from unrelated parties. These shares are being held as treasury stock.

(2) As previously reported, our board of directors enacted a stock repurchase authorization for an unstipulated number of shares for an indefinite period of time commencing March 12, 2008. The stock repurchase authorization will remain in effect until such time as of our board of directors decides to end it.

During the three months ended June 30, 2010, the Company and affiliated purchasers, as defined, purchased its 2007 Debentures as shown in the following table:

Period

(a) Total

number

of units

acquired (A)

(b) Average

price paid

per unit (A)

units purchased as

part of publicly

announced plans

or programs

(d) Maximum number

(or approximate

dollar value) of

units that may yet

be purchased under

the plans or programs

April 1, 2010 - April 30, 2010	-	$	-

May 1, 2010 - May 31, 2010	2,000	$	999.50	2,000

June 1, 2010 - June 30, 2010	500	$	990.00	500
Total	2,500	$	997.60	2,500	26,900

(A) One unit represents a $1,000 principal amount of the debenture.

Item 3. Defaults upon Senior Securities

Not applicable

Item 4. (Reserved)

Item 5. Other Information

Corporate Governance Guidelines - The governance portion of our website includes our corporate governance guidelines as approved by our board of directors. Our website is located at www.lsb-okc.com, and the link to our corporate governance guidelines is www.lsb-okc.com/PDFs/LSB_Corporate_Governance_Guidelines.pdf. We will provide these guidelines without charge upon written request to David M. Shear, Senior Vice President and General Counsel, LSB Industries, Inc., 16 South Pennsylvania, Oklahoma City, Oklahoma 73107.

Tentative Collective Bargaining Agreement - EDC and the negotiating committee completed negotiations and reached a tentative agreement on all terms of a three-year collective bargaining agreement at the El Dorado Facility to commence August 1, 2010 and run through July 31, 2013. The negotiated agreement was ratified by the bargaining unit members on July 22, 2010 and executed by the local union and the Company thereafter. The United Steelworkers International Union (“International”) is a party to the agreement and International must approve the negotiated terms and execute the final agreement. According to International’s chief spokesperson, approval from International is anticipated. In the meantime, all negotiated terms were implemented on August 1, 2010.

Letter of Intent - During April 2010, we entered into a letter of intent in connection with the possible acquisition by us of an air conditioning and heating manufacturer (“Business to be Acquired”) located in China. This transaction was subject to, among other things, completion of our due diligence, execution of definitive agreements, finalization of certain agreements between the Business to be Acquired and another company for the purchase of certain products on terms satisfactory to us and completion of an employment agreement with the current owner. We further reserved the right to modify the terms of the letter of intent based upon the results of our due diligence. During the second quarter we conducted extensive due diligence. As a result of that process, we have been unable to reach an agreement with the owner of the Business to be Acquired. Therefore, we have decided not to proceed with the transaction at this time and have terminated the letter of intent.

Item 6. Exhibits

(a)

Exhibits The Company has included the following exhibits in this report:


4.1a	Amended and Restated Loan and Security Agreement by and among LSB Industries, Inc., ThermaClime, Inc. and each of its subsidiaries that are Signatories, the lenders and Wells Fargo Foothill, Inc., which the Company hereby incorporates by reference from Exhibit 4.2 to the Company’s Form 10-Q for the fiscal quarter ended September 30, 2007.

4.1b	Exhibits and Schedules to the Amended and Restated Loan and Security Agreement by and among LSB Industries, Inc., ThermaClime, Inc. and each of its subsidiaries that are Signatories, the lenders and Wells Fargo Foothill, Inc.

4.2a	Term Loan Agreement, dated as of November 2, 2007, among LSB Industries, Inc., ThermaClime, Inc. and certain subsidiaries of ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., the Lenders, the Administrative and Collateral Agent and the Payment Agent, which the Company hereby incorporates by reference from Exhibit 4.1 to the Company’s Form 10-Q for the fiscal quarter ended September 30, 2007.

4.2b	Exhibits and Schedules to the Term Loan Agreement, dated as of November 2, 2007, among LSB Industries, Inc., ThermaClime, Inc. and certain subsidiaries of ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., the Lenders, the Administrative and Collateral Agent and the Payment Agent.

10.1a	Asset Purchase Agreement, dated as of December 6, 2002 by and among Energetic Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal Tech Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and Slurry Explosive Manufacturing Corporation, LLC, which the Company hereby incorporates by reference from Exhibit 2.1 to the Company's Form 8-K, dated December 12, 2002.

10.1b	Exhibits and Disclosure Letters to the Asset Purchase Agreement, dated as of December 6, 2002 by and among Energetic Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal Tech Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and Slurry Explosive Manufacturing Corporation, LLC.

10.2	Second Amendment to the Nitric Acid Supply, Operating and Maintenance Agreement, dated June 16, 2010, between El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer MaterialScience, LLC. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR THE PURPOSES OF THIS REQUEST.

10.3	Consent, Joinder and Second Amendment, dated as of April 1, 2010, by and among LSB Industries, Inc., ThermaClime, Inc., each of the Subsidiaries of ThermaClime identified on the signature pages thereof, the lenders identified on the signature pages thereof, Wells Fargo Capital finance, Inc., as the arranger and administrative agent, and Consolidated Industries Corp., which the Company hereby incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K, filed April 7, 2010.

10.4	Amendment and Waiver to the Term Loan, dated April 1, 2010, by and among ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Northwest Financial Corporation, Chemex I Corp., Chemex II Corp., Cherokee Nitrogen Company, ClimaCool Corp., ClimateCraft, Inc., Climate Master, Inc., DSN Corporation, El Dorado Chemical Company, International Environmental Corporation, Koax Corp., LSB Chemical Corp., The Climate Control Group, Inc., Trison Construction, Inc., ThermaClime Technologies, Inc., XpediAir, Inc., LSB Industries, Inc., each lender party thereto, Banc of America Leasing & Capital, LLC, as Administrative Agent and as Collateral Agent, Bank of Utah, as Payment Agent, and Consolidated Industries Corp., which the Company hereby incorporates by reference from Exhibit 99.4 to the Company’s Form 8-K, filed April 7, 2010.

21.1	Subsidiaries of the Company

31.1	Certification of Jack E. Golsen, Chief Executive Officer, pursuant to Sarbanes-Oxley Act of 2002, Section 302.

31.2	Certification of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley Act of 2002, Section 302.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has caused the undersigned, duly authorized, to sign this report on its behalf on this 5th day of August 2010.

LSB INDUSTRIES, INC.

	By: /s/ Tony M. Shelby
	Tony M. Shelby Executive Vice President of Finance and Chief Financial Officer (Principal Financial Officer)

	By: /s/ Harold L. Rieker, Jr.
	Harold L. Rieker, Jr. Vice President and Principal Accounting Officer

ex_41b.htm

EXHIBIT 4.1b

EXHIBITS AND SCHEDULES

EXHIBITS AND SCHEDULES OF AMENDED AND RESTATED LOAN AND SECURITY LOAN AGREEMENT (“AGREEMENT”) BY AND AMONG LSB INDUSTRIES, INC., THERMACLIME, INC. AND EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES, THE LENDERS AND WELLS FARGO FOOTHILL, INC., WHICH AGREEMENT THE COMPANY FILED AS EXHIBIT 4.2 TO THE COMPANY’S FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2007.


Exhibit A-1		Form of Assignment and Acceptance
Exhibit B-1		(intentionally left blank)
Exhibit C-1		Form of Compliance Certificate
Exhibit L-1		Form of LIBOR Notice

Schedule C-1		Commitments
Schedule E-1		Eligible Inventory Locations
Schedule P-1		Permitted Liens
Schedule 2.7(a)		Cash Management Banks
Schedule 3.1(m)		Collateral Access Locations
Schedule 5.5		Locations of Inventory and Equipment
Schedule 5.7		Chief Executive Office; FEIN
Schedule 5.8(b)		Capitalization of Borrowers
Schedule 5.8(c)		Capitalization of Borrowers’ Subsidiaries
Schedule 5.10		Litigation
Schedule 5.14		Environmental Matters
Schedule 5.16		Intellectual Property
Schedule 5.18		Demand Deposit Accounts
Schedule 5.20		Permitted Indebtedness
Schedule 7.4(b)		(intentionally left blank)
Schedule 7.13		Other Permitted Investments
Schedule 7.14		Transactions with Affiliates

EXHIBIT A-1

FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT

This ASSIGNMENT AND ACCEPTANCE AGREEMENT ("Assignment Agreement") is entered into as of ____________ between ______________ (“Assignor”) and ____________ ("Assignee"). Reference is made to the Agreement described in Item 2 of Annex I annexed hereto (the "Loan Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Loan Agreement.

In accordance with the terms and conditions of Section 14 of the Loan Agreement, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor's rights and obligations under the Loan Documents as of the date hereof with respect to the Obligations owing to the Assignor, and Assignor’s portion of the Total Commitments and the Revolver Commitments, all as specified in Item 4.b and Item 4.c of Annex I. After giving effect to such sale and assignments, the Assignee's portion of the Total Commitments and Revolver Commitments will be as set forth in Item 4.b of Annex I. After giving effect to such sale and assignment the Assignor’s amount and portion of the Total Commitments and Revolver Commitments will be as set forth in Item 4.d and Item 4.e of Annex I.

The Assignor (a) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; and (c) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower or any of its Subsidiaries or the performance or observance by any Borrower or any of its Subsidiaries of any of their respective obligations under the Loan Documents or any other instrument or document furnished pursuant thereto.

The Assignee (a) confirms that it has received copies of the Loan Agreement and the other Loan Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (b) agrees that it will, independently and without reliance, as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents; (c) confirms that it is eligible as an assignee under the terms of the Loan Agreement; (d) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (e) agrees that it will perform in accordance with their terms all of

the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender [and (f) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Loan Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty.]

Following the execution of this Assignment Agreement by the Assignor and Assignee, it will be delivered by the Assignor to the Agent for recording by the Agent. The effective date of this Assignment (the “Settlement Date”) shall be the later of (a) the date of the execution hereof by the Assignor and the Assignee, the payment by Assignor or Assignee to Agent for Agent's sole and separate account a processing fee in the amount of $5,000, and the receipt of any required consent of the Agent, and (b) the date specified in item 5 of Annex I.

Upon recording by the Agent, as of the Settlement Date (a) the Assignee shall be a party to the Loan Agreement and, to the extent of the interest assigned pursuant to this Assignment Agreement, have the rights and obligations of a Lender thereunder and under the other Loan Documents, and (b) the Assignor shall, to the extent of the interest assigned pursuant to this Assignment Agreement, relinquish its rights and be released from its obligations under the Loan Agreement and the other Loan Documents.

Upon recording by the Agent, from and after the Settlement Date, the Agent shall make all payments under the Loan Agreement and the other Loan Documents in respect of the interest assigned hereby (including, without limitation, all payments or principal, interest and commitment fees (if applicable) with respect thereto) to the Assignee. Upon the Settlement Date, the Assignee shall pay to the Assignor the Assigned Share (as set forth in Item 4.b of Annex I) of the principal amount of any outstanding loans under the Loan Agreement and the other Loan Documents. The Assignor and Assignee shall make all appropriate adjustments in payments under the Loan Agreement and the other Loan Documents for periods prior to the Settlement Date directly between themselves on the Settlement Date.

THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

[Remainder of page left intentionally blank.]

IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement and Annex I hereto to be executed by their respective officers thereunto duly authorized, as of the first date above written.

[NAME OF ASSIGNOR]

as Assignor

By ________________________

Title: ______________________

[NAME OF ASSIGNEE]

as Assignee

By: _______________________

Title: ______________________

ACCEPTED THIS ____ DAY OF

_______________

WELLS FARGO FOOTHILL, INC.,

AS AGENT

By:___________________________

Title:________________________

ANNEX FOR ASSIGNMENT AND ACCEPTANCE

ANNEX I

1.	Borrowers: ThermaClime, Inc., an Oklahoma corporation ("ThermaClime"), and each of the subsidiaries of ThermaClime and party to the below referenced Loan Agreement.

Name and Date of Loan Agreement: Amended and Restated Loan and Security Agreement, dated as of November 5, 2007, among LSB Industries, Inc., an Delaware corporation, as guarantor, the Borrowers, the lenders signatory thereto as the Lenders, and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders.

Date of Assignment Agreement:

Amounts:

Assignor’s Total Commitment

Assignor’s Revolver Commitment

Assignor’s Share of Total Commitment

Assigned Share of Revolver Commitment

Assigned Amount of Total Commitment

Assigned Amount of Revolver Credit Commitment

Resulting Amount of Assignor's Total Commitment after giving effect to the sale and Assignment to Assignee

Resulting Amount of Assignor’s Revolver Commitment

Assignor’s Resulting Share of Total Commitment after giving effect to the Assignment to Assignee

Assignor’s Resulting Share of Revolving CreditCommitment

Settlement Date:

6.	Notice and Payment Instructions, etc.

Assignee:

Assignor:

By: ____________________________

Title: ___________________________

By: _____________________________

Title: ____________________________

7.	Agreed and Accepted:

[ASSIGNOR]

By: ____________________________

Title: ___________________________

[ASSIGNEE]

By: _____________________________

Title: ____________________________

Accepted:

WELLS FARGO FOOTHILL, INC., as Agent

By: ______________________________

Title: _____________________________

EXHIBIT C-1

(Form of Compliance Certificate)

[on Borrowers’ letterhead]

To: Wells Fargo Foothill, Inc., as Agent

under the below-referenced Loan Agreement

2450 Colorado Avenue, Suite 3000 West

Santa Monica, California 90404

Attn: Business Finance Division Manager

Re: Compliance Certificate dated

Ladies and Gentlemen:

Reference is made to that certain Amended and Restated Loan and Security Agreement, dated as of November 5, 2007 (the "Loan Agreement") among LSB Industries, Inc., an Delaware corporation ("Parent"), ThermaClime, Inc., an Oklahoma corporation ("ThermaClime"), certain of ThermaClime's subsidiaries identified on the signature pages thereof (such subsidiaries, together with ThermaClime, are collectively, jointly and severally, the "Borrowers"), the lenders signatory thereto (the "Lenders"), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders ("Agent"). Capitalized terms used in this Compliance Certificate have the meanings set forth in the Loan Agreement unless specifically defined herein.

Pursuant to Section 6.3 of the Loan Agreement, the undersigned officer of ThermaClime hereby certifies that:

1. The financial information of Parent and its Subsidiaries and of ThermaClime and its Subsidiaries, as the case may be, furnished in Schedule 1 attached hereto, has been prepared in accordance with GAAP (except for year-end adjustments and the lack of footnotes, in the case of financial statements delivered under Section 6.3(a) of the Loan Agreement) and fairly presents the financial condition of Parent and its Subsidiaries and of ThermaClime and its Subsidiaries, as the case may be.

2. Such officer has reviewed the terms of the Loan Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of the Borrowers during the accounting period covered by the financial statements delivered pursuant to Section 6.3 of the Loan Agreement.

3. Such review has not disclosed the existence on and as of the date hereof, and the undersigned does not have knowledge of the existence as of the date hereof, of any event or condition that constitutes a Default or Event of Default, except for such conditions or events listed on Schedule 2 attached hereto, specifying the nature and period of existence thereof and what action Borrowers have taken, are taking, or propose to take with respect thereto.

4. Borrowers are in timely compliance with all representations, warranties, and covenants set forth in the Loan Agreement and the other Loan Documents, except as set forth on Schedule 2 attached hereto. Without limiting the generality of the foregoing, Borrowers are in compliance with the covenants contained in Section 7.20 of the Loan Agreement as demonstrated on Schedule 3 hereof.

IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned this _____ day of _______________, ________.

THERMACLIME, INC.,

an Oklahoma corporation,

as Administrative Borrower

By: ________________________

Name:

Title:

SCHEDULE 3

1. Minimum EBITDA.

(a) ThermaClime’s and its Subsidiaries’ EBITDA for the _________ ending _________, ________ is $______________, which amount [is/is not] greater than or equal to the amount set forth in Section 7.20(a)(i) of the Loan Agreement for the corresponding period.

2. Fixed Charge Coverage Ratio. [If Applicable]

(a) The Fixed Charge Coverage Ratio of ThermaClime and its Subsidiaries, for the fiscal year ending ______________, is calculated as follows

(i)

EBITDA of ThermaClime and its Subsidiaries for the 12 month period then ended: $________________

(ii)

Principal Indebtedness of ThermaClime and its Subsidiaries scheduled to be paid or prepaid during such period: $________________

(iii)

Gross interest expense of ThermaClime and its Subsidiaries for such period: $________________

(iv)

Interest income of ThermaClime and its Subsidiaries for such period: $________________

(v)

Non-cash accretion expense of ThermaClime and its Subsidiaries for such period: $________________

(vi)

Non-cash amortization of debt origination cost of ThermaClime and its Subsidiaries for such period: $________________

(vii)

Capitalized Lease Obligations of ThermaClime and its Subsidiaries having a scheduled due date during such period: $________________

Item (i) divided by the sum of

Item (ii) plus Item (vii) plus the result of Item (iii) minus

the sum of Item (iv) plus Item (v) plus Item (vi)

(= Fixed Charge Coverage Ratio) ___ : ___

(b) The Fixed Charge Coverage Ratio set forth above [is/is not] greater than or equal to the amount set forth in Section 7.20(a)(iii) of the Loan Agreement for the corresponding period.

EXHIBIT L-1

FORM OF LIBOR NOTICE

Wells Fargo Foothill, Inc., as Agent

under the below referenced Loan Agreement

2450 Colorado Place

Suite 3000 West

Santa Monica, California 90404

Attention: Business Finance Division Manager

Ladies and Gentlemen:

Reference hereby is made to that certain Amended and Restated Loan and Security Agreement, dated as of November 5, 2007 (the "Loan Agreement"), among LSB Industries, Inc., an Delaware corporation ("Parent"), ThermaClime, Inc., an Oklahoma corporation ("Administrative Borrower"), certain of Administrative Borrower's subsidiaries signatory thereto (such subsidiaries, together with Administrative Borrower, each a "Borrower" and collectively, the "Borrowers"), the lenders signatory thereto (the "Lenders"), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders (“Agent”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement.

This LIBOR Notice represents the Borrowers’ request to elect the LIBOR Option with respect to outstanding Advances in the amount of $_________ (the "LIBOR Rate Component")[, and is a written confirmation of the telephonic notice of such election given to Agent].

Such LIBOR Rate Component will have an Interest Period of [1, 2, or 3] month(s) commencing on ______________.

This LIBOR Notice further confirms the Borrowers’ acceptance, for purposes of determining the rate of interest based on the LIBOR Rate under the Loan Agreement, of the LIBOR Rate as determined pursuant to the Loan Agreement.

Administrative Borrower, on behalf of itself and the other Borrowers, represents and warrants that (i) as of the date hereof, each representation or warranty contained in or pursuant to any Loan Document, any agreement, instrument, certificate, document or other writing furnished at any time under or in connection with any Loan Document, and as of the effective date of any advance, continuation or conversion requested above is true and correct in all material respects (except to the extent any representation or warranty expressly related to an earlier date), (ii) each of the covenants and agreements contained in any Loan Document have been performed (to the extent required to be performed on or before the date hereof or each such effective date), and (iii) no Default or Event of Default has occurred and is continuing on the date hereof, nor will any thereof occur after giving effect to the request above.

Dated: ________________________

THERMACLIME, INC., an Oklahoma corporation, as Administrative Borrower

By _________________________

Name:_______________________

Title: _______________________

Acknowledged by:

WELLS FARGO FOOTHILL, INC.,

as Agent

By: ______________________________

Name: ____________________________

Title: _____________________________

Schedule C-1

Commitments


Lender	Revolver Commitment		Term Loan Sub-facility Commitment*		Total Commitment
Wells Fargo Foothill, Inc.	$	30,000,000	$	4,500,000	$	30,000,000

Congress Financial Corporation (Southwest)	$	20,000,000	$	3,000,000	$	20,000,000

All Lenders	$	50,000,000	$	7,500,000	$	50,000,000

*	The Term Loan Commitment is a sub-facility of the Revolver Commitment.

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

[This page intentionally left blank.]

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

[This page intentionally left blank.]

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CLIMACOOL CORP.

(updated October 26, 2007)

Inventory is located at:

1.	518 North Indiana, Oklahoma City, OK 73106 (Landlord: Summit Machine Tool Manufacturing Corp.)

2.	4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Sublessor: Climate Master, Inc.)

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CLIMATE MASTER, INC.

(updated October 26, 2007)

Inventory is located at:

1.	7300 Southwest 44th Street, Oklahoma City, Oklahoma 73179 (Landlord: Raptor Master LLC).

2.	4700 West Point Boulevard , Oklahoma City, Oklahoma 73179 (Landlord: Prime Financial Corporation)

3.	4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Landlord: Summit Machinery Company)

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CLIMATECRAFT, INC.

(updated October 26, 2007)

Inventory is located at:

1.	1427 Northwest 3rd Street, Oklahoma City, Oklahoma 73106. (Landlord: Summit Machine Tool Manufacturing Corp.)

2.	1601 Northwest 4th Street, Oklahoma City, Oklahoma 73106. (Landlord: Summit Machine Tool Manufacturing Corp.)

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

Inventory is located at 1080 Industrial Drive, Cherokee, Alabama 35616 (Landlord: Cherokee Nitrogen Holdings, Inc.)

Page 6 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

Inventory is located at:

1.	Bryan, Brazos County, Texas 77806 (Landlord: Northwest Financial Corporation (‘NWF”)

2.	Pittsburg, Camp County, Texas 75686 (Landlord: NWF)

3.	El Dorado, Union County, Arkansas 71730 (Landlord: NWF)

4.	Cooper, Delta County, Texas 75432 (Landlord: NWF)

5.	Newbern, Dyer County, Tennessee 38059 (Landlord: NWF)

6.	Whiteright, Grayson County, Texas 75491 (Landlord: NWF)

7.	Tyler, Smith County, Texas 75706 (Landlord: NWF)

8.	Itasca, Hill County, Texas 76055 (Landlord: NWF)

9.	Trinity County, Texas 75862

10.	Dublin, Erath County, Texas 76446

11.	Athens, Henderson County, Texas 75751

12.	Corsicana, Navarro County, Texas 75151 (Landlord: NWF)

13.	Marquez, Leon County, Texas 77865 (Landlord: Union Pacific)

14.	Terrell, Kaufman County, Texas 75160 (Landlord: NWF)

15.	Cherokee, Alabama 35616 (Landlord: Cherokee Nitrogen Holdings, Inc.)

16.	Annona, Texas 75550

17.	Lamar, Missouri

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

1.	Inventory is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Prime Holdings Corporation).

2.	Inventory is located at 4931 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

3.	Inventory is located at 4925 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

4.	Inventory is located at 4929 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

5.	Inventory is located at 4927 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

6.	Inventory is located at 4921 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

7.	Inventory is located at 4919 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

8.	Inventory is located at 2801 SW 15th Street, Oklahoma City, Oklahoma 73128 (Landlord: Absolute Delivery Service, LLC).

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

KOAX CORP.

(updated October 26, 2007)

Inventory is located at 510 North Indiana, Oklahoma City, Oklahoma 73106 (Landlord: LSB Industries, Inc.).

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

LSB CHEMICAL CORP.

(updated October 26, 2007)

[This page intentionally left blank.]

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

[This page intentionally left blank.]

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

Inventory is located at 4000 Northwest 39th Street, Oklahoma City, OK 73112 (Landlord: Summit Machinery Company)

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

Inventory is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Prime Holdings Corporation)

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE E-1

ELIGIBLE INVENTORY LOCATIONS

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

Inventory is located at 4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Landlord: Summit Machinery Company)

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE P-1

PERMITTED LIENS

(updated October 26 2007)

Name of Obligor	Description of Secured Indebtedness
ThermaClime Technologies, Inc. (f/k/a ACP International Limited (“TTI”) (operating lease)	Secured Party: Park National Bank, assigned to Marquette Equipment Finance, LLC Collateral: All equipment, software and other property leased under that Equipment Lease dated March 1, 2007 between Prime Financial Corporation and TTI (Continental washer and dryer)
TTI, as bailee (operating lease)	Secured Party: Park National Bank, as bailor Collateral: Radiator coil washer and dryer
TTI (operating lease)	Secured Party: Prime Financial Corporation Collateral: One (1) Continental Equipment 2-stage belt washer, natural gas heated dryer and drain tank
TTI (operating lease)	Secured Party: Prime Financial Corporation Collateral: Burr oak fin die, S/N FDM-1532-1

Name of Obligor	Description of Secured Indebtedness
ThermaClime, Inc. (f/k/a ClimaChem, Inc.)	Secured Party: Toshiba America Information Systems Collateral: Six (6) Toshiba copiers

Name of Obligor	Description of Secured Indebtedness
ClimaCool Corp.	None

Name of Obligor	Description of Secured Indebtedness
ClimateCraft, Inc. (“CLC”) (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf NC Punching Machine
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: 1999 Amada HFB1254 Promecam CNC Press Brake w/ Controls
CLC	Secured Party: City of Oklahoma City Collateral: Real estate owned by Summit Machine Tool Manufacturing Corp.
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Two (2) model 625014 Accushears w/ 48” extended travel and CNC front gauging 12’x6’x6’; S/N 5110 and 5111
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf model TC2020 Punch Machine, S/N A0030A0239 with tooling
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada CNC Hydraulic Press Brake model HFB220/440, SN H980519

Page 1 of 6

Name of Obligor	Description of Secured Indebtedness
Cherokee Nitrogen Company	None

Name of Obligor	Description of Secured Indebtedness
Climate Master, Inc. (“CLM,”) as bailee (operating lease)	Secured Party: Marquette Equipment Finance, LLC, as Bailor, assigned to Park National Bank Collateral: One (1) Chiyoda SP-25ST 3 Axis Tube Bender with RH rotation, including all standard equipment and 5/8”, 3/4” and 7/8” OD and mandrels
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf L3040 Laser Cutting Machine System purchased from Icon Machine Tool, Inc., S/N A0235A0061, and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Trumpf TruLaser 3530 Laser Cutting Machine, Serial #AX035A0061
CLM (operating lease)	Secured Party: National Machine Tool Financial Corporation and TCF Equipment Finance, Inc. Collateral: One (1) new Trumpf L3530 4000 Watt Laser with 60”x120”, S/N A0235A0061, and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: IOS Capital, as lessor Collateral: All equipment now or hereafter leased (PCP 1050, booklet maker and accessories) in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 2068765, as amended from time to time, between IOS Capital, LLC as lessor, and the above referenced Lessee/Debtor, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. Customer: 1095557 IKCPP500 C11029146
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: 1 each five stage Power Spray Stainless Washer (installed) in accordance with quote 3703-0107R3 from Industrial Finishing Systems.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Ingersoll-Rand oil-free Nirvana compressor system consisting of various components; S/N IRN75H-OF.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Gamma G333PC Wire Processing System per quote 06-0150-2743-0135C; S/N 1-528324-1 and all accessories and attachments thereto.

Page 2 of 6

Name of Obligor

Description of Secured Indebtedness

CLM, as lessee (operating lease)	Secured Party: IOS Capital, as lessor Collateral: All equipment now [5 Ricoh copiers] or hereafter leased in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 2929907, as amended from time to time, between Lessor and Lessee, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. CUSTOMER: 1095557 RIAF2035 S/P J5837002733 RIAF2035 S/P J5837002727 RIAF2035 S/P J5837102886 RIAF2035 S/P J5837102735 RIAF2035 S/P J5837102721 RIAF1060 J4235501227 RIAF1060 J422500470 RIAF2090 J7031100205 RIAF2090 J7031100244
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada Vipros 368 King, Turret Punch Press, S/N 36840024, with New London Slug Conveyor, One (1) Amada LUL510 loading device, S/N 00510090, Amada SR510 .30 unloading device, S/N 2218, Sun Classic Workstation with Line Control Software, S/N FW900085, AP100 Punch Upgrade, AP100 Punch Add. Seat Upgrade, complete with all attachments now or hereafter acquired.
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada press brake, model HFB 1003/8, S/N HFB010030 R981151, w/ ISB light curtain
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Raidzone GangSTOTR Systems RC8-2-R2000 (2x8 disk rack mount systems and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Nine (9) OptiGun-2AX Automatic Guns, Nine (9) OptiTronicPlus Control Units and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Six (6) sets of ECI line equipment (Procix) and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada 386 King, Vipros 30 ton CNC Turret Punch, S/N 36820017 and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada CNC Blanking Shear, S/N 101000056 and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One(1) Trumpf Laser 3040 Plus and associated accessories

Page 3 of 6

Name of Obligor

Description of Secured Indebtedness

CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One(1) Trumpf Laser 3040 Plus and associated accessories
CLM (operating lease)	Secured Party: RCA Capital Corp. Collateral: One (1) new Chiyoda SP-25ST 3 Axis CNC Pipe Bender and associated accessories
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) single Tube Cutoff Line (STCOS) and all accessories and attachments thereto (Burr Oak Copper Cut).
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor, as assigned to Marquette Equipment Finance, LLC, as assigned to Park National Bank Collateral: One (1) Chiyoda SP-25 ST 3-Axis Tube Bender and associated accessories.
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: One 1996 Amada FCXB-III-8025 CNC Press Brake
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: IPCS Equipment and accessories
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Used 1995 FBD-125 Amada Press Brake, S/N 12530058
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: 88 ton Amada HFB, S/N R091-18; 88 ton Amada HFB, S/N R970432; 138 ton Amada FBD, S/N 12530263

Name of Obligor	Description of Secured Indebtedness
El Dorado Chemical Company (“EDC”) as bailee	Secured Party: Orica USA Inc., as bailor Collateral: All of bailor’s inventory located at bailee’s El Dorado, AR facility
EDC, as lessee (operating lease)	Secured Party: LSB Industries, Inc. Collateral: Catalysts associated with EDC’s El Dorado, AR facility
EDC, as bailee (operating lease)	Secured Party: Republic Bank, Inc., as bailor Collateral: Personal property (rail cars) located at bailee’s El Dorado, AR facility and described in Lease Schedule No. 001 to Master Lease Agreement No. AF10506 by and between Prime Financial Corporation, as lessee, and Applied Financial, LLC, as lessor
EDC	Secured Party: Air Liquide Industrial US LP Collateral: Gas generating plant, located at debtor’s El Dorado, AR facility
EDC (operating lease)	Secured Party: General Electric Capital Corporation Collateral: PerkinElmer Aanalyst 700 AA Spectrometer and accessories

Page 4 of 6

Name of Obligor	Description of Secured Indebtedness
XpediAir, Inc. (f/k/a The Environmental Group, Inc.)	None

Name of Obligor	Description of Secured Indebtedness
International Environmental Corporation (“IEC”) (operating lease)	Secured Party: Prime Financial Corporation Collateral: Bolina Cut-to-Length; 2 Optiflex 110/08 Pullmax CNC Press Brakes; vertical bender; Trumpf laser cutting machine
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada Turret Press Dies & accessories
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Two Trumpf Laser Cutting Machines
IEC	Secured Party: Amada Capital Corporation Collateral: Amada Turret Press Model VIPROS358K w/ scrap conveyor and attachments
IEC	Secured Party: Amada Capital Corporation Collateral: Software package consisting of two seats of Anmest punch software and one seat AP100 US punch complete w/ all attachments
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: One (1) T-Drill SP-55 tube end spinner, 440V, S/N 97032
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: High Takt assembly line (spur line south bldg)
IEC (operating lease)	Secured Party: IOS Capital Collateral: All equipment now or hereafter leased in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 1842990, as amended from time to time, between IOS Capital, LLC as lessor, and the above referenced Lessee/Debtor, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. Customer: 357586 RIAF 2075 S/P C11020120, RIAF2075 S/P C11020023, RIAF 2075 S/P C11020123, RIAF2060 S/P C11020019, RIAF3030 S/P C11020011, RIAF3030 S/P C11020010, RIAF3030 W/P C11020009, RIAF3030 SP C11020008, RIAF3425C C11020124, ZZrightfax software
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf Laser 3040 Plus, 4000 watt resonator
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Security system

Page 5 of 6

Name of Obligor	Description of Secured Indebtedness
Koax Corp (operating lease)	Secured Party: Intrust Bank Collateral: LSE 1751964 S/N MPH04374

Name of Obligor	Description of Secured Indebtedness
LSB Chemical Corp.	None

Name of Obligor	Description of Secured Indebtedness
Chemex I Corp. (f/k/a Slurry Explosive Corporation)	None

Name of Obligor	Description of Secured Indebtedness
Trison Construction, Inc.	None

Name of Obligor	Description of Secured Indebtedness
Chemex II Corp. (f/k/a Universal Tech Corporation)	None

Name of Obligor	Description of Secured Indebtedness
The Climate Control Group, Inc.	None

Name of Obligor	Description of Secured Indebtedness
Northwest Financial Corporation	None

Name of Obligor	Description of Secured Indebtedness
CEPOLK Holdings, Inc. (“CHI”) (f/k/a ThermalClime, Inc.)	Prudential Insurance Company of America ("Prudential") holds a lien on the partnership interest owned by CHI in a limited partnership involved in an energy conservation project, to secure certain loans made by Prudential to CEPOLK Limited Partnership in the approximate amount of $5,253,252.

Page 6 of 6

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CLIMACOOL CORP.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CLIMATECRAFT, INC.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CLIMATE MASTER, INC.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 6 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

KOAX CORP.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

LSB CHEMICAL CORP.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE 2.7(a)

CASH MANAGEMENT BANKS

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

JP Morgan Chase Bank, N.A.

100 North Broadway

Oklahoma City, Oklahoma 73102

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

Equipment and/or inventory is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128. (Landlord: Prime Holdings Corporation)

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

NONE

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CLIMACOOL CORP.

(updated October 26, 2007)

1.	Equipment and/or inventory is located at 518 North Indiana, Oklahoma City, OK 73106 (Landlord: Summit Machine Tool Manufacturing Corp.)

2.	Equipment and/or inventory is located at 4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Sublessor: Climate Master, Inc.)

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CLIMATECRAFT, INC.

(updated October 26, 2007)

1.	Equipment and/or inventory is located at 1427 Northwest 3rd Street, Oklahoma City, Oklahoma 73106. (Landlord: Summit Machine Tool Manufacturing Corp.)

2.	Equipment and/or inventory is located at 1601 Northwest 4th Street, Oklahoma City, Oklahoma 73106. (Landlord: Summit Machine Tool Manufacturing Corp.)

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CLIMATE MASTER, INC.

(updated October 26, 2007)

1.	Equipment and/or inventory is located at 7300 Southwest 44th Street, Oklahoma City, Oklahoma 73179 (Landlord: Raptor Master LLC).

2.	Equipment and/or inventory is located at 4700 West Point Boulevard, Oklahoma City, Oklahoma 73179 (Landlord: Prime Financial Corporation).

3.	Equipment and/or inventory is located at 4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Landlord: Summit Machinery Company).

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

1.	Bryan, Brazos County, Texas 77806 (Landlord: Northwest Financial Corporation (“NWF”)

2.	Pittsburg, Camp County, Texas 75686 (Landlord: NWF)

3.	El Dorado, Union County, Arkansas 71730 (Landlord: NWF)

4.	Cooper, Delta County, Texas 75432 (Landlord: NWF)

5.	Newbern, Dyer County, Tennessee 38059 (Landlord: NWF)

6.	Whiteright, Grayson County, Texas 75491 (Landlord: NWF)

7.	Tyler, Smith County, Texas 75706 (Landlord: NWF)

8.	Itasca, Hill County, Texas 76055 (Landlord: NWF)

9.	Corsicana, Navarro County, Texas 75151 (Landlord: NWF)

10.	Marquez, Leon County, Texas 77865 (Landlord: Union Pacific)

11.	Terrell, Kaufman County, Texas 75160 (Landlord: NWF)

12.	Cherokee, Alabama 35616 (Landlord: Cherokee Nitrogen Holdings, Inc.)

Page 6 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

Equipment and/or Inventory is located at 4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112 (Landlord: Summit Machinery Company)

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

1.	Equipment and/or inventory is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Prime Holdings Corporation).

2.	Equipment and/or inventory is located at 4931 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

3.	Equipment and/or inventory is located at 4925 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

4.	Equipment and/or inventory is located at 4929 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

5.	Equipment and/or inventory is located at 4927 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

6.	Equipment and/or inventory is located at 4921 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

7.	Equipment and/or inventory is located at 4919 SW 7th Street, Oklahoma City, Oklahoma 73128 (Landlord: Quail Creek Properties LLC ).

8.	Equipment and/or inventory is located at 2801 SW 15th Street, Oklahoma City, Oklahoma 73128 (Landlord: Absolute Delivery Service, LLC).

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

KOAX CORP.

(updated October 26, 2007)

Equipment and/or inventory is located at 510 North Indiana, Oklahoma City, Oklahoma 73106 (Landlord: LSB Industries, Inc.).

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

LSB CHEMICAL CORP.

(updated October 26, 2007)

NONE

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

NONE

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

Equipment and/or inventory is located at 4000 Northwest 39th Street, Oklahoma City, OK 73112 (Landlord: Summit Machinery Company)

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

NONE

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE 3.1(m)

COLLATERAL ACCESS LOCATIONS

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

Equipment and/or inventory is located at 1080 Industrial Drive, Cherokee, Alabama 35616 (Landlord: Cherokee Nitrogen Holdings, Inc.)

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CLIMACOOL CORP.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CLIMATECRAFT, INC.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CLIMATE MASTER, INC.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 6 of 14

AMENDED AND RESTATED’

SCHEDULE 5.5

LOCATIONS OF INVENTORY

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

KOAX CORP.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

LSB CHEMICAL CORP.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE 5.5

LOCATIONS OF INVENTORY

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

Please refer to Amended and Restated Schedule E-1

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

1.	ThermaClime Technologies, Inc.’s, f/k/a ACP International Limited (“TTI”), chief executive office is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128.

2.	TTI’s FEIN is 73-1553910.

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

1.	ThermaClime, Inc.’s, f/k/a ClimaChem, Inc. (“TCI”), chief executive office is located at 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107.

2.	TCI’s FEIN is 73-1528549.

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CLIMACOOL CORP.

(updated October 26, 2007)

1.	ClimaCool Corp.’s (“ClimaCool”) chief executive office is located at 4000 NW 39th Street, Oklahoma City, Oklahoma 73112.

2.	ClimaCool’s FEIN is 73-1409358.

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CLIMATECRAFT, INC.

(updated October 26, 2007)

1.	ClimateCraft Inc.’s (“ClimateCraft”) chief executive office is located at 518 North Indiana, Oklahoma City, Oklahoma 73106.

2.	ClimateCraft’s FEIN is 73-1207959.

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CLIMATE MASTER, INC.

(updated October 26, 2007)

1.	Climate Master, Inc.’s (“CM”) chief executive office is located at 7300 Southwest 44th Street, Oklahoma City, Oklahoma 73179.

2.	CM’s FEIN is 93-0857025.

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007

1.	El Dorado Chemical Company’s (“EDC”) chief executive office is located at 16 South Pennsylvania, Oklahoma City, Oklahoma 73107.

2.	EDC’s FEIN is 73-1183488.

Page 6 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

1.	XpediAir, Inc.’s, f/k/a The Environmental Group, Inc. ("XPA"), chief executive office is located at 4000 N.W. 39th Street, Oklahoma City, Oklahoma 73112.

2.	XPA’s FEIN is 73-1431586.

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

1.	International Environmental Corporation’s (“IEC”) chief executive office is located at 5000 Southwest 7th Street, Oklahoma City, Oklahoma 73128.

2.	IEC’s FEIN is 73-0754306.

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

KOAX CORP.

(updated October 26, 2007)

1.	Koax Corp.’s (“Koax”) chief executive office is located at 510 North Indiana, Oklahoma City, Oklahoma 73106.

2.	Koax’s FEIN is 73-1284158.

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

LSB CHEMICAL CORP.

(updated October 26, 2007)

1.	LSB Chemical Corp.’s (“LSBCC”) chief executive office is located at 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107.

2.	LSBCC’s FEIN is 73-1207958.

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

1.	Chemex I Corp.’s, f/k/a Slurry Explosive Corporation ("Chemex I"), chief executive office is located at 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107.

2.	Chemex I=s FEIN is 73-1330903.

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

1.	Trison Construction, Inc.’s (“Trison”) chief executive office is located at 4000 Northwest 39th Street, Oklahoma City, Oklahoma 73112.

2.	Trison’s FEIN is 73-1538285.

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

1.	Chemex II Corp.’s, f/k/a Universal Tech Corporation (“Chemex II”), chief executive office is located at 16 South Pennsylvania, Oklahoma City, Oklahoma 73107.

2.	Chemex II’s FEIN is 73-1364261.

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE 5.7

CHIEF EXECUTIVE OFFICE; FEIN

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

1.	Cherokee Nitrogen Company’s (“CNC”) chief executive office is located at 16 South Pennsylvania, Oklahoma City, Oklahoma 73107.

2.	CNC’s FEIN is 41-2115998.

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE 5.8(b)

CAPITALIZATION OF BORROWERS

(updated October 26, 2007)

Borrower	Class	No. of Authorized Shares	No. of Outstanding Shares
International Environmental Corporation	Common	300, par value $10.00	300, par value $10.00
LSB Chemical Corp.	Common	50, par value $10.00	50, par value $10.00
El Dorado Chemical Company	Common	25,000, par value $1.00	1,000, par value $1.00
ThermaClime Technologies, Inc., f/k/a ACP International Limited	Common	500,000, par value $0.10	10,000, par value $0.10
ClimaCool Corp.	Common	50,000, par value $1.00	1,000, par value $1.00
XpediAir, Inc., f/k/a The Environmental Group, Inc.	Common	500,000, par value $0.10	10,000, par value $0.10
ThermaClime, Inc., f/k/a ClimaChem, Inc.	Common	500,000, par value $0.10	10,000, par value $0.10
Climate Master, Inc.	Common	1,000, par value $1.00	1,000, par value $1.00
ClimateCraft, Inc.	Common (Class A Voting)	900, par value $0.50	900, par value $0.50
ClimateCraft, Inc.	Common (Class B Non-Voting)	100, par value $0.50	100, par value $0.50
Koax Corp.	Common	50, par value $10.00	50, par value $10.00
Chemex I Corp., f/k/a Slurry Explosive Corporation	Common	10,000, par value $1.00	1,000, par value $1.00
Trison Construction, Inc.	Common	500,000, par value $0.10	10,000, par value $0.10
Chemex II Corp., f/k/a Universal Tech Corporation	Common	10,000, par value $1.00	1,000, par value $1.00
Cherokee Nitrogen Company	Common	500,000, par value $0.10	10,000, par value $0.10

AMENDED AND RESTATED

SCHEDULE 5.8(c)

CAPITALIZATION OF BORROWERS' SUBSIDIARIES

(updated October 26, 2007)

Subsidiary	Jurisdiction	No. of Authorized Shares	No. of Outstanding Shares
Northwest Financial Corporation	Oklahoma	100, par value $1,000	54, par value $1,000
CEPOLK Holdings, Inc. f/k/a ThermalClime, Inc.	Oklahoma	50,000, par value $1.00	1,000, par value $1.00

The Climate Control Group, Inc.	Oklahoma	100,000, par value $0.10	10,000, par value $0.10

Please also refer to Amended and Restated Schedule 5.8(b).

AMENDED AND RESTATED

SCHEDULE 5.10

LITIGATION

(updated October 26, 2007)

NONE

AMENDED AND RESTATED

SCHEDULE 5.14

ENVIRONMENTAL MATTERS

(updated October 26, 2007)

Two (2) inactive disposal areas are known to exist at the nitrate plant leased by Cherokee Nitrogen Company in Cherokee, Alabama. The first involves industrial waste disposed of in an on-site landfill located east of the plant. The landfill has been capped in excess of ten (10) years and is covered with vegetation. The second involves approximately one hundred (100) tons of phosphoric acid tank sludge buried directly east of the plant. Material was generated from an old phosphate plant that is no longer in existence. The material was buried prior to 1986. Any liability associated with these landfills is the responsibility of U.S. Steel, a prior owner of the site.

2.	An asbestos, construction debris, and elemental sulfur on-site landfill is located at El Dorado Chemical Company’s ammonium nitrate plant located in El Dorado, Arkansas. The landfill was closed in 1995 under a state-approved closure plan.

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 1 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 2 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CLIMACOOL CORP.

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 3 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CLIMATECRAFT, INC.

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Climatecraft"

#2,369,333

United States

07/18/00

COPYRIGHTS

NONE

Page 4 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CLIMATE MASTER, INC.

(updated October 26, 2007)

Patent

Serial/Reg. No.

Place of

Registration

Issue

Date

“Water-Cooled Air Conditioning

system Using Condenser Water

Regeneration for Precise Air Reheat

in Dehumidifying Mode”

11/161,808

United States

Pending

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Climate Master (& Design)"

2,139,570

United States

02/24/98

"Climate Master (& Design)"

#TMA 471,487

Canada

02/21/97

"Climate Master"

808,500

United States

05/17/66

"Climate Master"

409,647

Chile

07/22/93

"Climate Master"

84930

Israel

10/08/92

"Climate Master"

292/82

Saudi Arabia

12/30/92

"Climate Master"

1,514,734

United Kingdom

11/13/98

"Climate Master"

11,215

Greece

07/07/98

"Climate Master"

280854

Korea

12/07/93

"Climate Master"

641,594

Taiwan

04/16/94

"Climate Master"

614,556

Taiwan

10/01/93

"Climate Master"

516424

Mexico

12/10/92

"Climate Master"

25162

Kuwait

08/16/93

"Climate Master"

0-999746

Czech Republic

03/20/00

"Climate Master"

583,151

Benelux

06/22/95

"Climate Master"

95575091

France

06/09/95

"Climate Master"

147,007

Hungary

04/25/95

"Climate Master"

172643

Norway

04/25/96

"Climate Master"

309 649

Portugal

05/06/96

"Climate Master"

O-POZ-1170-95

Slovak Republic

05/02/95

"Climate Master"

16121

Turkey

05/01/95

"Climate Master"

729,783

Italy

10/16/97

Page 5 of 15

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Climate Master"

402,883

Europe

02/24/98

"Climate Master"

3480166

China

03/10/03

"Climate Master"

860,657

Australia

12/14/00

"Climate Mate"

TMA 371,539

Canada

08/03/90

"Roommate"

1,906,435

United States

07/18/95

"Paradigm"

2,112,244

United States

11/11/97

"Geodesigner"

2,184,992

United States

08/25/98

“Earthpure”

2,994,583

United States

09/13/05

“Climadry”

3,253,779

United States

06/19/07

COPYRIGHTS

NONE

Page 6 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"El Dorado (& Design)"

1,427,064

United States

02/03/87

"E-2"

833,891

United States

08/22/67

COPYRIGHTS

NONE

Page 7 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Climacool"

2,564,496

United States

04/23/02

“CHP”

1,707,991

United States

08/18/92

XpediAir” (Design Only)*

2,986,893

United States

08/23/05

* Trademark is the subject of a Settlement Agreement with Expedia, Inc. regarding XpediAir, Inc’s right to use the name, throughout the world, in connection with the sale and manufacture of HVAC equipment and related goods and services, and to register the name with the USPTO or any foreign patent and trademark office in design form only.

COPYRIGHTS

NONE

Page 8 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

PATENTS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Conditioned Air Fan Coil Unit"

6,109,044

United States

08/29/00

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"International Environmental Corporation

(& IE Design)"

1,569,505

439970

292/85

United States

Mexico

Saudi Arabia

12/05/89

08/18/93

08/31/93

"International Environmental"

B1,514,822

92/165,999

United Kingdom

Hong Kong

07/01/94

11/21/94

IEC International Environmental (& Design)

77110687

United States

Pending

"Sureflow"

2,449,571

United States

05/08/01

"IE (Stylized)"

2,556,892

United States

04/02/02

"Air Coil Technologies"

1,755,144

United States

03/02/93

“UV Ultrashield”

2,660,647

United States

12/10/02

COPYRIGHTS

NONE

Page 9 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

KOAX CORP.

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

Mark

Serial/Reg. No.

Place of

Registration

Issue

Date

"Koax"

1,776,407

United States

06/15/93

"Koax and design"

1,905,551

United States

07/18/95

COPYRIGHTS

NONE

Page 10 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

LSB CHEMICAL CORP.

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 11 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 12 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 13 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 14 of 15

AMENDED AND RESTATED

SCHEDULE 5.16

INTELLECTUAL PROPERTY

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

Page 15 of 15

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4005107842

P.O. Box 26788

Oklahoma City, OK

Operating

Page 1 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

THERMACLIME, INC

(f/k/a CLIMACHEM, INC.)

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

400519526

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4005026745

P.O. Box 26788

Oklahoma City, OK

Payroll

Page 2 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CLIMATECRAFT, INC.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

400526026

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4005097502

P.O. Box 26788

Oklahoma City, OK

Payroll

BancFirst

4005059015

P.O. Box 26788

Oklahoma City, OK

Working Fund

Page 3 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CLIMACOOL CORP.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4005042554

P.O. Box 26788

Oklahoma City, OK

Operating

Page 4 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CLIMATE MASTER, INC.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009580563

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4003291308

P.O. Box 26788

Oklahoma City, OK

COD Account

BancFirst

4005107710

P.O. Box 26788

Oklahoma City, OK

Payroll Account

Page 5 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

EL DORADO CHEMICAL COMPANY

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009580181

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4025001220

P.O. Box 26788

Oklahoma City, OK

Workers Comp Claim

BancFirst

4005070248

P.O. Box 26788

Oklahoma City, OK

Payroll

BancFirst

4005107338

P.O. Box 26788

Oklahoma City, OK

Cafeteria Account

Regions Bank

8010112512

100 East Peach

El Dorado, AR

General Account

The Bank of Union

1108810

P.O. Box 249

Union City, OK

Claims Account

The Bank of Union

1108802

P.O. Box 249

Union City, OK

Employee Benefits

The Bank of Union

1108828

P.O. Box 249

Union City, OK

Admin Account

Page 6 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4005077684

P.O. Box 26788

Oklahoma City, OK

Operating

Page 7 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

INTERNATIONAL ENVIRONMENTAL CORPORATION

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009580110

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4009580204

P.O. Box 26788

Oklahoma City, OK

Payroll

BancFirst

400514958

P.O. Box 26788

Oklahoma City, OK

Operations Fund

Page 8 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

KOAX CORP.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009580136

P.O. Box 26788

Oklahoma City, OK

Operating

Page 9 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

LSB CHEMICAL CORP.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009580071

P.O. Box 26788

Oklahoma City, OK

Operating

Page 10 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4003292284

P.O. Box 26788

Oklahoma City, OK

Operating

Page 11 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

TRISON CONSTRUCTION, INC.

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

400521962

P.O. Box 26788

Oklahoma City, OK

Operating

BancFirst

4005037879

P.O. Box 26788

Oklahoma City, OK

Payroll

Page 12 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4009586431

P.O. Box 26788

Oklahoma City, OK

Operating

Page 13 of 14

AMENDED AND RESTATED

SCHEDULE 5.18

DEMAND DEPOSIT ACCOUNTS

CHEROKEE NITROGEN COMPANY

(updated October 26, 2007)

Name of

Institutions

Account

Number

Branch

Address

Description

of Account

BancFirst

4005058027

P.O. Box 26788

Oklahoma City, OK

Operating

Colonial Bank

8140017040

1045 1st Street

Cherokee, AL

Petty Cash

Page 14 of 14

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

THERMACLIME TECHNOLOGIES, INC.

(f/k/a ACP INTERNATIONAL LIMITED)

(as of September 30, 2007)

ThermaClime Technologies, Inc. (f/k/a ACP International Limited) is indebted to the following entities in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 1 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

THERMACLIME, INC.

(f/k/a CLIMACHEM, INC.)

(as of September 30, 2007

ThermaClime, Inc., f/k/a ClimaChem, Inc., is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000

12/2007

2.a.

LSB Industries, Inc.

$6,980,978

Semi-Annual Int

12/31/2009

2.b.

LSB Industries, Inc.

$25,359,028

Semi-Annual Int.

On Demand

2.c.

LSB Industries, Inc.

4,907,916

Semi-Annual Int.

On Demand

Northwest Financial Corporation

13,328,828

N/A

On Demand

CEPOLK Holdings, Inc.

3,898,523

N/A

On Demand

El Dorado Nitrogen, L.P.

25,734,720

N/A

On Demand

The Climate Control Group, Inc.

$3,104,268

N/A

On Demand

Page 2 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CLIMACOOL CORP.

(as of September 30, 2007)

ClimaCool Corp. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 3 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CLIMATECRAFT, INC.

(as of September 30, 2007)

ClimateCraft, Inc. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

City of Oklahoma City

$2,450,000

(1)

Summit Machine Tool Manufacturing Corp.

$715,719

$9,350

12/01/2015

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

N/A

12/2007

(1)	Annual payments are made to the City of Oklahoma City in the amount of $175,000 on August 1. The final payment, a balloon payment, in the amount of $875,000 is due on 08/01/2017. Interest is paid semi-annually.

*guarantee

Page 4 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CLIMATE MASTER, INC.

(as of September 30, 2007)

Climate Master, Inc. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 5 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

EL DORADO CHEMICAL COMPANY

(as of September 30, 2007)

El Dorado Chemical Company ("EDC") is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

EDC guarantees the obligations of El Dorado Nitrogen, L.P. to Bayer Corporation in connection with the nitric acid plant project in Baytown, Texas, including the supply of such product.

Page 6 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

XPEDIAIR, INC.

(f/k/a THE ENVIRONMENTAL GROUP, INC.)

(as of September 30, 2007)

XpediAir, Inc. (f/k/a The Environmental Group, Inc.) is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 7 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

INTERNATIONAL ENVIRONMENTAL CORPORATION

(as of September 30, 2007)

International Environmental Corporation is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

Amada Capital Corporation

$57,715

5,452.45

08/01/2008

*guarantee

Page 8 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

KOAX CORP.

(as of September 30, 2007)

Koax Corp. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 9 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

LSB CHEMICAL CORP.

(as of September 30, 2007)

LSB Chemical Corp. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

DSN Corporation

$275,773

N/A

On Demand

*guarantee

Page 10 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CHEMEX I CORP.

(f/k/a SLURRY EXPLOSIVE CORPORATION)

(as of September 30, 2007)

Chemex I Corp. (f/k/a Slurry Explosive Corporation) is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 11 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

TRISON CONSTRUCTION, INC.

(as of September 30, 2007)

Trison Construction, Inc. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 12 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CHEMEX II CORP.

(f/k/a UNIVERSAL TECH CORPORATION)

(as of September 30, 2007)

Chemex II Corp. (f/k/a Universal Tech Corporation) is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 13 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

THE CLIMATE CONTROL GROUP, INC.

(as of September 30, 2007)

The Climate Control Group, Inc. is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

LSB Industries, Inc.

$228,321

On Demand

*guarantee

Page 14 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

NORTHWEST FINANCIAL CORPORATION

(as of September 30, 2007)

Northwest Financial Corporation is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 15 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CEPOLK HOLDINGS, INC.

(f/k/a THERMALCLIME, INC.)

(as of September 30, 2007)

CEPOLK Holdings, Inc. (f/k/a ThermalClime, Inc.) is indebted to the following entities and in the following amounts:

Creditor

Amount

Monthly

Payments

Maturity

Date

Holders of the ThermaClime, Inc.

Unsecured Notes due 2007

$6,950,000*

12/2007

*guarantee

Page 16 of 17

AMENDED AND RESTATED

SCHEDULE 5.20

PERMITTED INDEBTEDNESS

CHEROKEE NITROGEN COMPANY

(as of September 30, 2007)

[This page intentionally left blank.]

Page 17 of 17

AMENDED AND RESTATED

SCHEDULE 7.13

OTHER PERMITTED INVESTMENTS

(as of September 30, 2007)

1.	See Schedules 5.8(b) and (c) for Equity Interests.

2.	LSB Holdings, Inc., a subsidiary of LSB Industries, Inc., is indebted to ClimaCool Corp. in the principal amount of $2,705,594.

3.	DSN Corporation is indebted to ThermaClime, Inc. in the principal amount of $18,784,414 less $4,500,000 (adjustment as of October 31, 2007).

AMENDED AND RESTATED

SCHEDULE 7.14

AFFILIATE TRANSACTIONS

(updated October 26, 2007)

1.	Lease Agreement between Prime Holdings Corporation (“PHC”) and International Environmental Corporation (“IEC”) for property at 5000 West I-40, OKC.

2.	Lease Agreement between PHC and ThermaClime Technologies, Inc. (“TTI”) for property at 5000 West I-40, OKC.

3.	Railcar Services Agreement between Prime Financial Corporation (“PFC”) and El Dorado Chemical Company (“EDC”).

4.	Industrial Plant Lease between PFC and Climate Master, Inc. (“CLM”) for property at 4700 West Point Boulevard, OKC.

5.	Equipment Lease between IEC and PFC Re: Laser Center, 2 Pullmax Press Brakes and accessories

6.	Equipment Lease between IEC and PFC Re: Cabinet & Steel Rack w/ Amada Turret Press Dies and shop carts with Amada Turret Punch Press tooling.

7.	Equipment Lease between IEC and PFC Re: Bolina Cut-to-Length, 2 Optiflex 110/08 Pullmax CNC Press Brakes, and 1 Vertical Bender Hairpin Bender.

8.	Equipment Lease between IEC and PFC Re: Trumpf Laser 3040 Plus.

9.	Equipment Lease between IEC and PFC Re: T-Drill SP-55 Tube End Spinner.

10.	Equipment Lease between IEC and PFC Re: Security System.

11.	Equipment Lease between IEC and PFC Re: High Takt Assembly Line.

12.	Equipment Lease between CLM and PFC Re: IPCS Equipment

13.	Equipment Lease between CLM and PFC Re: Optima Press Brake and accessories.

14.	Equipment Lease between CLM and PFC Re: Amada Vipros 868 King, Turret Punch Press and accessories.

15.	Equipment Lease between CLM and PFC Re: ECI equipment.

Page 1 of 4

16.	Equipment Lease between CLM and PFC Re: 1996 Amada FCXBIII-8025 CNC Press Brake.

17.	Equipment Lease between CLM and PFC Re: Model HFB/1003/8 Amada Press Brake.

18.	Equipment Lease between CLM and PFC Re: Model HFB/1003/8 Amada Press Brake.

19.	Equipment Lease between CLM and PFC Re: Procix equipment.

20.	Equipment Lease between CLM and PFC Re: Trumpf 3040 Laser System.

21.	Equipment Lease between CLM and PFC Re: Trumpf 3040 Laser System.

22.	Equipment Lease between CLM and PFC Re: RAIDZone GangStor System.

23.	Equipment Lease between CLM and PFC Re: Blanking Shear.

24.	Equipment Lease between CLM and PFC Re: Amada 386 King, Vipros 30 CNC Turret Punch

25.	Equipment Lease between CLM and PFC Re: Optigun equipment.

26.	Equipment Lease between CLM and PFC Re: Burr Oak Copper Cut.

27.	Equipment Lease between CLM and PFC Re: Chiyoda SP-25ST Tube bender

28.	Equipment Lease between CLM and PFC Re: Amada FBD-125 Press Brake.

29.	Equipment Lease between CLM and PFC Re: Trumpf Laser L3040 Laser Cutting Machine.

30.	Equipment Lease between CLM and PFC Re: Trumpf Trulaser 3530.

31.	Equipment Lease between CLM and PFC Re: Ingersoll Rand Nirvana Compressor System.

32.	Equipment Lease between CLM and PFC Re: Gamma Wire Processing System.

33.	Equipment Lease between CLM and PFC Re: Power Spray Stainless Washer.

34.	Equipment Lease between CLM and PFC Re: Three (3) Amada Press Brakes.

35.	Equipment Sublease between ClimateCraft, Inc. (“CLC”) and PFC for Trumpf Punching Machine.

Page 2 of 4

36.	Equipment Lease between CLC and PFC Re: 1999 Amada HFB 1254 Promecam CNC Press Brake.

37.	Equipment Lease between CLC and PFC Re: Trumpf Tooling Set.

38.	Equipment Lease between CLC and PFC Re: 2 Accushears.

39.	Equipment Lease between CLC and PFC Re: Trumpf TC2020 Punch Machine.

40.	Equipment Lease between CLC and PFC Re: Amada CNC Hydraulic Press Brake.

41.	Equipment Lease between TTI and PFC Re: Continental Belt Washer.

42.	Equipment Lease between TTI and PFC Re: Burr Oak Fin Die.

43.	Equipment Lease between EDC and PFC Re: 2004 Chevy Impala.

44.	Equipment Lease between EDC and PFC Re: 2002 International Spreader Truck.

45.	Plant Equipment Lease between EDC and DSN Corporation (“DSN”).

46.	Equipment Lease between Trison Construction, Inc. (“Trison”) and PFC Re: 2 John Deer Gators and 3 trailers with dove tail.

47.	License Agreement Between CLC and ClimateCraft Technologies, Inc.

48.	Assignment of Option to Purchase between CLM and PFC Re: CLM Facility Located at 7300 S.W. 44th Street, Oklahoma City from Raptor Master LLC.

49.	Consulting Agreements between LSB Chemical Corp. (“LSB Chemical”) and the following affiliates.

a.	Summit Machine Tool Manufacturing Corp. (“Summit”)

PFC

50.	Lease Agreement between DSN and Northwest Financial Corporation.

51.	Capital Lease Agreement with Right of Transfer of Title between Summit and CLC for CLC facility in OKC.

52.	Lease of drilling equipment from LSB Holdings, Inc. to Trison.

53.	Lease of office space from SMC to TCI at 4000 NW 39th Street, OKC.

54.	Lease of office space from PFC to TCI at 16 South Pennsylvania Avenue, OKC.

Page 3 of 4

55.	Lease of office space from PFC to LSB Chemical at 16 South Pennsylvania Avenue, OKC.

56.	Lease of office space from SMC to The Climate Control Group, Inc. (“CCG”) at 4000 NW 39th Street, OKC.

57.	Lease of office space from SMC to IEC at 4000 NW 39th Street, OKC.

58.	Auto rental from PFC to CCG.

59.	Services Agreements between TCI and the following subsidiaries:

DSN

b.	El Dorado Nitric Company

c.	El Dorado Acid, LLC

d.	El Dorado Acid II, LLC

60.	Please refer to Amended and Restated Schedules E-1, 5.20 and 7.13.

Page 4 of 4

ex_42b.htm

EXHIBIT 4.2b

SCHEDULES AND EXHIBITS OF TERM LOAN AGREEMENT, DATED AS OF NOVEMBER 2, 2007, AMONG LSB INDUSTRIES, INC., THERMACLIME, INC. AND CERTAIN SUBSIDIARIES OF THERMACLIME, INC., CHEROKEE NITROGEN HOLDINGS, INC., THE LENDERS, THE ADMINISTRATIVE AND COLLATERAL AGENT AND THE PAYMENT AGENT, WHICH TERM LOAN AGREEMENT THE COMPANY FILED AS EXHIBIT 4.1 TO THE COMPANY’S FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2007.

		SCHEDULES

		1.01(a)		Cherokee Site
		1.01(b)		El Dorado Site
		1.01(c)		Facility Assets
		1.01(d)		Lenders and Lending Offices
		2.01		Commitments and Applicable Percentages
		4.01(a)(iii)		Financing Statements
		4.01(a)(iv)		Leased Property
		5.03		Government Authorizations and Other Consents
		5.05		Indebtedness
		5.06		Litigation
		5.09		Environmental Matters
		5.13		Subsidiaries
		5.18		IP Rights
		5.21		Pipelines
		5.22		Material Contracts
		5.23		Permits
		5.27		Labor Matters
		7.01(b)		Existing Liens
		7.02		Existing Indebtedness and Guarantees
		7.03		Existing Investments
		7.05		Facility Leases/Uses
		7.08		Affiliate Transactions
		7.09		Burdensome Agreements
		11.02		Addresses for Notices; Payment Information


EXHIBITS

	A	Term Note
	B	Compliance Certificate
	C	Borrowing Notice
	D	Assignment and Assumption
	E	Security Agreement
	F-1	Cherokee Mortgage
	F-2	El Dorado Mortgage
	G	Assignment and Consent Agreement
	H-1	Intercompany Lease Subordination Agreement
	H-2	Intercompany Loan Subordination Agreement
	I	Management Agreement Subordination
	J-1	Opinion Matters – Counsel to Loan Parties
	J-2	Opinion Matters – Local Counsel (Alabama)
	J-3	Opinion Matters – Local Counsel (Arkansas)
	K	Inter-Lender Agreement
	L	Assignment and Subordination Agreement
	M	Trademark Security Agreement

SCHEDULE 1.01(a)

LEGAL DESCRIPTION OF CHEROKEE SITE

The tract or lot of land lying in the County of Colbert, State of Alabama, known and described as follows, to wit:

PARCEL I:

Begin at the Northwest corner of Section 7, Township 3 South, Range 13 West, Colbert County, Alabama, and run thence South 0 degrees 36 minutes 44 seconds West 2621.36 feet with the westerly boundary line of said Section 7 to a point on said boundary line; thence run North 88 degrees 55 minutes 46 seconds West 990.00 feet to a point; thence run South 0 degrees 35 minutes 43 seconds West 2623.55 feet parallel with the westerly boundary line of said Section 7, to a point on the northerly boundary line of Section 13, Township 3 South, Range 14 West; thence run South 0 degrees 46 minutes 39 seconds West a distance of 5329.16 feet to a point on the southerly boundary of Section 13, Township 3 South, Range 14 West; thence run South 87 degrees 49 minutes 42 seconds East 1000.47 feet to the Southwest corner of Section 18, Township 3 South, Range 13 West; thence run South 89 degrees 14 minutes 26 seconds East 1397.26 feet to the Southwest corner of the Southeast quarter of the Southeast quarter of said Section 18, which section is a fractional section; thence run North 0 degrees 21 minutes 39 seconds East a distance of 46.5 feet to a concrete monument on the north right-of-way margin of Lile Academy Road; thence south 89 degrees 08 minutes 27 seconds east along said north right-of-way margin a distance of 1,281.76 feet to a concrete monument; thence south 88 degrees 50 minutes 29 seconds east a distance of 2,191.21 feet; thence south 89 degrees 04 minutes 39 seconds east a distance of 474.74 feet; thence north 12 degrees 06 minutes 31 seconds east a distance of 784.37 feet; thence north 12 degrees 02 minutes 41 seconds east a distance of 51.11 feet; thence south 89 degrees 59 minutes 07 seconds west a distance of 726.65 feet; thence north 00 degrees 00 minutes 42 seconds east a distance of 414.62 feet; thence north 84 degrees 05 minutes 23 seconds east a distance of 780.35 feet; thence north 00 degrees 41 minutes 22 seconds east a distance of 816.26 feet to the south right-of-way margin of a 200 foot railroad right-of-way; thence north 88 degrees 03 minutes 37 seconds west along said south right-of-way margin a distance of 1,193.19 feet; thence westerly along the curving south right-of-way margin a distance of 347.85 feet (said curve concave south, having a radius of 1,046.00 feet, a chord bearing of south 82 degrees 24 minutes 48 seconds west, a chord length of 346.25 feet); thence north 02 degrees 12 minutes 51 seconds west a distance of 205.80 feet to the north right-of-way margin of a 200 foot railroad right-of-way; thence easterly along the curving north right-of-way margin a distance of 361.43 feet (said curve concave south, having a radius of 1,246.00 feet, a chord bearing north 83 degrees 37 minutes 48 seconds east, a chord distance of 360.16 feet); thence south 88 degrees 03 minutes 37 seconds east a distance of 1,188.82 feet; thence north 00 degrees 41 minutes 22 seconds east a distance of 310.14 feet; thence south 89 degrees 24 minutes 33 seconds east a distance of 240.77 feet to U.S.-T.V.A. Monument No. 50 (being a concrete monument capped by a bronz tablet showing said monument number and also "T.3S.R.13W.", and all other references to U.S.-T.V.A. monuments herein shall refer to monuments of like character); thence north 00 degrees 24 minutes 16 seconds east a distance of

Page 1 of 7

420.42 feet to U.S.-T.V.A. Monument No. 51; thence run north 33 degrees 37 minutes west 2,733.00 feet to U.S.-T.V.A. Monument No. 52 in the north line of Section 17, which is in the south line of Section 8; thence north 37 degrees 38 minutes west 416.00 feet to U.S.-T.V.A. Monument No. 53 at the northwest corner of the Southwest Quarter of the Southwest Quarter of the Southeast Quarter of the Southwest Quarter of Section 8; thence north 01 degree 35 minutes east 977.00 feet to U.S.-T.V.A. Monument No. 54 at the northwest corner of the Southeast Quarter of the Southwest Quarter of Section 8; thence north 35 degrees 59 minutes west 1,633.00 feet to U.S.-T.V.A. Monument No. 55 at the southeast corner of the Southwest Quarter of the Southwest Quarter of the Southwest Quarter of the Northwest Quarter of Section 8; thence north 88 degrees 50 minutes west 332.00 feet to U.S.-T.V.A. Monument No. 56 at the southwest corner of the Northwest Quarter of Section 8; thence with the south line of the Northeast Quarter of Section 7 north 88 degrees 50 minutes west 330.00 feet to U.S.-T.V.A. Monument No. 57; thence leaving the said south line north 01 degree 23 minutes 15 seconds east 1,966.31 feet to U.S.-T.V.A. Monument No. 58; thence run north 88 degrees 35 minutes west 336.33 feet to U.S.-T.V.A. Monument No. 59; thence run south 68 degrees 55 minutes 24 seconds west 1,751.46 feet, more or less, to a point on the south line of the north half of the north half of Section 7, Township 3 South, Range 13 West, which point is to be found by finding the intersection of said south line of said north half of the north half of said Section 7 with a line run south 00 degrees 39 minutes 12 seconds west a distance of 45 feet from U.S.-T.V.A. Monument No. 60; thence run north 00 degrees 39 minutes 12 seconds east 659.42 feet; thence run north 56 degrees 58 minutes 57 seconds east 1,150.50 feet, more or less, to U.S.-T.V.A. Monument No. 62 which is located in the north boundary of said Section 7 at a point 1,399.63 feet easterly from the northwest corner thereof; thence run north 88 degrees 39 minutes 30 seconds west with said section line 1,399.63 feet to the POINT OF BEGINNING.

LESS AND EXCEPT FROM THE FOLLOWING PARCELS: III, IV, V, VI, AND VII:

Parcel III:

Commencing at the Southwest corner of Section 18, T-3-S, R-13-W, Colbert County, Alabama, thence North 0 degrees 48 minutes East along the West line of said Section 18 a distance of 4085.36 feet to a point; thence North 89 degrees 58 minutes East a distance of 2003.88 feet to a concrete monument and the point of beginning of the tract herein described; thence North 0 degrees 02 minutes West a distance of 450.00 feet to a point on a chain link fence; thence North 89 degrees 58 minutes East with chain link fence a distance of 298.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 116.50 feet to a point; thence North 89 degrees 58 minutes East with chain link fence a distance of 52.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 333.50 feet to a point; thence leaving said chain link fence South 89 degrees 58 minutes West a distance of 2.00 feet to a concrete monument; thence continuing South 89 degrees 58 minutes West a distance of 348.00 feet to the concrete monument at the point of beginning of the tract herein described.

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Parcel IV

Commence at the Southwest corner of the said Section 7, Township 3 South, Range 13 West, Colbert County, Alabama; thence North 0 degrees 36 minutes 44 seconds east along the west line of the said Section 7 a distance of 2621.68 feet to the northwest corner of the Southwest 1/4 of the said Section 7 and the point of beginning of the tract herein described; thence continuing north 0 degrees 36 minutes 44 seconds east a distance of 200.00 feet to a point; thence south 89 degrees 23 minutes 16 seconds east a distance of 1500.00 feet to a point; thence south 0 degrees 36 minutes 44 seconds west a distance of 600.0 feet to a point; thence north 89 degrees 23 minutes 16 seconds west a distance of 1500.0 feet to a point on the west line of said Section 7; thence north 0 degrees 36 minutes 44 seconds east a distance of 400.0 feet to the point of beginning of the tract herein described.

Parcel V

A parcel of land located in Section 18, Township 3-South, Range 13-West in Colbert County, State of Alabama, said parcel lying east of a right of way for a proposed road approximately 3 miles north of Cherokee, and being more particularly described as follows: Commencing at a point in the east line of Section 18, said point being 1276.0 feet south of the northeast corner of said section; thence due west, 620.9 feet to the POINT OF BEGINNING at the northeast corner of the parcel of land herein described; thence due south 600.0 feet to a point; thence due west, 500.0 feet to a point; thence with a line 132.0 feet east of and parallel to the east line of the right of way of a proposed road due north, 600.0 feet to a point; thence due east, 500.0 feet to the point of beginning.

Parcel VI

Also for the point of beginning, commence at the intersection of the South line of North half of North half of Section 7, Township 3 South, Range 13 West, Colbert County, Alabama, with a line run South 0 degrees 39 minutes 12 seconds West from U.S.-T.V.A. Monument No. 60; thence run North 0 degrees 39 minutes 12 seconds East 659.42 feet to the point of beginning; from said point of beginning run thence North 56 degrees 58 minutes 57 seconds E 1150.50 feet, more or less, to U.S.-T.V.A. Monument No. 62, which is located in the North boundary of Section 7 at a point of 1399.63 feet easterly from the Northwest corner thereof; from said Monument No. 62 run thence South 58 degrees 53 minutes 18 seconds West 1126.17 feet to U.S.-T.V.A. Monument No. 61; thence run South 0 degrees 39 minutes 12 seconds West to the point of beginning.

Parcel VII:

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East a distance of 825.71 feet to the POINT OF BEGINNING; continue thence North 00 degrees 21 minutes 39 seconds East a distance of 505.52 feet; thence South 89 degrees 22 minutes 51 seconds East a distance of 1,116.70 feet; thence South 66 degrees 13 minutes 10 seconds West along said southeasterly right of way margin a distance of 1,223.71 feet to the POINT OF BEGINNING, containing 6.48 acres, more or less, and then being that same parcel of land described in Deed Book 264, Page 560 as recorded in the Probate Office of Colbert County, Alabama.

PARCEL II:

A tract of land lying in Colbert County, State of Alabama, in the East half of East half of Northeast quarter, Section 7, the West half of Northwest quarter and Southwest quarter of Section 8, and the Northeast quarter and East half of Northwest quarter of Section 17, Township 3 South, Range 13 West on the southwest shore of Pickwick Landing Lake opposite Kogor's Island and approximately 4 miles northeast of Cherokee, Alabama, and being more particularly described as follows:

Beginning at U.S.-T.V.A. Monument 51 in the Southwest quarter of Southwest quarter of Northeast quarter of Section 17 and in the boundary of true United States of America's land at a corner of the land of Mrs. F.W. Benson and S.W. Frierson & C.W. Watts' thence with the United States of America's boundary North 33 degrees 37' West 2733.00 feet to the U.S.-T.V.A. Monument 52 in the north line of Section 17, which is the south line of Section 8; thence North 37 degrees 38' West, 416.00 feet to U.S.-T.V.A. Monument 53 at the northwest corner of the Southwest quarter of the Southwest quarter of the Southeast quarter of Southwest quarter, Section 8; thence North 1 degree 35' East, 977.00 feet to U.S.-T.V.A. Monument 54 at the northwest corner of the Southeast quarter of the SW 1/4 Section 8, thence North 35 degrees 59' West, 1633.00 feet to U.S.-T.V.A. Monument 55 at the southeast corner of the Southwest quarter of the Southwest quarter of Southwest quarter of Northwest quarter, Section 8; thence North 88 degrees 50' West, 332.00 feet to U.S.-T.V.A. Monument 56 at the southwest corner of the Northwest quarter of Section 8; thence with the south line of the Northeast quarter, Section 7 North 88 degrees 50' West, 330.00 feet to U.S.-T.V.A. Monument 57; thence leaving the said South line, North 1 degree 23 minutes 15 seconds East, 1966.31 feet to U.S.-T.V.A. Monument 58; thence, leaving the United States of America's boundary South 89 degrees 59 minutes 29 seconds East, 410 feet, passing a metal marker at 385.00 feet, to a point in the 423-foot contour on the shore of Pickwick Landing Lake; thence with the 423-foot contour as it meanders in a southeasterly direction to a point; thence, leaving the contour, South 61 degrees 19 minutes 05 seconds West, 534.50 feet, passing a metal marker at 17 feet, to U.S.-T.V.A. Monument 49 in the south line of the Northeast quarter of Section 17 and in the boundary of the United States of America's land; thence with the United States of America's boundary and the south line of the Northeast quarter of Section 17, North 89 degrees 19 minutes West, 260.20 feet to U.S.-T.V.A. Monument 50; thence leaving the said south line, North 0 degrees 24 minutes 16 seconds East, 420.42 feet to the point of beginning.

PARCEL III:

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concrete monument and the point of beginning of the tract herein described; thence North 0 degrees 02 minutes West a distance of 450.00 feet to a point on a chain link fence; thence North 89 degrees 58 minutes East with chain link fence a distance of 298.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 116.50 feet to a point; thence North 89 degrees 58 minutes East with chain link fence a distance of 52.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 333.50 feet to a point; thence leaving said chain link fence South 89 degrees 58 minutes West a distance of 2.0 feet to a concrete monument; thence continuing South 89 degrees 58 minutes West a distance of 348.00 feet to the concrete monument at the point of beginning at the tract herein described.

PARCEL VIII:

A parcel of land lying in Section 17, Township 3 South, Range 13 West, Colbert County, Alabama, and being more particularly described as follows: Commence at the southwest corner of Section 17, Township 3 south, Range 13 West, Colbert County, Alabama; thence north 00 degrees 44 minutes 27 seconds west a distance of 44.05 feet to a concrete monument on the north right-of-way of Lile Academy Road; thence south 88 degrees 50 minutes 29 seconds east along the north right-of-way of an unnamed County road a distance of 2,191.21 feet; thence south 89 degrees 04 minutes 39 seconds east a distance of 535.94 feet to the east right-of-way of a County road and the POINT OF BEGINNING; thence north 12 degrees 05 minutes 42 seconds east a distance of 761.78 feet; thence south 70 degrees 57 minutes 14 seconds east a distance of 233.95 feet to a Point of Curve; thence southeasterly along a curve concave north a distance of 638.62 feet (said curve having a radius of 2,025.00 feet, a chord bearing of south 79 degrees 59 minutes 24 seconds east, a chord distance of 635.97 feet) to the Point of Tangency; thence south 89 degrees 01 minute 08 seconds east a distance of 517.34 feet to a Point of Curve; thence southeasterly along said curve concave southwesterly a distance of 566.33 feet (said curve having a radius of 950.00 feet, a chord bearing of south 71 degrees 56 minutes 27 seconds east, a chord distance of 557.98 feet) to a Point of Reverse Curve; thence southwesterly along a curve a distance of 108.67 feet (said curve concave northeasterly having a chord bearing of south 25 degrees 43 minutes 19 seconds east, a chord distance of 88.51 feet) to a point; thence south 00 degrees 41 minutes 33' west a distance of 360.35 feet; thence north 89 degrees 04 minutes 24 seconds west a distance of 1,995.46 feet; thence north 00 degrees 46 minutes 28 seconds east a distance of 30.00 feet; thence north 88 degrees 59 minutes 48 seconds west a distance of 94.09 feet to the POINT OF BEGINNING.

PARCEL IX:

A parcel of land lying in Section 17, Township 3 South, Range 13 West and being more particularly described as follows: Commence at the southwest corner of Section 17, Township 3 south, Range 13 West, Colbert County, Alabama; thence north 00 degrees 44 minutes 27 seconds west a distance of 44.05 feet to a concrete monument on the north right-of-way of Lile Academy Road; thence south 88 degrees 50 minutes 29 seconds east along the north right-of-way of an unnamed County road a distance of 2,191.21 feet; thence south 89 degrees 04 minutes 39 seconds east a distance of 535.94 feet to the east right-of-way of a County Road; thence north 12 degrees 05 minutes 42 seconds east along said east right-of-way a distance of 812.15 feet to the POINT OF BEGINNING; thence north 12 degrees 05 minutes 22 seconds east along said right-of-way a distance of 204.63 feet; thence north 01 degree 53 minutes 39 seconds east along said

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right-of-way a distance of 310.69 feet; thence south 89 degrees 07 minutes 03 seconds east a distance of 1,802.58 feet to T.V.A. Monument #48; thence south 42 degrees 56 minutes 26 seconds east a distance of 310.99 feet; thence south 56 degrees 00 minutes 16 seconds west a distance of 808.14 feet to a point of curve; thence northwesterly along a curve concave southwesterly a distance of 43.45 feet (said curve having a radius of 1,000.00 feet, a chord bearing of N 87 deg 46 min 18 sec West a arc length of 43.45 feet) to the point of tangency; thence north 89 degrees 01 minutes 16 seconds West a distance 516.26 feet to the Point of a Curve; thence northwesterly along a curve concave north a distance of 622.86 feet (said curve having a radius of 1,975 feet, a chord bearing of North 79 degrees 59 minutes 24 seconds West, a chord distance of 620.28 feet) to the Point of Tangency; thence North 70 degrees 57 minutes 14 seconds West a distance of 240.04 feet to the POINT OF BEGINNING.

All the foregoing being the same property conveyed by LaRoche Industries, Inc. to Cherokee Nitrogen Company, by deed dated October 31, 2000, filed for record in the Office of the Judge of Probate of Colbert County, Alabama, on November 7, 2000, at 1:37 p.m., and recorded on Microfiche 2000 25, Frames 133-141.

Less and except therefrom property conveyed by Cherokee Nitrogen, Inc., to National Telephone Company of Alabama, by corrective warranty deed dated April 2, 2001 and recorded on Fiche 2001 09 Frame 748, being more particularly described as follows, to-wit:

Commence at a cotton spindle on the SW corner of Section 18, T-3-S, R-12-W, Colbert County, Alabama; then run S 89 degrees 14’ 26” E for 1397.26’ to a spike found; then run N 0 degrees 21’ 39” E for 46.4’ to a 6” concrete monument, the point of beginning; then run N 0 degrees 21’ 39” E for 50.0’ to an iron pin; then run S 89 degrees 14’ 26” E for 50.0’ to an iron pin; then run S 0 degrees 21’ 39” W for 50.0’ to an iron pin; then run N 89 degrees 14’ 26” W for 50.0’ to the point of beginning.

Non-Exclusive Easement for Private Road

A fifty (50) foot wide private road lying in Section 17, Township 3 South, Range 13 West, Colbert County, Alabama, and being more particularly described as follows: Commence at the southwest corner of Section 17, Township 3 South, Range 13 West, Colbert County, Alabama, thence North 00 degrees 44 minutes 27 seconds West a distance of 44.05 feet to a concrete monument on the northern right-of-way margin of Lile Academy road; thence South 88 degrees 50 minutes 29 seconds East along the northern right-of-way margin of a gravel road a distance of 2,191.21 feet; thence South 89 degrees 04 minutes 39 seconds East a distance of 535.74 feet to the east right-of-way margin of a County Road; thence North 12 degrees 05 minutes 42 seconds East a distance of 761.78 feet to the POINT OF BEGINNING; thence continue North 12 degrees 05 minutes 42 seconds East a distance of 50.37 feet; thence South 70 degrees 57 minutes 14 seconds East a distance of 240.04 feet to the P.C. of a curve; thence southeasterly a curve concave northerly a distance of 622.86 feet (said curve having a radius of 1,975.00 feet, a chord distance of 620.28 feet, a chord bearing of South 79 degrees 59 minutes 24 seconds East) to the P.T. of said curve; thence South 89 degrees 01 minute 16 seconds East a distance of 516.26 feet to the P.C. of a curve; thence southeasterly along a curve concave southwesterly a distance of

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648.77 feet (said curve having a radius of 1,000.00 feet, a chord distance of 637.45 feet, a chord bearing of South 70 degrees 26 minutes 42 seconds East) to the P.T. of said curve and the P.C. of a cul-de-sac; thence easterly, southerly, northwesterly along a curve (having a radius of 50.00 feet; a chord bearing of South 82 degrees 09 minutes 16 seconds West, a chord distance of 70.63 feet) a distance of 234.31 feet to the P.T. of said curve; thence northwesterly along a curve concave southwest a distance of 566.33 feet (said curve having a radius of 950.00 feet, a chord bearing of North 71 degrees 56 minutes 27 seconds West, a chord distance of 557.98 feet) to the P.T. of said curve; thence North 89 degrees 01 minute 08 seconds West a distance of 517.34 feet to the P.C. of a curve; thence northwesterly along a curve concave northerly of 638.62 feet (said curve having a radius of 2,025.00 feet, a chord distance of 635.97 feet, a chord bearing of 79 degrees 59 minute 24 seconds west) to the P.T. of said curve, thence North 70 degrees 57 minutes 14 seconds West) to the P.T. of said curve; thence North 70 degrees 57 minutes 14 seconds West a distance of 233.95 feet to the POINT OF BEGINNING.

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SCHEDULE 1.01(b)

LEGAL DESCRIPTION OF EL DORADO SITE

The land referred to herein below is all situated in Union County, Arkansas

Tract 1:

The South Half of Section 6, and the North Half of Section 7, and the Northwest Quarter of the Northwest Quarter of Section 8, all in Township 17 South, Range 15 West, and the following described tract:

Beginning at the Northwest Corner of the Northeast Quarter of the Northwest Quarter of Section 8, Township 17 South, Range 15 West;

thence South along the West line of said Northeast Quarter of the Northwest Quarter of Section 8 to the intersection with the South right-of-way line of the access road as now located, said right-of-way line being 50 feet perpendicular distance from the center line of said access road;

thence in a Northeasterly direction along said right-of-way line to the intersection with the South line of the right-of-way of the railroad spur, said right-of-way line for the railroad spur being 50 feet perpendicular distance from the center line of said railroad spur;

thence along said South right-of-way line for the railroad spur to a point which is 750 feet South of the North line of said Section 8;

thence East along a line which is parallel to the North line of said Section 8, and750 feet distant therefrom to the intersection with the South right-of-way line for the railroad spur herein above described;

thence in a Southeasterly direction along the said South right-of-way line to the intersection with the West right-of-way line of the El Dorado-Smackover Highway;

thence in a Northwesterly direction along the West right-of-way line of said El Dorado-Smackover Highway to the North line of Section 9, Township 17 South, Range 15West;

thence West along the North line of said Section 9 and the North line of said Section 8 to the POINT OF BEGINNING.

LESS AND EXCEPT THE FOLLOWING TRACTS:

1. Commencing at the Southeast Corner of Section 6, Township 17 South, Range 15 West, and

thence run North 88 degrees 53 minutes 44 seconds West 1772.43 feet;

thence North 01 degree 03 minutes 47 seconds East 576.89 feet for a POINT OF BEGINNING;

thence North 88 degrees 56 minutes 13 seconds West 134.0 feet;

thence North 01 degree 03 minutes 47 seconds East 40.00 feet;

thence North 88 degrees 56 minutes 13 seconds West 16.00 feet;

thence North 01 degree 03 minutes 47 seconds East 40.0 feet;

thence South 88 degrees 56 minutes 13 seconds East 150.00 feet;

thence South 01 degree 03 minutes 47 seconds West 80.00 feet to the POINT OF BEGINNING.

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AND

2. Commencing at the Southeast Corner of Section 6, Township 17 South, Range 15 West, run thence North 88 degrees 53 minutes 44 seconds West 2341.68 feet;

thence North 01 degree 05 minutes 46 seconds East 545.52 feet for a POINT OF BEGINNING;

thence North 88 degrees 54 minutes 14 seconds West 240.00 feet;

thence North 01 degree 05 minutes 46 seconds East 30.00 feet;

thence North 88 degrees 54 minutes 14 seconds West 96.71 feet;

thence North 01 degree 05 minutes 46 seconds East 118.10 feet;

thence South 88 degrees 54 minutes 14 seconds East 336.71 feet;

thence South 01 degree 05 minutes 46 seconds West 85.72 feet;

thence South 88 degrees 54 minutes 14 seconds East 59.31 feet;

thence South 01 degree 05 minutes 46 seconds West 40.58 feet;

thence North 88 degrees 54 minutes 14 seconds West 59.31 feet;

thence South 01 degree 05 minutes 46 seconds West 21.80 feet to the POINT OF BEGINNING.

Tract 2:

Commencing at the North Quarter Corner of Section 1, Township 17 South, Range 16 West, thence South 88 degrees 46 minutes East, 282.7 feet;

thence South 01 degree 14 minutes West, 269.2 feet to the POINT OF BEGINNING;

thence South 88 degrees 46 minutes East, 150.0 feet;

thence South 01 degree 14 minutes West, 150.0 feet;

thence North 88 degrees 46 minutes West, 150.0 feet;

thence North 01 degree 14 minutes East, 150.0 feet to the POINT OF BEGINNING.

Tract 3:

Beginning at the Southwest Corner of the Northeast Quarter of Section 31, Township 16South, Range 15 West;

thence North 00 degrees 07 minutes East 150 feet to a stake;

thence South 88 degrees 37 minutes East 150 feet to a stake;

thence South 00 degrees 07 minutes West 150 feet to a stake on South line of the Northeast Quarter;

thence North 88 degrees 37 minutes West 150 feet to POINT OF BEGINNING.

Tract 4:

Beginning at the Southeast Corner of the Southwest Quarter of Section 30, Township 16 South, Range 15 West, at a iron pipe Corner;

thence North 88 degrees 38 minutes West 150 feet along the South line of said Section 30 to a stake;

thence North 00 degrees 07 minutes East 150 feet to a stake;

thence South 88 degrees 38 minutes East to a stake on the East line of said Southwest Quarter;

thence South 00 degrees 07 minutes West 150 feet to POINT OF BEGINNING.

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Tract 5:

Commencing at the Northwest Corner of the South Half of the Northeast Quarter of Section 12, Township 17 South, Range 16 West;

thence South 00 degrees 04 minutes East, 469.0 feet;

thence North 53 degrees 09 minutes East, 126.45 feet;

thence North 61 degrees 26 minutes East, 239.7 feet to the POINT OF BEGINNING;

thence North 00 degrees 04 minutes West, 118.7 feet;

thence North 89 degrees 56 minutes East, 150.0 feet;

thence South 00 degrees 04 minutes East, 150.0 feet;

thence South 89 degrees 56 minutes West, 150.0 feet;

thence North 00 degrees 04 minutes West, 31.3 feet to the POINT OF BEGINNING.

Tract 6:

Beginning at a point which is South 00 degrees 18 minutes East 223.2 feet and North 89 degrees 42 minutes East 273.1 feet distance from the Northwest Corner of the Southwest Quarter of Section 9, Township 17 South, Range 15 West;

thence North 00 degrees 18 minutes West 150 feet;

thence North 89 degrees 42 minutes East 150 feet;

thence South 00 degrees 18 minutes East 150 feet;

thence South 89 degrees 42 minutes West 150 feet to the POINT OF BEGINNING.

Tract 7:

Beginning at the Southwest Corner of the Southeast Quarter of Section 2, Township 17 South, Range 16 West;

thence North 150 feet along the West line of said Southeast Quarter to a stake;

thence South 88 degrees 56 minutes East 150 feet to a stake;

thence South 150 feet to a stake on South line of said Section 2;

thence North 88 degrees 56 minutes West 150 feet to POINT OF BEGINNING.

Tract 8:

Beginning at the Southwest Corner, Section 2, Township 17 South, Range 16 West;

thence North along Section line 150 feet to a stake;

thence South 88 degrees 56 minutes East 150 feet to a stake;

thence South 150 feet to a stake;

thence North 88 degrees 56 minutes West 150 feet to POINT OF BEGINNING.

Tract 9:

Commencing at the Southwest Corner of the Southeast Quarter of Section 12, Township 17 South, Range 16 West;

thence North 00 degrees 04 minutes West, 276.7 feet;

thence North 89 degrees 56 minutes East, 271.8 feet to the POINT OF BEGINNING;

thence North 00 degrees 04 minutes West, 150 feet;

thence North 89 degrees 56 minutes East, 150 feet;

thence South 00 degrees 04 minutes East, 150 feet;

thence South 89 degrees 56 minutes West, 150 feet to the POINT OF BEGINNING.

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Tract 10:

Commencing at the Southwest Corner of Southeast Quarter of Section 7, Township 17 South, Range 15 West;

thence South 88 degrees 25 minutes East 155.4 feet;

thence North 01 degree 35 minutes East 308.5 feet to the POINT OF BEGINNING;

thence continuing North 01 degree 35 minutes East 150 feet;

thence South 88 degrees 25 minutes East 150 feet;

thence South 01 degree 35 minutes West 150 feet;

thence North 88 degrees 25 minutes West 150 feet to the POINT OF BEGINNING.

Tract 11:

Beginning at the Northwest Corner of the Southeast Quarter, Section 18, Township 17 South, Range 15 West;

thence South 88 degrees 21 minutes East 150 feet along the North line of the said Southeast Quarter to a stake;

thence South 00 degrees 11 minutes East 150 feet to a stake;

thence North 88 degrees 21 minutes West 150 feet to a stake on the West line of the said Southeast Quarter;

thence North 00 degrees 11 minutes West 150 feet to the POINT OF BEGINNING.

Tract 12:

Beginning at a point on the West line of the Southeast Quarter of Section 18, Township 17 South, Range 15 West, located North 00 degrees 11 minutes West 150 feet from the Southwest Corner of said Southeast Quarter;

thence North 00 degrees 11 minutes West 100 feet along the West line of said Southeast Quarter to a stake;

thence South 88 degrees 17 minutes East 150 feet to a stake;

thence South 00 degrees 11 minutes East 100 feet to a stake;

thence North 88 degrees 17 minutes West 150 feet to the POINT OF BEGINNING.

Tract 15:

Beginning at the Southeast Corner of Section 1, Township 17 South, Range 16 West;

thence North 89 degrees 25 minutes West along the South line of said Section 1, 4830.14 feet to POINT OF BEGINNING;

thence North 00 degrees 04 minutes East 150 feet;

thence North 89 degrees 25 minutes West 150 feet;

thence South 00 degrees 04 minutes West 150 feet to the intersection of South line of Section 1;

thence South 89 degrees 25 minutes East along Section line 150 feet to POINT OF BEGINNING.

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Tract 16:

Beginning at a point 10.4 feet North of the Southwest Corner of Section 5, Township 17South, Range 15 West;

thence East 29.5 feet;

thence North 150.0 feet;

thence West 29.5 feet;

thence South 150.0 feet to the POINT OF BEGINNING.

Tract 17:

Beginning at a point 70 yards North of the Southeast Corner of Section 1, Township 17 South, Range 16 West;

thence West 25.00 feet;

thence South approximately 134.83 feet;

thence East 25.00 feet;

thence North to the PLACE OF BEGINNING.

The exclusive right to produce water from any horizon lying under the following described Tract 18 in Union County, Arkansas, at and below a depth of 350 feet below the surface:

Tract 18:

The East Half of Section 1 and the East Half of Section 12, all in Township 17 South, Range 16 West,

And

The South Half of Section 7 and all of Section 8, all in Township 17 South, Range 15 West,

And

All that part of the West Half of the West Half of Section 9, Township 17 South, Range 15 West, lying West of the El Dorado-Smackover Highway and all that part of the Southwest Quarter of the Southwest Quarter of Section 4, Township 17 South, Range 15 West, lying West of the El Dorado-Smackover Highway and all of Section 5 and the North Half of Section 6, all in Township 17 South, Range 15 West, EXCEPT the following described tracts, lettered (a) through (k), both inclusive, to-wit:

(a) The Northwest Quarter of the Northwest Quarter of Section 8, Township 17 South, Range 15 West.

(b) Beginning at the Northwest Corner of the Northeast Quarter of the Northwest Quarter of Section 8, Township 17 South, Range 15 West;

thence South along the West line of said Northeast Quarter of the Northwest Quarter of said Section 8 to the intersection with the South right-of-way line of the Access Road as now located, said right-of-way line being 50 feet perpendicular distance from the center line of said Access Road;

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thence along said South right-of-way line for the railroad spur to a point which is 750 feet South of the North line of said Section 8;

thence East along a line which is parallel to the North line of said Section 8, and 750 feet distant therefrom, to the intersection with the South right-of-way line for the railroad spur hereinabove described;

thence in a Southeasterly direction along the said South right-of-way line to the intersection with the West right-of-way line of the El Dorado-Smackover Highway;

thence in a Northwesterly direction along the West right-of-way line of said El Dorado-Smackover Highway to the North line of Section 9, Township 17 South, Range 15 West;

thence West along the North line of said Section 9 and the North line of said Section 8 to the POINT OF BEGINNING.

thence South 88 degrees 24 minutes East 4060.30 feet to the POINT OF BEGINNING of this excepted tract;

thence South 00 degrees 40 minutes West 1213.20 feet;

thence South 88 degrees 10 minutes East 1200.33 feet to the El Dorado-Smackover Highway;

thence in a Northwesterly direction along said Highway to the North line of said Section 5;

thence in a Westerly direction to the POINT OF BEGINNING.

(d) Commencing at the Northeast Corner of Section 6, Township 17 South, Range 15 West;

thence North 88 degrees 23 minutes West 1327 feet to the POINT OF BEGINNING of this excepted tract;

thence South 01 degree 37 minutes West 90 feet;

thence North 88 degrees 23 minutes West 990 feet;

thence North 01 degree 37 minutes East 90 feet;

thence South 88 degrees 23 minutes East 990 feet to the POINT OF BEGINNING.

(e) Tract 2 described above.

(f) Tract 5 described above.

(g) Tract 6 described above.

(h) Tract 9 described above.

(i) Tract 10 described above.

(j) Tract 16 described above.

(k) Tract 17 described above.

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drainage ditch, road, trail or railroad upon any of the land which constitutes a part of Tract 18 described above or which leads from Tract 18 described above to Tracts 3, 4, 7, 8, 11, 12 and 15 described above, and the right-of-way in connection therewith, all as is more fully set forth in said Quitclaim Deed, Assignment and Bill of Sale.

TOGETHER WITH such water rights as were reserved by Monsanto Company in a Quitclaim Deed in favor of J. L. Lee which was filed February 23, 1981 in Record Book 1459, Page 601, of the Union County Deed Records describing the following tract:

Beginning at the Southwest Corner of the Southwest Quarter of the Southeast Quarter of Section 8, Township 17 South, Range 15 West;

thence North 417.4 feet;

thence East 417.4 feet;

thence South 417.4 feet;

thence West 417.4 feet to the POINT OF BEGINNING.

ALSO

Commencing at the Southeast Corner of the Southeast Quarter of the Southwest Quarter of Section 8, Township 17 South, Range 15 West;

thence North 01 degree 06 minutes East 274.0 feet to the POINT OF BEGINNING;

thence North 88 degrees 54 minutes West 69.8 feet;

thence North 01 degree 06 minutes East 150.0 feet;

thence South 88 degrees 54 minutes East 69.8 feet;

thence South 01 degree 06 minutes West 150.0 feet to the POINT OF BEGINNING.

TOGETHER WITH such water rights as were reserved in a Quitclaim Deed in favor of Louis Knox White et al which was filed September 10, 1982 in Record Book 1521, Page 257, in the Union County Deed Records describing the following tract:

Beginning at the Southwest Corner of the Southwest Quarter of the Northwest Quarter of Section 9, Township 17 South, Range 15 West;

and run North 00 degrees 38 minutes East 1729.4 feet to the South right-of-way line of the Missouri-Pacific Railroad;

thence in a Southeasterly direction along said right-of-way for 547.8 feet to the West line of Highway No. 7B;

thence South 08 degrees 29 minutes East along said line 21.8 feet;

thence South 05 degrees 24 minutes East along said line 1444.0 feet;

thence South 02 degrees 50 minutes East along said line 96.57 feet;

thence North 88 degrees 14 minutes West 675.4 feet to the POINT OF BEGINNING.

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Tract 41-1 (25):

The West Half of the Southeast Quarter of the Southeast Quarter and the Northeast Quarter of the Southeast Quarter of Section 7, and the Southwest Quarter of the Northwest Quarter of Section 8, all in Township 17 South, Range 15 West, Union County, Arkansas, EXCEPTING THE FOLLOWING DESCRIBED TRACT:

Beginning at a point 600.0 feet North of the Northwest Corner of the Southwest Quarter of said Section 8;

thence North 435.6 feet;

thence East 100.0 feet;

thence South 435.6 feet;

thence West 100.0 feet to the POINT OF BEGINNING.

Tract 41-2 (20):

The North Three-Quarters of the North Half of the Northwest Quarter of the Southeast Quarter (N 3/4 N/2 NW/4 SE/4) of Section 7, Township 17 South, Range 15 West, LESS three (3) acres in the form of a square in the Northeast Corner thereof.

Tract 41-4 (22):

Three acres in the form of a square out of the Northeast Corner of the Northwest Quarter of the Southeast Quarter of Section 7, Township 17 South, Range 15 West of the Fifth Principal Meridian.

(Same Property as the exception in 41-2 (20) above)

Tract 41-4 (23):

Beginning at a point 600 feet North of the Southwest Corner of the Southwest Quarter of the Northwest Quarter of Section 8, Township 17 South, Range 15 West of the Fifth Principal Meridian;

thence East 100.0 feet;

thence North 435.6 feet;

thence West 100.0 feet;

thence South 435.6 feet to the PLACE OF BEGINNING.

(Same Property as the exception in 41-1 (25) above)

Tract 41-4 (24):

A part of the Southwest Quarter of the Southeast Quarter of Section 8, Township 17 South, Range 15 West of the Fifth Principal Meridian, described as follows:

Beginning at a point 417.4 feet North of the Southwest Corner of the said Southwest Quarter of the Southeast Quarter of Section 8 and running thence North 208.71 feet;

thence East 208.71 feet;

thence South 208.71 feet;

thence West 208.71 feet to the PLACE OF BEGINNING,

Page 8 of 12

EXCEPT that part of the Southwest Quarter of the Southeast Quarter of Section 8 contained within the following parcel of land, described as:

Commencing at the Southwest Corner of said Southwest Quarter of the Southeast Quarter of said Section 8;

thence South 88 degrees 54 minutes East, 80.2 feet;

thence North 01 degree 06 minutes East, 274.0 feet to the POINT OF BEGINNING of said parcel;

thence North 88 degrees 54 minutes West, 150.0 feet;

thence North 01 degree 06 minutes East, 150.0 feet;

thence South 88 degrees 54 minutes East, 150.0 feet;

thence South 01 degree 06 minutes West, 150.0 feet to the POINT OF BEGINNING.

Tract 41-5 (19):

The South Five-Eighths of the Northwest Quarter of the Southeast Quarter and the North Three-Eighths of the Southwest Quarter of the Southeast Quarter of Section 7, Township 17 South, Range 15 West of the Fifth Principal Meridian.

Tract 41-7:

The Southwest Quarter of the Northeast Quarter and the Southeast Quarter of the Northwest Quarter of Section 6, Township 17 South, Range 15 West, Union County, Arkansas.

Tract 41-9:

The Northwest Quarter of the Southwest Quarter of Section 5, Township 17 South, Range 15 West,

AND

The East Half of the Northeast Quarter of Section 6, Township 17 South, Range 15 West.

Tract 41-10:

The Northwest Quarter of the Northeast Quarter of Section 6, Township 17 South, Range 15 West, Union County, Arkansas, LESS AND EXCEPT the following tract:

Commencing at the Northeast Corner of the Northwest Quarter of the Northeast Quarter of Section 6, Township 17 South, Range 15 West, and run thence South 90 feet;

thence West 990 feet;

thence North 90 feet;

thence East 990 feet to the POINT OF BEGINNING.

Tract 41-11:

The Southeast Quarter of the Northeast Quarter of Section 1, Township 17 South, Range 16 West,

ALSO

The Southwest Quarter of the Northwest Quarter of Section 6, Township 17 South, Range 15 West,

Page 9 of 12

LESS AND EXCEPT THE FOLLOWING TRACTS:

1. All that part of the Southeast Quarter of the Northeast Quarter (SE/4 NE/4) of Section 1, Township 17 South, Range 16 West, Union County, Arkansas, lying North and West of Arkansas State Highway #335,

2. All that part of the Southwest Quarter of the Northwest Quarter (SW/4 NW/4) of Section 6, Township 17 South, Range 15 West, Union County, Arkansas, lying North and West of Arkansas State Highway #335.

Tract 41-12:

The East Quarter of the Southwest Quarter of the Southeast Quarter of Section 1, Township 17 South, Range 16 West

AND

the Southeast Quarter of the Southeast Quarter of Section 1 Township 17 South, Range 16 West of the Fifth Principal Meridian, LESS THE FOLLOWING TRACTS:

1. A tract described as:

Commencing 70 yards North of the Southeast Corner of the Southeast Quarter of the Southeast Quarter of Section 1, Township 17 South, Range 16 West, as a BEGINNING POINT;

thence South 70 yards;

thence West 330 yards;

thence North 61.5 yards;

thence in a straight line to a POINT OF BEGINNING.

2. A tract described as:

Beginning at a point 70 yards North of the Southeast Corner of Section 1, Township 17 South, Range 16 West;

thence North 15.17 feet;

thence West 25.00 feet;

thence South 15.17 feet;

thence East to the POINT OF BEGINNING.

3. A tract described as:

Commencing at the Southeast Corner (SECor) of Section 1, Township 17 South, Range 16 West, Union County, Arkansas, and run North 89 degrees 24 minutes 22 seconds West along the South line of said Section 1 a distance of 1172.08 feet, more or less, to the center line of a county road for the point of beginning;

thence run North 33 degrees 28 minutes 58 seconds East 432.00 feet;

thence North 89 degrees 21 minutes 48 seconds West 715.87 feet;

thence South 00 degrees 16 minutes 35 seconds West 363.30 feet to the South line of Section 1;

thence South 89 degrees 24 minutes 22 seconds East 479.28 feet to the point of beginning.

Page 10 of 12

4. (Monsanto to Gardner)

Commencing at the Southeast Corner of Section 1, Township 17 South, Range 16 West, and run North 89 degrees 25 minutes West 400.0 feet;

thence North 00 degrees 15 minutes East 199.7 feet to the POINT OF BEGINNING;

thence North 00 degrees 15 minutes East 150.9 feet;

thence North 89 degrees 25 minutes West 543.7 feet to the center of State Highway No. 335;

thence South 33 degrees 55 minutes West along said Highway for 422.4 feet;

thence South 89 degrees 25 minutes East 184.0 feet;

thence North 00 degrees 15 minutes East 184.5 feet;

thence North 89 degrees 00 minutes East 593.5 feet to the POINT OF BEGINNING.

5. (Monsanto to Haney)

Commencing at the Southeast Corner of Section 1, Township 17 South, Range 16 West, and run North 89 degrees 25 minutes West 400.0 feet;

thence run North 00 degrees 15 minutes East 350.6 feet to the POINT OF BEGINNING;

thence run North 00 degrees 15 minutes East 819.7 feet to the center of State Highway No. 335;

thence run South 33 degrees 55 minutes West along said Highway for 979.8 feet;

thence run South 89 degrees 25 minutes East 543.7 feet to the POINT OF BEGINNING.

6. (NWF to Cole Timber)

The East Quarter of the Southwest Quarter of the Southeast Quarter (E/4 SW/4 SE/4) and all that part of the Southeast Quarter of the Southeast Quarter (SE/4 SE/4) of Section 1, Township 17 South, Range 16 West, Union County, Arkansas, lying West of Arkansas State Highway #335.

Tract 41-12A:

1. (Gardner to Monsanto)

Beginning at the Northeast Corner (NECor) of Section 12, Township 17 South, Range 16 West, Union County, Arkansas, and run South 00 degrees 15 minutes West 330.0 feet;

thence North 89 degrees 25 minutes West 400.0 feet;

thence North 00 degrees 15 minutes East 529.7 feet;

thence North 89 degrees 00 minutes East 375.0 feet;

thence South 00 degrees 15 minutes West 134.85 feet;

thence South 89 degrees 25 minutes East 25.0 feet;

thence South 00 degrees 15 minutes West 75.05 feet to the POINT OF BEGINNING, and being part of the Southeast Quarter of the Southeast Quarter (SE/4 SE/4) of Section 1, and part of the Northeast Quarter of the Northeast Quarter (NE/4 NE/4) of Section 12, all in Township 17 South, Range 16 West.

Page 11 of 12

2. (Haney to Monsanto)

Beginning at the Southeast Corner of the Northeast Quarter of the Northeast Quarter (SECor NE/4 NE/4) of Section 12, Township 17 South, Range 16 West, Union County, Arkansas, and run North 89 degrees 25 minutes West 400.0 feet;

thence North 00 degrees 15 minutes East 990.0 feet;

thence South 89 degrees 25 minutes East 400.0 feet;

thence South 00 degrees 15 minutes West 990.0 feet to the POINT OF BEGINNING.

Tract 41-16:

The North Half of the Southwest Quarter of Section 7, Township 17 South, Range 15 West, Union County, Arkansas.

Tract 41-17:

The Northwest Quarter of the Southwest Quarter of Section 8, Township 17 South, Range 15 West, Union County, Arkansas.

Tract 41-18:

The Southwest Quarter of the Southwest Quarter (SW1/4 SW 1/4) and the West Half of the Southeast Quarter of the Southwest Quarter (W1/2 SE1/4 SW1/4) of Section 5, Township 17 South, Range 15 West, Union County, Arkansas

AND

Beginning at the Northeast Corner of the Southeast Quarter of the Southwest Quarter (SE1/4 SW1/4) of Section 5, Township 17 South, Range 15 West, Union County, Arkansas, and run North 88 degrees 53 minutes West 695.0 feet;

thence South 00 degrees 11 minutes West 1326.0 feet to the South line of said forty;

thence South 88 degrees 53 minutes East along said South line 347.5 feet;

thence North 00 degrees 11 minutes East 1290.4 feet;

thence South 88 degrees 53 minutes East 347.5 feet;

thence North 00 degrees 11 minutes East 26.0 feet to the POINT OF BEGINNING.

Railroad Right-of-Way:

Railroad right-of-way extending 50 feet on each side of the centerline of the railroad track as the same is now located, on, over and across the North Half of Section 8, the North Half of Section 9, and the North Half of Section 10, all in Township 17 South, Range 15 West.

Page 12 of 12

SCHEDULE 1.01(c)

FACILITY ASSETS

Part A – Cherokee Facility

The major personal property assets identified at this facility include a concrete dome prill storage facility with a storage capacity of 14,000 tons; a Kellogg Company ammonia processing plant, 500 tons per day (“TPD”) rated capacity; a Chemical Industrial Engineers Company nitric acid plant #1, 300 TPD rated capacity; a D.M. Weatherly Company nitric acid plant #2, 500 TPD rated capacity; ammonium nitrate solution neutralizers; UAN production equipment; a Technip Company urea plant, 600 TPD rated capacity; a pollution control and irrigation system; cooling towers; a de-mineralizer; barge unloading equipment and storage tanks; forklift trucks; an auxiliary boiler; a de-aerator system; product storage tanks; air compressors; an electrical substation and transformers; and process plant piping, pumps and wiring.

Part B – El Dorado Facility

The major personal property assets identified at this facility include 2 Chemico weak nitric acid plants, 785 TPD combined rated capacity; a Chemico sulfuric acid plant, 360 TPD rated capacity; an E2 high-density ammonium nitrate prill plant, 1,100 TPD rated capacity; a K-T lo-density ammonium nitrate prill plant, 700 TPD rated capacity; a 100 TPD mixed acids plant, a D.M. Weatherly nitric acid plant, 350 TPD rated capacity; a CB&I tank farm, including ten ammonia storage spheres, a refrigerated ammonia tank, and six ammonia storage tanks; a plant steam generation system, including two Babcock & Wilcox processing boilers; a plant electrical generation system, including substations and transformers; maintenance and machine shop equipment; a wastewater pH neutralization system; a pollution control and irrigation system; cooling towers; forklift trucks; air compressors; and process plant piping, pumps and wiring.

Schedule 1.01(d)

Lenders and Lending Offices

Banc of America Leasing & Capital LLC

Mail Code: GA3-003-04-01

NORTHEAST CENTER BUILDING

2059 NORTHLAKE PKWY

TUCKER GA 30084-5399

Attn: Shelley B. LaCagnin, Vice President - Operations Manager

Tel: 770-270-8590

Fax: 770-270-8638

With a copy to:

Banc of American Leasing & Capital LLC

One Financial Plaza, 2nd Floor

Mail Code: R11-537-02-01

http://corpdir.bankofamerica.com/staffresults.asp?txtField1Name=mailunit&txtField1Type=is&txtField1V

Providence, RI 02903

Attn: Lee Bonaldi

Vice President - Credit Underwriting

Tel: 401-278-7655

Fax: 401-719-8344

And a copy to:

Banc of America Leasing & Capital LLC

Annemarie L. Warren

Vice President - Group Operations Manager

Banc of America Leasing

Mail Code: MA5-100-32-01

100 FEDERAL ST

BOSTON MA 02110

Tel: 617-434-3611

Fax: 617-434-0532

Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services Inc.

222 N. LaSalle Street, 16th Floor

Chicago, IL 60601

Attention: Gary Modesto, Vice President, Group Credit Manager

Tel: 312-750-6204

Fax: 312-316-3422

Email: Gary_Modesto@ml.com

- 1 - -

Arvest Bank

3900 N. Lincoln Boulevard

Oklahoma City, OK 73105

Attn: Cindy Batt, Sr. Vice President & Corporate Division Manager

Tel: 405-523-4169

Fax: 405-523-4126

Email: cbatt@arvest.com

Bank of Utah, as Payment Agent

ATTN: Corporate Trust Services

200 E. South Temple, Suite 210

Salt Lake City, UT 84111

Phone: (801) 924-3690

Fax: (801) 746-3519

- 2 - -

Schedule 2.01

Commitments and Applicable Percentages

As a % of Total

Commitment

Allocation: &# 160; Commitment Amounts Amounts

Banc of America Leasing & Capital, LLC $10,000,000.00 20.00%

Banc of America Leasing & Capital, LLC $ 5,000,000.00 10.00%

Arvest Bank $15,000,000.00 30.00%

Merrill Lynch Capital, a Division of Merrill

Lynch Business Financial Services Inc. $15,000,000.00 30.00%

______________________________________________________

Total Commitment Amount: $50,000,000.00 100.00%

SCHEDULE 4.01(a)(iii)

FINANCING STATEMENTS

1.	Cherokee Mortgage filed in the real property records of the Probate Office (County Clerk) of Colbert County, Alabama.

2.	Financing Statement filed in the Probate Office (County Clerk) of Colbert County, Alabama naming Collateral Agent, as secured party, and Cherokee Nitrogen Company (“CNC”) and Cherokee Nitrogen Holdings, Inc. (“CNH”), as debtors, covering the Collateral with respect to CNC and CNH.

Financing Statement filed in the Office of the County Clerk of Oklahoma County, Oklahoma naming Collateral Agent, as secured party, and CNH, Northwest Financial Corporation (“NWF”), CNC, DSN Corporation (“DSN”) and El Dorado Chemical Company (“EDC”), as debtors, covering the Collateral with respect to CNH, NWF, CNC, DSN and EDC.

4.	El Dorado Mortgage filed in the real property records of the Office of the Circuit Clerk and Ex-Officio Recorder of Union County, Arkansas.

5.	Financing Statement filed in the Office of the Circuit Clerk and Ex-Officio Recorder of Union County, Arkansas, naming Collateral Agent, as secured party, and NWF, EDC, and DSN, as debtors, covering the Collateral with respect to NWF, EDC and DSN.

6.	Trademark Security Agreement filed in the United States Patent and Trademark Office made by EDC in favor of Collateral Agent covering the trademarks owned by EDC.

Page 1 of 1

SCHEDULE 4.01(a)(iv)

LEASED PROPERTY

None

SCHEDULE 5.03

GOVERNMENT AUTHORIZATIONS AND OTHER CONSENTS

1.	Filing of UCC-1 Financing Statements, Mortgages, and Trademark Security Agreement referenced on Schedule 4.01(a)(iii).

2.	Consent of Wells Fargo Foothill, Inc. and Persons party to the Assigned Agreements.

3.	Filing of UCC-3 Continuation Statements.

SCHEDULE 5.05

INDEBTEDNESS

(as of September 30, 2007)

Long Term Debt

1.	El Dorado Chemical Company (“EDC”) is indebted to the following:

a.	ThermaClime, Inc. (“TCI”) in the principal amount of $35,593,138.

b.	LSB Chemical Corp. (“LSB Chemical”) in the principal amount of $2,098,787.

2.	Trison Construction, Inc. (“Trison”) is indebted to TCI in the principal amount of $6,364,700 less $2,500,0001.

3.	International Environmental Corporation (“IEC”) is indebted to the following:

a.	Amada Capital Corporation in the amount of $57,714.

b.	ThermaClime Technologies, Inc. (“TTI”) in the principal amount of $779,221.

4.	ClimateCraft, Inc. (“CLC”) is indebted to the following:

a.	The City of Oklahoma City in the amount of $2,450,000.

b.	TCI in the principal amount of $6,947,768 less $5,200,0001.

c.	Summit Machine Tool Manufacturing Corp. in the principal amount of $715,719.

5.	TCI is indebted to the following:

a.	IEC in the principal amount of $76,297,857.

b.	The Climate Control Group, Inc. (“CCG”) in the principal amount of $3,104,268.

c.	Climate Master, Inc. (“CLM”) in the principal amount of $40,537,986.

d.	Koax Corp. (“Koax”) in the principal amount of $22,811,075.

e.	Chemex I Corp. (“Chemex I”) in the principal amount of $276,944.

f.	Chemex II Corp. (“Chemex II”) in the principal amount of $1,484,718.

g.	Northwest Financial Corporation in the principal amount of $13,328,828.

h.	CEPOLK Holdings, Inc. in the principal amount of $3,898,523.

i.	El Dorado Nitrogen, L.P. in the principal amount of $25,734,720.

j.	LSB Industries, Inc. (“LSB”) in the principal amount of $36,287,224 and $962,398 in interest.

k.	Holders (LSB) of 10-3/4% Senior Unsecured Notes due 2007 in the principal amount of $6,950,000.

6.	Cherokee Nitrogen Company (“CNC”) is indebted to the following companies:

a.	TCI in the principal amount of $10,604,163.

b.	EDC in the principal amount of $2,438,209.

1 Adjustment as of October 31, 2007.

Page 1 of 3

7.	LSB Chemical is indebted to the following companies:

a.	TCI in the principal amount of $24,187,624 plus $4,500,0001 .

b.	DSN Corporation (“DSN”) in the principal amount of $275,773.

8.	DSN is indebted to TCI in the principal amount of $18,784,414 less $4,500,0001.

9.	XpediAir, Inc. (“XPA”) is indebted to TCI in the principal amount of $1,768,968 less $1,900,0001.

10.	CCG is indebted to LSB in the principal amount of $228,321.

11.	TTI is indebted to TCI in the principal amount of $3,548,796 less $2,700,0001.

12.	ClimaCool Corp. (“CCC”) is indebted to TCI in the principal amount of $3,450,175 less $2,300,0001.

13.	Chemex I is indebted to the following companies:

(a)	LSB Chemical in the principal amount of $385,282 less $150,0001.

(b)	Chemex II in the principal amount of $348.

14.	Cherokee Nitrogen Holdings, Inc. is indebted to LSB in the principal amount of $61,899,327.

Accrued Liabilities

15.	TCI has accrued $1,940,175 for payroll, taxes, insurance other expenses.

16.	IEC has accrued $4,247,406 for payroll, taxes and other expenses.

17.	TTI has accrued $245,358 for payroll, taxes and other expenses.

18.	Koax has accrued $125,735 for payroll, taxes and other expenses.

19.	CLM has accrued $ 10,231,111 for payroll, taxes and other expenses.

20.	CLC has accrued $ 1,143,698 for payroll, taxes and other expenses.

21.	XPA has accrued $66,966 for payroll, taxes and other expenses.

22.	Trison has accrued $105,893 for payroll, taxes and other expenses.

23.	CCC has accrued $408,394 for payroll, taxes and other expenses.

1 Adjustment as of October 31, 2007.

Page 2 of 3

24.	LSB Chemical has accrued $33,737 for payroll, taxes and other expenses.

25.	EDC has accrued $3,284,122 for payroll, taxes and other expenses.

26.	Chemex I $492,052 for payroll, taxes and other expenses.

27.	CNC has $466,714 for payroll, taxes and other expenses.

Accounts Payable

28.	TCI has accounts payable in the amount of $457,490.

29.	CLM has accounts payable in the amount of $10,393,220.

30.	IEC has accounts payable in the amount of $5,951,735.

31.	TTI has accounts payable in the amount of $1,686,575.

32.	CLC has accounts payable in the amount of $947,479.

33.	Trison has accounts payable in the amount of $495,550.

34.	Koax has accounts payable in the amount of $254,471.

35.	LSB Chemical has accounts payable in the amount of $31,429.

34.	EDC has accounts payable in the amount of $8,929,336.

35.	CNC has accounts payable in the amount of $3,821,811.

2 Adjustment as of October 31, 2007.

Page 3 of 3

SCHEDULE 5.06

LITIGATION

Donna Wetheral v. Climate Master. On September 14, 2007 Climate Master, Inc. (“Climate Master”) was served with the complaint filed in this litigation with the Circuit Court of Johnson County, Illinois. Plaintiff sues in its individual capacity and as a class action representative stating that Climate Master now offers a coated coil option for its evaporator coils to protect its evaporator coils from corrosion from airborne chemicals resulting from modern building material out gassing and most airborne environmental chemicals. Plaintiff asserts that it was well known in the industry that a coating was necessary to prevent failure of evaporator coils, that Climate Master was aware of the need to coat its coils since the mid-1990s, and that Climate Master sold untreated coils to thousands of consumers, including the Plaintiff, despite knowledge that they were defective and failing without the coating. Plaintiff asserts itself as a representative of a class consisting of, “all consumers who purchased heating and cooling systems sold or installed in Illinois, with evaporator coils manufactured by Climate Master, Inc. prior to Climate Master’s utilization of their new E-coated technology”. Plaintiff asserts claims against Climate Master based upon negligence and strict liability. As these claims arise in tort, Climate Master intends to place its applicable insurance carriers on notice of this claim. Insurance coverage on this matter is unknown at this time.

Climate Master advises that there has been an industry wide issue related to coil failures. The research of others appears to link coil failures to formicary corrosion that is suspected of being the result of environmental airborne materials. Although the occurrence of such failures is low nationwide, such research indicates that unexplainable failures seem to occur more frequently in some geographical areas and that the failure appear to occur after one to four years of installation and use. Climate Master, like other manufacturers, began to experience certain coil failures (many times concentrated in a particular geographic area) which began to appear to be the result of formicary corrosion. In an effort to minimize any formicary corrosion issues, Climate Master began offering its E-coating as a standard part of its offering of residential products in June, 2003. In April, 2004, the coating was made standard on Climate Masters vertical stack commercial products and as an option on all its other commercial products, except Climate Master’s commercial roof top series of products. In March, 2006, Climate Master then began offering a non-coated option for its vertical stack commercial products. Not all HVAC manufacturer’s have decided even to offer coated coils. While Climate Master has continued to experience some coil failures of coated coils, the incidences appear to have declined in number for the coated coils.

SCHEDULE 5.09

ENVIRONMENTAL MATTERS

A.	ITEMS DISCUSSED IN PARENT’S FORM 10Q FOR THE PERIOD ENDING JUNE 30, 2007

El Dorado Chemical Company - Discharge Water Matters. The El Dorado Facility within our Chemical Business generates process wastewater. The process water discharge and storm-water run off are governed by a state National Pollutant Discharge Elimination System (“NPDES”) water discharge permit issued by the Arkansas Department of Environmental Quality (“ADEQ”), which permit is to be renewed every five years. The ADEQ issued to the El Dorado Facility a NPDES water discharge permit in 2004, and the El Dorado Facility had until June 1, 2007 to meet the compliance deadline for the more restrictive limits under the 2004 NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits, the El Dorado Facility has significantly reduced the effluent levels of its wastewater.

In order to directly discharge its wastewater from the El Dorado Facility into the creek and to meet the June 2007 permit limits, the El Dorado Facility has conducted a study of the adjacent stream to determine whether a permit modification is appropriate. On September 22, 2006, the Arkansas Pollution Control and Ecology Commission (“Commission”) approved the results of the study that showed that the proposed permit modification is appropriate. A public hearing was held on the matter on November 13, 2006 with minimal opposition.

The El Dorado Facility has demonstrated its ability to comply with the more restrictive permit limits, and the rules which support the more restrictive dissolved minerals rules have been revised to authorize a permit modification to adopt achievable dissolved minerals permit limits. The ADEQ has orally agreed to issue a consent administrative order to authorize the El Dorado Facility to continue operations without incurring permit violations pending the modification of the permit to implement the revised rule and to allow the El Dorado Facility to continue to discharge its wastewater into the creek from and after June 1, 2007.

In addition, the El Dorado Facility has entered into a consent administrative order (“CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater at the El Dorado Facility. A new CAO to address the shallow groundwater contamination became effective on November 16, 2006 and requires the evaluation of the current conditions and remediation based upon a risk assessment. The final remedy for shallow groundwater contamination, should any remediation be required, will be selected pursuant to the new CAO and based upon the risk assessment. Based on area well surveys performed, there are no known users of this shallow groundwater in the area, and

Page 1 of 3

preliminary risk assessments have not identified any public health risk that would require remediation. As an interim measure, the El Dorado Facility has installed two recovery wells to recycle groundwater and to recover nitrates. The cost of any additional remediation that may be required will be determined based on the results of the investigation and risk assessment and cannot currently be reasonably estimated. Therefore, no liability has been established at June 30, 2007.

El Dorado Chemical Company - Air Matters. Under the terms of a consent administrative order relating to air matters (“AirCAO”), which became effective in February 2004, resolving certain air regulatory alleged violations associated with the El Dorado Facility’s sulfuric acid plant and certain other alleged air emission violations, the El Dorado Facility is required to implement additional air emission controls at the El Dorado Facility no later than February 2010. We have decided to accelerate this capital expenditure and currently estimate the environmental compliance related expenditures to be between $6.0 and $6.5 million, to be expended through the third quarter of 2008.

Slurry Explosive Corporation (n/k/a Chemex I Corp.). In April 2002, Slurry Explosive Corporation (“Slurry”), later renamed Chemex I Corp., a subsidiary within our Chemical Business, entered into a Consent Administrative Order (“Slurry Consent Order”) with the Kansas Department of Health and Environment (“KDHE”), regarding Slurry’s Hallowell, Kansas manufacturing facility (“Hallowell Facility”). The Slurry Consent Order addressed the release of contaminants from the facility into the soils and groundwater and surface water at the Hallowell Facility. There are no known users of the groundwater in the area. Under the terms of the Slurry Consent Order, Slurry is required to, among other things, submit an environmental assessment work plan to the KDHE for review and approval, and agree with the KDHE as to any required corrective actions to be performed at the Hallowell Facility.

In connection with the sale of substantially all of the operating assets of Slurry and Universal Tech Corporation (“UTeC”) in December 2002, which was accounted for as discontinued operations, both subsidiaries within our Chemical Business, UTeC leased the Hallowell Facility to the buyer under a triple net long-term lease agreement. However, Slurry retained the obligation to be responsible for, and perform the activities under, the Slurry Consent Order. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters. The successor (“Chevron”) of the prior owner of the Hallowell Facility has agreed, within certain limitations, to pay and has been paying one-half of the costs of certain interim remediation measures at the site approved by the KDHE, subject to reallocation.

At June 30, 2007, the total estimated liability (which is included in current and noncurrent accrued and other liabilities) in connection with this remediation matter is approximately $1.4 million and Chevron’s share for one-half of these costs (which is included in accounts receivable and other assets) is approximately $.7 million. Slurry and Chevron expect to pursue a course with the KDHE of long-term surface and ground

Page 2 of 3

water monitoring to track the natural decline in contamination, instead of the soil excavation. We estimate the costs relating to this course of action to be substantially less than the cost of soil excavation but we are unable to determine if the KDHE will ultimately accept the proposal.

B.	OTHER DISCLOSURES

El Dorado Chemical Company - Landfill. In 1995, the EDC entered into a Consent Administrative Agreement (“Agreement”) with the State of Arkansas. The Agreement provided for the Company to remediate (by removal of hazardous material) and close a landfill located on the EDC site. The Agreement also provided for the Company to monitor groundwater for certain contaminants and, depending on the results of the monitoring program, to submit a remediation plan, upgrade certain equipment to reduce wastewater effluent. EDC timely completed the landfill remediation and closure and performed the ground water monitoring activities.

El Dorado Chemical Company – Caustic. On May 8, 1998, approximately 2,300 gallons of caustic spilled when a valve in a storage vessel failed, which was released to a stormwater drain and resulted in a minor fish kill in a drainage ditch near the plant. EDC entered into a CAO with ADEQ to resolve this event.

Page 3 of 3

SCHEDULE 5.13

SUBSIDIARIES

Part (a) – Subsidiaries of Parent

1.	ThermaClime, Inc., a Borrower

2.	Northwest Financial Corporation, a Borrower

3.	LSB Chemical Corp., a Borrower

4.	El Dorado Chemical Company, a Borrower

5.	Chemex I Corp., a Borrower

6.	DSN Corporation, a Borrower

7.	Chemex II Corp., a Borrower

8.	El Dorado Nitric Company

9.	El Dorado Acid, L.L.C.

10.	El Dorado Acid II, L.L.C.

11.	El Dorado Nitrogen, L.P.

12.	XpediAir, Inc., a Borrower

13.	International Environmental Corporation, a Borrower

14.	Climate Master, Inc., a Borrower

15.	The Climate Control Group, Inc., a Borrower

16.	ClimateCraft, Inc., a Borrower

17.	ThermaClime Technologies, Inc., a Borrower

18.	CEPOLK Holdings, Inc.

19.	ClimaCool Corp., a Borrower

20.	Trison Construction, Inc., a Borrower

21.	Koax Corp., a Borrower

22.	Cherokee Nitrogen Company, a Borrower

23.	Prime Financial Corporation

24.	Prime Holdings Corporation

25.	Northwest Capital Corporation

26.	LSB Holdings, Inc.

27.	LSB-Europa Limited

28.	Summit Machine Tool Inc. Corp.

29.	Cherokee Nitrogen Holdings, Inc., a Borrower

30.	ClimateCraft Technologies, Inc.

31.	Summit Machine Tool Manufacturing Corp.

32.	Summit Machinery Company

33.	Pryor Plant Chemical Company

34.	Hercules Energy Mfg. Corporation

Page 1 of 3

Part (b) - Equity Investments of Parent

1.	CEPOLK Holdings, Inc., a subsidiary of ThermaClime, Inc., is the sole limited partner of, and owns a fifty percent (50%) interest in, CEPOLK Limited Partnership.

2.	Summit Machinery Company, a subsidiary of Parent, owns a 50% of the value of KAC Acquisition Company, an Oklahoma corporation, the value of which is de minimis.

Part (c) – Parent’s Outstanding Equity Interest in Each of the Borrowers

1.	ThermaClime, Inc. (“TCI”). The total authorized capital stock of TCI is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000, of which LSB owns 9,500 shares (95% ownership) and Prime Financial Corporation (“PFC”) owns 500 shares (5% ownership).

2.	Northwest Financial Corporation (“NWF”). The total authorized capital stock of NWF is 100 shares of common stock. The total outstanding shares of capital stock is 54 which is owned 100% by TCI.

3.	LSB Chemical Corp. (“LSBCC”). The total authorized capital stock of LSBCC is 50 shares of common stock. The total outstanding shares of capital stock is 50 which is owned 100% by TCI.

4.	El Dorado Chemical Company (“EDC”). The total authorized capital stock of EDC is 25,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by LSBCC.

5.	Chemex I Corp. (“Chemex I). The total authorized capital stock of Chemex I is 10,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by EDC.

6.	DSN Corporation (“DSN”). The total authorized capital stock of DSN is 50,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by LSBCC.

7.	Chemex II Corp. (“Chemex II). The total authorized capital stock of Chemex II is 10,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by LSBCC.

8.	XpediAir, Inc. (“XPA”). The total authorized capital stock of XPA is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by TCI.

9.	International Environmental Corporation (“IEC”). The total authorized capital stock of IEC is 300 shares of common stock. The total outstanding shares of capital stock is 300 which is owned 100% by TCI.

Page 2 of 3

10.	Climate Master, Inc. (“CLM”). The total authorized capital stock of CLM is 1,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by TCI.

11.	The Climate Control Group, Inc. (“CGG”). The total authorized capital stock of CCG is 100,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by TCI.

12.	ClimateCraft, Inc. (“CLC”). The total authorized capital stock of CLC is 1,000, of which 900 shares are Class A voting common stock and 100 shares are Class B non-voting common stock. The total outstanding shares of both classes of common stock combined is 1,000 which is owned 100% by TCI.

13.	ThermaClime Technologies, Inc. (“TTI”). The total authorized capital stock of TTI is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by TCI.

14.	ClimaCool Corp. (“CCC”). The total authorized capital stock of CCC is 50,000 shares of common stock. The total outstanding shares of capital stock is 1,000 which is owned 100% by TCI.

15.	Trison Construction, Inc. (“Trison”). The total authorized capital stock of Trison is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by TCI.

16.	Koax Corp. (“Koax”). The total authorized capital stock of Koax is 50 shares of common stock. The total outstanding shares of capital stock is 50 which is owned 100% by TCI.

17.	Cherokee Nitrogen Company (“CNC”). The total authorized capital stock of CNC is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by TCI.

18.	Cherokee Nitrogen Holdings, Inc. (“CNH”). The total authorized capital stock of CNH is 500,000 shares of common stock. The total outstanding shares of capital stock is 10,000 which is owned 100% by LSB Holdings, Inc.

Page 3 of 3

SCHEDULE 5.18

INTELLECTUAL PROPERTY RIGHTS

Chemex I Corp.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 1 of 21

Chemex II Corp.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 2 of 21

Cherokee Nitrogen Company

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 3 of 21

Cherokee Nitrogen Holdings, Inc.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 4 of 21

ClimaCool Corp.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 5 of 21

Climate Master, Inc.

PATENTS

Patent

App./Reg. No.

Place of

Registration

Issue

Date

“Water-Cooled Air Conditioning

System Using Condenser Water

Regeneration for Precise Air Reheat

in Dehumidifying Mode”

11/161,808

United States

Pending

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“Climate Master (& Design)”

2,139,570

United States

02/24/98

“Climate Master (& Design)”

#TMA 471,487

Canada

02/21/97

“Climate Master”

808,500

United States

05/17/66

“Climate Master”

409,647

Chile

07/22/93

“Climate Master”

84930

Israel

10/08/92

“Climate Master”

292/82

Saudi Arabia

12/30/92

“Climate Master”

1,514,734

United Kingdom

11/13/98

“Climate Master”

11,215

Greece

07/07/98

“Climate Master”

280854

Korea

12/07/93

“Climate Master”

641,594

Taiwan

04/16/94

“Climate Master”

614,556

Taiwan

10/01/93

“Climate Master”

516424

Mexico

12/10/92

“Climate Master”

25162

Kuwait

08/16/93

“Climate Master”

0-999746

Czech Republic

03/20/00

“Climate Master”

583,151

Benelux

06/22/95

“Climate Master”

95575091

France

06/09/95

“Climate Master”

147,007

Hungary

04/25/95

“Climate Master”

172643

Norway

04/25/96

“Climate Master”

309 649

Portugal

05/06/96

“Climate Master”

O-POZ-1170-95

Slovak Republic

05/02/95

“Climate Master”

16121

Turkey

05/01/95

“Climate Master”

729,783

Italy

10/16/97

“Climate Master”

402,883

Europe

02/24/98

“Climate Master”

3480166

China

03/10/03

“Climate Master”

860,657

Australia

12/14/00

“Climate Mate”

TMA 371,539

Canada

08/03/90

Page 6 of 21

Climate Master, Inc. (cont’d.)

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“Roommate”

1,906,435

United States

07/18/95

“Paradigm”

2,112,244

United States

11/11/97

“Geodesigner”

2,184,992

United States

08/25/98

“Earthpure”

2,994,853

United States

09/13/05

“Climadry”

3,253,779

United States

06/19/07

COPYRIGHTS

NONE

TRADENAMES1

Climate Master

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 7 of 21

ClimateCraft, Inc.

PATENTS

NONE

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“Climatecraft”

#2,369,333

United States

07/18/00

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 8 of 21

DSN Corporation

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 9 of 21

El Dorado Chemical Company

PATENTS

NONE

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“El Dorado (& Design)”

1,427,064

United States

02/03/87

“E-2”

833,891

United States

08/22/67

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 10 of 21

International Environmental Corporation

PATENTS

Patent

Serial./Reg. No.

Place of

Registration

Issue

Date

“Conditioned Air Fan Coil Unit”

6,109,044

United States

08/29/00

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“International Environmental

Corporation (& IE Design)”

1,569,505

439970

United States

Mexico

12/05/89

08/18/93

292/85

Saudi Arabia

08/31/93

“International Environmental”

B1,514,822

United Kingdom

07/01/94

92/165,999

Hong Kong

11/21/94

IEC International Environmental (& Design)”

77110687

United States

Pending

“Sureflow”

2,449,571

United States

05/08/01

“IE (Stylized)”

2,556,892

United States

04/02/02

“Air Coil Technologies”

1,755,144

United States

03/02/93

“UV Ultrashield”

2,660,647

United States

12/10/02

COPYRIGHTS

NONE

TRADE NAMES1

Air Coil Technologies

International Climate Systems

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 11 of 21

Koax Corp.

PATENTS

NONE

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“Koax”

1,776,407

United States

06/15/93

“Koax and design”

1,905,551

United States

07/18/95

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 12 of 21

LSB Chemical Corp.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 13 of 21

Northwest Financial Corporation

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 14 of 21

The Climate Control Group, Inc.

PATENTS

NONE

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“APR Corporation and Design”

1,624,527

United States

11/27/90

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 15 of 21

ThermaClime, Inc.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 16 of 21

ThermaClime, Inc. (continued)

DOMAIN NAMES

The following domain names are registered by ThermaClime, Inc. with Catalog.com:

1.	climatecontrolgroup.com

koax.com

koax.biz

4.	climacoolcorp.com

5.	edc-ark.com

6.	bryantgeo.com

7.	carriergeo.com

8.	climatemast.com

9.	climatemaster.com

10.	climatemaster.eu

11.	climatemaster.hk

12.	climatematergenesis.com

13.	climasize.com

14.	climatemate.com

15.	climadry.com

16.	watersourceparts.com

17.

trison.us

18.	trisonconstruction.biz

19.	trisonconstruction.com

20.	trisonconstruction.info

21.	trisonconstruction.org

22.	trisonconstruction.net

23.	sureflow.net

24.	iec-okc.com

25.	iecokc.com

26.	sureflowcomfort.com

27.	sureflow-comfort.com

28.	iecreps.com

29.	carriersolutioncenter.com

30.	ineedhvac.com

31.	hvacbids.com

32.	fancoil.com

33.	uvcdirect.com

Page 17 of 21

ThermaClime Technologies, Inc.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 18 of 21

Trison Construction, Inc.

PATENTS

NONE

TRADEMARKS

NONE

COPYRIGHTS

NONE

TRADE NAMES1

Trison Geothermal Construction Inc.

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 19 of 21

XpediAir, Inc.

PATENTS

NONE

TRADEMARKS

Mark

Serial./Reg. No.

Place of

Registration

Issue

Date

“Climacool”

2,564,496

United States

04/23/02

“CHP”

1,707,991

United States

08/18/92

“XpediAir” (Design Only)*

2,986,893

United States

08/23/05

COPYRIGHTS

NONE

TRADE NAMES1

NONE

SERVICE MARKS

NONE

1 Other than the formal corporate name.

Page 20 of 21

LICENSES

1.	License Agreement between Koax Corp. and The City of Oklahoma City Pursuant to ONG Franchise Ordinance to Authorize Receipt of Transport Gas, dated July 3, 2006.

2.	License Agreement between Climate Master, Inc. and The City of Oklahoma City Pursuant to ONG Franchise Ordinance to Authorize Receipt of Transport Gas, dated December 8, 2005.

3.	License Agreement between International Environmental Corporation and The City of Oklahoma City Pursuant to ONG Franchise Ordinance to Authorize Receipt of Transport Gas, dated December 8, 2006.

4.	System License Agreement between Cherokee Nitrogen Company and Tennessee Gas Pipeline Company and Midwestern Gas Transmission Company, dated November 30, 2000.

5.	Software License between PTC Global and International Environmental Corporation.

6.	Software License between SigmaTEK and International Environmental Corporation.

7.	Software License and Services Agreement between ThermaClime, Inc. (formerly known as ClimaChem, Inc.) and Cognos Corporation (successor in interest to Adaytum, Inc.), effective June 29, 2000, as amended.

8.	Software License Agreement between ThermaClime, Inc. (formerly known as ClimaChem, Inc.) and Electronic Storage Corporation, executed April 4, 2003.

9.	Software and Services License Agreement between Cherokee Nitrogen Company and Mainsaver Software, effective December 4, 2002.

10.	Master License Agreement for Software Program Processes between El Dorado Chemical Company and Marcam Solutions, Inc.

11.	Engineering and License Agreement between El Dorado Chemical Company and Kaltenbach-Thuring S.A., dated October 27, 1994, regarding LDAN plant capacity increase.

12.	Order Form, dated June 26, 1997, between SSA Global Technologies, Inc., successor in interest to Computer Associates International, Inc., and LSB Industries, Inc., as amended.

Page 21 of 21

SCHEDULE 5.21

PIPELINES

Cherokee Site

1.	North Alabama natural gas pipeline.

2.	Enbridge natural gas pipeline.

3.	Cherokee Water Company water line.

El Dorado Site

1.	Valero ammonia pipeline.

2.	Centerpoint Energy natural gas pipeline.

3.	Water pipeline supplies treated river water to the facility as industrial water make up.

SCHEDULE 5.22

MATERIAL CONTRACTS

1.	Anhydrous Ammonia Sales Agreement between El Dorado Chemical Company (“EDC”) and Koch Nitrogen International SARL and Koch Nitrogen Company(“Koch”), effective January 3, 2005.

2.	AN Supply Agreement between EDC and Orica USA, Inc., dated November 1, 2001, as amended.

3.	On-Site Product Supply Agreement between EDC and Air Liquide America Corporation, dated as of May 31, 1994.

4.	Sales Agreement between CNC and Nelson Brothers LLC for Ammonium Nitrate, dated October 1, 2001.

5.	NAESB Base Contract between CNC and Interconn Resources, Inc., dated April 1, 2003.

See also Schedules 5.23 and 7.05.

SCHEDULE 5.23

PERMITS

Cherokee Nitrogen Company, Cherokee, Alabama

·	NPDES Wastewater Discharge Permit #AL 0000418; effective date 2-1-06; expiration date 1-31-11

·	Title V Air Permit #701-0013; effective date 12-14-06; expiration date 11-28-11

El Dorado Chemical Company, El Dorado, Arkansas

·	NPDES Wastewater Discharge Permit #AR0000752; effective date 7-1-02; expiration date

6-30-07

·	Title V Air Permit #0573-AOP-R7; effective date 4-12-05; expiration date 4-11-10

SCHEDULE 5.27

LABOR MATTERS

1.	El Dorado Chemical Company (“EDC”) is party to collective bargaining agreement, effective October 17, 2004, with the International Association of Machinists and Aerospace Workers, AFL-CIO, Local 224.

2.	EDC is party to a collective bargaining agreement, effective August 1, 2004, with the Paper, Allied-Industrial, Chemical & Energy (PACE) Workers International Union AFL-CIO and Its Local 5-434.

3.	Cherokee Nitrogen Company is party to a collective bargaining agreement, dated November 12, 2004, with the United Steelworkers of America's International Union, AFL-CIO, CLC, Cherokee Local 417-G.

SCHEDULE 7.01(b)

EXISTING LIENS

Name of Obligor	Description of Secured Indebtedness
Chemex I Corp.	None

Name of Obligor	Description of Secured Indebtedness
Chemex II Corp.	None

Name of Obligor	Description of Secured Indebtedness
Cherokee Nitrogen Company	None

Name of Obligor	Description of Secured Indebtedness
Cherokee Nitrogen Holdings, Inc.	None

Name of Obligor	Description of Secured Indebtedness
ClimaCool Corp.	None

Name of Obligor	Description of Secured Indebtedness
Climate Master, Inc. (“CLM,”) as bailee (operating lease)	Secured Party: Marquette Equipment Finance, LLC, as Bailor, assigned to Park National Bank Collateral: One (1) Chiyoda SP-25ST 3 Axis Tube Bender with RH rotation, including all standard equipment and 5/8”, 3/4” and 7/8” OD and mandrels
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf L3040 Laser Cutting Machine System purchased from Icon Machine Tool, Inc., S/N A0235A0061, and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Trumpf TruLaser 3530 Laser Cutting Machine, Serial #AX035A0061
CLM (operating lease)	Secured Party: National Machine Tool Financial Corporation and TCF Equipment Finance, Inc. Collateral: One (1) new Trumpf L3530 4000 Watt Laser with 60”x120”, S/N A0235A0061, and all accessories and attachments thereto.

Page 1 of 7

Name of Obligor

Description of Secured Indebtedness

CLM, as lessee (operating lease)	Secured Party: IOS Capital, as lessor Collateral: All equipment now or hereafter leased (PCP 1050, booklet maker and accessories) in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 2068765, as amended from time to time, between IOS Capital, LLC as lessor, and the above referenced Lessee/Debtor, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. Customer: 1095557 IKCPP500 C11029146
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: 1 each five stage Power Spray Stainless Washer (installed) in accordance with quote 3703-0107R3 from Industrial Finishing Systems.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Ingersoll-Rand oil-free Nirvana compressor system consisting of various components; S/N IRN75H-OF.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Gamma G333PC Wire Processing System per quote 06-0150-2743-0135C; S/N 1-528324-1 and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: IOS Capital, as lessor Collateral: All equipment now [5 Ricoh copiers] or hereafter leased in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 2929907, as amended from time to time, between Lessor and Lessee, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. CUSTOMER: 1095557 RIAF2035 S/P J5837002733 RIAF2035 S/P J5837002727 RIAF2035 S/P J5837102886 RIAF2035 S/P J5837102735 RIAF2035 S/P J5837102721 RIAF1060 J4235501227 RIAF1060 J422500470 RIAF2090 J7031100205 RIAF2090 J7031100244

Page 2 of 7

Name of Obligor

Description of Secured Indebtedness

CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada Vipros 368 King, Turret Punch Press, S/N 36840024, with New London Slug Conveyor, One (1) Amada LUL510 loading device, S/N 00510090, Amada SR510 .30 unloading device, S/N 2218, Sun Classic Workstation with Line Control Software, S/N FW900085, AP100 Punch Upgrade, AP100 Punch Add. Seat Upgrade, complete with all attachments now or hereafter acquired.
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada press brake, model HFB 1003/8, S/N HFB010030 R981151, w/ ISB light curtain
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Raidzone GangSTOTR Systems RC8-2-R2000 (2x8 disk rack mount systems and all accessories and attachments thereto.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Nine (9) OptiGun-2AX Automatic Guns, Nine (9) OptiTronicPlus Control Units and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: Six (6) sets of ECI line equipment (Procix) and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada 386 King, Vipros 30 ton CNC Turret Punch, S/N 36820017 and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) Amada CNC Blanking Shear, S/N 101000056 and associated accessories.
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One(1) Trumpf Laser 3040 Plus and associated accessories
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One(1) Trumpf Laser 3040 Plus and associated accessories
CLM (operating lease)	Secured Party: RCA Capital Corp. Collateral: One (1) new Chiyoda SP-25ST 3 Axis CNC Pipe Bender and associated accessories
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor Collateral: One (1) single Tube Cutoff Line (STCOS) and all accessories and attachments thereto (Burr Oak Copper Cut).
CLM, as lessee (operating lease)	Secured Party: Prime Financial Corporation, as lessor, as assigned to Marquette Equipment Finance, LLC, as assigned to Park National Bank Collateral: One (1) Chiyoda SP-25 ST 3-Axis Tube Bender and associated accessories.

Page 3 of 7

Name of Obligor

Description of Secured Indebtedness

CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: One 1996 Amada FCXB-III-8025 CNC Press Brake
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: IPCS Equipment and accessories
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: Used 1995 FBD-125 Amada Press Brake, S/N 12530058
CLM (operating lease)	Secured Party: Prime Financial Corporation Collateral: 88 ton Amada HFB, S/N R091-18; 88 ton Amada HFB, S/N R970432; 138 ton Amada FBD, S/N 12530263

Name of Obligor	Description of Secured Indebtedness
ClimateCraft, Inc. (“CLC”) (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf NC Punching Machine
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: 1999 Amada HFB1254 Promecam CNC Press Brake w/ Controls
CLC	Secured Party: City of Oklahoma City Collateral: Real estate owned by Summit Machine Tool Manufacturing Corp.
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Two (2) model 625014 Accushears w/ 48” extended travel and CNC front gauging 12’x6’x6’; S/N 5110 and 5111
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf model TC2020 Punch Machine, S/N A0030A0239 with tooling
CLC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada CNC Hydraulic Press Brake model HFB220/440, SN H980519

Name of Obligor	Description of Secured Indebtedness
DSN Corporation	None

Name of Obligor	Description of Secured Indebtedness
El Dorado Chemical Company (“EDC”) as bailee	Secured Party: Orica USA Inc., as bailor Collateral: All of bailor’s inventory located at bailee’s El Dorado, AR facility
EDC, as lessee (operating lease)	Secured Party: LSB Industries, Inc. Collateral: Catalysts associated with EDC’s El Dorado, AR facility

Page 4 of 7

Name of Obligor

Description of Secured Indebtedness

EDC, as bailee (operating lease)	Secured Party: Republic Bank, Inc., as bailor Collateral: Personal property (rail cars) located at bailee’s El Dorado, AR facility and described in Lease Schedule No. 001 to Master Lease Agreement No. AF10506 by and between Prime Financial Corporation, as lessee, and Applied Financial, LLC, as lessor
EDC	Secured Party: Air Liquide Industrial US LP Collateral: Gas generating plant, located at debtor’s El Dorado, AR facility
EDC (operating lease)	Secured Party: General Electric Capital Corporation Collateral: PerkinElmer Aanalyst 700 AA Spectrometer and accessories

Name of Obligor	Description of Secured Indebtedness
International Environmental Corporation (“IEC”) (operating lease)	Secured Party: Prime Financial Corporation Collateral: Bolina Cut-to-Length; 2 Optiflex 110/08 Pullmax CNC Press Brakes; vertical bender; Trumpf laser cutting machine
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Amada Turret Press Dies & accessories
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Two Trumpf Laser Cutting Machines
IEC	Secured Party: Amada Capital Corporation Collateral: Amada Turret Press Model VIPROS358K w/ scrap conveyor and attachments
IEC	Secured Party: Amada Capital Corporation Collateral: Software package consisting of two seats of Anmest punch software and one seat AP100 US punch complete w/ all attachments
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: One (1) T-Drill SP-55 tube end spinner, 440V, S/N 97032
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: High Takt assembly line (spur line south bldg)

Page 5 of 7

Name of Obligor

Description of Secured Indebtedness

IEC (operating lease)	Secured Party: IOS Capital Collateral: All equipment now or hereafter leased in an equipment leasing transaction in connection with that certain Master Agreement No. -------------, Product Schedule No./Agreement No. 1842990, as amended from time to time, between IOS Capital, LLC as lessor, and the above referenced Lessee/Debtor, including, without limit, the equipment listed below, and all additions, improvements, attachments, accessories, accessions, upgrades and replacements related thereto, and any and all substitutions or exchanges, and any and all products, insurance and/or other proceeds (cash and non-cash) therefrom. Customer: 357586 RIAF 2075 S/P C11020120, RIAF2075 S/P C11020023, RIAF 2075 S/P C11020123, RIAF2060 S/P C11020019, RIAF3030 S/P C11020011, RIAF3030 S/P C11020010, RIAF3030 W/P C11020009, RIAF3030 SP C11020008, RIAF3425C C11020124, ZZrightfax software
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Trumpf Laser 3040 Plus, 4000 watt resonator
IEC (operating lease)	Secured Party: Prime Financial Corporation Collateral: Security system

Name of Obligor	Description of Secured Indebtedness
Koax Corp (operating lease)	Secured Party: Intrust Bank Collateral: LSE 1751964 S/N MPH04374

Name of Obligor	Description of Secured Indebtedness
LSB Chemical Corp.	None

Name of Obligor	Description of Secured Indebtedness
Northwest Financial Corporation	None

Name of Obligor	Description of Secured Indebtedness
The Climate Control Group, Inc.	None

Name of Obligor	Description of Secured Indebtedness
ThermaClime, Inc. (f/k/a ClimaChem, Inc.)	Secured Party: Toshiba America Information Systems Collateral: Six (6) Toshiba copiers

Page 6 of 7

Name of Obligor	Description of Secured Indebtedness
ThermaClime Technologies, Inc. (f/k/a ACP International Limited (“TTI”) (operating lease)	Secured Party: Park National Bank, assigned to Marquette Equipment Finance, LLC Collateral: All equipment, software and other property leased under that Equipment Lease dated March 1, 2007 between Prime Financial Corporation and TTI (Continental washer and dryer)
TTI, as bailee (operating lease)	Secured Party: Park National Bank, as bailor Collateral: Radiator coil washer and dryer
TTI (operating lease)	Secured Party: Prime Financial Corporation Collateral: One (1) Continental Equipment 2-stage belt washer, natural gas heated dryer and drain tank
TTI (operating lease)	Secured Party: Prime Financial Corporation Collateral: Burr oak fin die, S/N FDM-1532-1

Name of Obligor	Description of Secured Indebtedness
Trison Construction, Inc. (“Trison”)	None

Name of Obligor	Description of Secured Indebtedness
XpediAir, Inc.	None

Page 7 of 7

SCHEDULE 7.02

EXISTING INDEBTEDNESS AND GUARANTEES

(as of September 30, 2007)

Part A - Indebtedness

1.	International Environmental Corporation is indebted to Amada Capital Corporation in the amount of $57,714.

2.	ClimateCraft, Inc. is indebted to the following:

a.	The City of Oklahoma City in the amount of $2,450,000.

b.	Summit Machine Tool Manufacturing Corp. in the principal amount of $715,719.

3.	ThermaClime, Inc. is indebted to the following:

a.	CEPOLK Holdings, Inc. in the principal amount of $3,898,523.

b.	El Dorado Nitrogen, L.P. in the principal amount of $25,734,720.

Part B - Guarantees

N/A

SCHEDULE 7.03

EXISTING INVESTMENTS

(as of September 30, 2007)

1.	See Schedule 5.13 for Equity Interests.

2.	El Dorado Chemical Company (“EDC”) is indebted to the following:

a.	ThermaClime, Inc. (“TCI”) in the principal amount of $35,593,138.

b.	LSB Chemical Corp. (“LSB Chemical”) in the principal amount of $2,098,787.

3.	Trison Construction, Inc. is indebted to TCI in the principal amount of $6,364,700 less $2,500,0001.

4.	ClimateCraft, Inc. is indebted to TCI in the principal amount of $6,947,768 less $5,200,0001.

5.	TCI is indebted to the following:

a.	International Environmental Corporation in the principal amount of $76,297,857.

b.	The Climate Control Group, Inc. in the principal amount of $3,104,268.

c.	Climate Master, Inc. in the principal amount of $40,537,986.

d.	Koax Corp. in the principal amount of $22,811,075.

e.	Chemex I Corp. (“Chemex I”) in the principal amount of $276,944.

f.	Chemex II Corp. (“Chemex II”) in the principal amount of $1,484,718.

g.	Northwest Financial Corporation in the principal amount of $13,328,828.

6.	Cherokee Nitrogen Company is indebted to the following companies:

a.	TCI in the principal amount of $10,604,163.

b.	EDC in the principal amount of $2,438,209.

7.	LSB Chemical is indebted to the following companies:

a.	TCI in the principal amount of $24,187,624 plus $4,500,0001.

b.	DSN Corporation (“DSN”) in the principal amount of $275,773.

8.	DSN is indebted to TCI in the principal amount of $18,784,414 less $4,500,0001.

9.	XpediAir, Inc. is indebted to TCI in the principal amount of $1,768,968 less $1,900,0001.

10.	ThermaClime Technologies, Inc. is indebted to TCI in the principal amount of $3,548,796 less $2,700,0001.

11.	ClimaCool Corp. (“CCC”) is indebted to TCI in the principal amount of $3,450,175 less $2,300,0001.

1 Adjustment as of October 31, 2007.

12.	Chemex I is indebted to the following companies:

a.	LSB Chemical in the principal amount of $385,282 less $150,0001.

b.	Chemex II in the principal amount of $348.

13.	LSB Holdings, Inc., a subsidiary of LSB Industries, Inc., is indebted to CCC in the principal amount of $2,705,594.

SCHEDULE 7.05

FACILITY USE/LEASES

Part I – Cherokee Site

1.	Cherokee Nitrogen Company leases from Cherokee Nitrogen Holdings, Inc. (“CNH”) the Cherokee Site and Facility Assets therein pursuant to a Lease Agreement effective January 1, 2004.

2.	Nelson Brothers LLC leases from CNH a certain portion of the Cherokee Site pursuant to a Ground Lease dated November 4, 1998, as amended.

3.	Farm Lease between CNH and Isbell Farms, effective as of January 1, 2007.

Ground Lease between United States Steel Corporation and The Industrial Development Board of the Town of Cherokee (“Board”) dated as of April 1, 1980, Lease Agreement between the Board and Airco, Inc. dated as of April 1, 1980, as amended between the Board and The BOC Group, Inc. (formerly known as Airco, Inc.) on August 1, 1993, Trust Indenture between the Board and Trust Company Bank dated as of April 1, 1980 and Indenture of Trust between the Board and First-Citizens Bank and Trust Company dated as of August 1, 1993.

5.	Airgas Specialty Products, Inc. leases from CNH a certain portion of the Cherokee Site pursuant to a Lease Agreement dated June 1, 2005.

6.	Austin Powder Company leases from CNH a certain portion of the Cherokee Site pursuant to a Real Property Lease and Easement dated effective November 1, 2007.

Part II – El Dorado Site

1.	El Dorado Chemical Company (“EDC”) leases from Northwest Financial Corporation (“NWF”) a certain portion of the El Dorado Site pursuant to a Lease Agreement dated March 7, 1988, as amended.

2.	DSN Corporation (“DSN”) leases from NWF a certain portion of the El Dorado Site pursuant to a Lease Agreement dated April 15, 2003.

3.	EDC subleases from DSN a certain portion of the El Dorado Site and the Facility Assets therein pursuant to a Sublease Agreement dated April 15, 2003.

4.	On-Site Product Supply Agreement between EDC and Air Liquide America Corporation dated May 31, 1994.

Page 1 of 1

SCHEDULE 7.08

AFFILIATE TRANSACTIONS

1.	Agreement for Raw Material Sourcing between LSB Industries, Inc. (“LSB”) and its subsidiaries.

2.	Tax Sharing Agreement between LSB and ThermaClime, Inc. (f/k/a ClimaChem, Inc. (“TCI”)).

3.	Tax Sharing Agreement between LSB and ClimateCraft, Inc. (“CLC”).

4.	Management Agreement between LSB and TCI.

5.	Lease Agreement between Prime Holdings Corporation (“PHC”) and International Environmental Corporation (“IEC”) for property at 5000 West I-40, OKC.

6.	Lease Agreement between Prime Holdings Corporation (“PHC”) and ThermaClime Technologies, Inc. (“TTI”) for property at 5000 West I-40, OKC.

7.	Railcar Services Agreement between Prime Financial Corporation (“PFC”) and El Dorado Chemical Company (“EDC”).

8.	Industrial Plant Lease between PFC and Climate Master, Inc. (“CLM”) for property at 4700 West Point Boulevard, OKC.

9.	Equipment Lease between IEC and PFC Re: Laser Center, 2 Pullmax Press Brakes and accessories

10.	Equipment Lease between IEC and PFC Re: Cabinet & Steel Rack w/ Amada Turret Press Dies and shop carts with Amada Turret Punch Press tooling.

11.	Equipment Lease between IEC and PFC Re: Bolina Cut-to-Length, 2 Optiflex 110/08 Pullmax CNC Press Brakes, and 1 Vertical Bender Hairpin Bender.

12.	Equipment Lease between IEC and PFC Re: Trumpf Laser 3040 Plus.

13.	Equipment Lease between IEC and PFC Re: T-Drill SP-55 Tube End Spinner.

14.	Equipment Lease between IEC and PFC Re: Security System.

15.	Equipment Lease between IEC and PFC Re: High Takt Assembly Line.

16.	Equipment Lease between CLM and PFC Re: IPCS Equipment

Page 1 of 5

17.	Equipment Lease between CLM and PFC Re: Optima Press Brake and accessories.

18.	Equipment Lease between CLM and PFC Re: Amada Vipros 868 King, Turret Punch Press and accessories.

19.	Equipment Lease between CLM and PFC Re: ECI equipment.

20.	Equipment Lease between CLM and PFC Re: 1996 Amada FCXBIII-8025 CNC Press Brake.

21.	Equipment Lease between CLM and PFC Re: Model HFB/1003/8 Amada Press Brake.

22.	Equipment Lease between CLM and PFC Re: Model HFB/1003/8 Amada Press Brake.

23.	Equipment Lease between CLM and PFC Re: Procix equipment.

24.	Equipment Lease between CLM and PFC Re: Trumpf 3040 Laser System.

25.	Equipment Lease between CLM and PFC Re: Trumpf 3040 Laser System.

26.	Equipment Lease between CLM and PFC Re: RAIDZone GangStor System.

27.	Equipment Lease between CLM and PFC Re: Blanking Shear.

28.	Equipment Lease between CLM and PFC Re: Amada 386 King, Vipros 30 CNC Turret Punch

29.	Equipment Lease between CLM and PFC Re: Optigun equipment.

30.	Equipment Lease between CLM and PFC Re: Burr Oak Copper Cut.

31.	Equipment Lease between CLM and PFC Re: Chiyoda SP-25ST Tube bender

32.	Equipment Lease between CLM and PFC Re: Amada FBD-125 Press Brake.

33.	Equipment Lease between CLM and PFC Re: Trumpf Laser L3040 Laser Cutting Machine.

34.	Equipment Lease between CLM and PFC Re: Trumpf Trulaser 3530.

35.	Equipment Lease between CLM and PFC Re: Ingersoll Rand Nirvana Compressor System.

36.	Equipment Lease between CLM and PFC Re: Gamma Wire Processing System.

Page 2 of 5

37.	Equipment Lease between CLM and PFC Re: Power Spray Stainless Washer.

38.	Equipment Lease between CLM and PFC Re: Three (3) Amada Press Brakes.

39.	Equipment Lease between CLM and IEC Re: Trumpf Laser 3040 Plus.

40.	Equipment Sublease between LSB and CLM Re: Blanking Shear (leased by LSB from PFC).

41.	Equipment Sublease between CLC and PFC for Trumpf Punching Machine.

42.	Equipment Lease between CLC and PFC Re: 1999 Amada HFB 1254 Promecam CNC Press Brake.

43.	Equipment Lease between CLC and PFC Re: Trumpf Tooling Set.

44.	Equipment Lease between CLC and PFC Re: 2 Accushears.

45.	Equipment Lease between CLC and PFC Re: Trumpf TC2020 Punch Machine.

46.	Equipment Lease between CLC and PFC Re: Amada CNC Hydraulic Press Brake.

47.	Equipment Lease between TTI and PFC Re: Continental Belt Washer.

48.	Equipment Lease between TTI and PFC Re: Burr Oak Fin Die.

49.	Equipment Lease between EDC and PFC Re: 2004 Chevy Impala.

50.	Equipment Lease between EDC and PFC Re: 2002 International Spreader Truck.

51.	Plant Equipment Lease between EDC and DSN Corporation

52.	Equipment Lease between Trison Construction, Inc. (“Trison”) and PFC Re: 2 John Deer Gators and 3 trailers with dove tail.

53.	Services Agreements between LSB and the following subsidiaries:

a.	Chemex II Corp.

b.	Koax Corp.

c.	Climate Master, Inc.

d.	International Environmental Corporation

e.	The Climate Control Group, Inc.

f.	LSB Chemical Corp.

g.	ClimateCraft, Inc.

h.	El Dorado Chemical Company

Page 3 of 5

i.	Chemex I Corp.

j.	ThermaClime, Inc.

k.	DSN Corporation

l.	ThermaClime Technologies, Inc.

m.	XpediAir, Inc.

n.	Trison Construction, Inc.

54.	Precious Metals Lease between LSB and EDC.

55.	Exclusive License Agreement Between CLC and ClimateCraft Technologies, Inc.

56.	Assignment of Option to Purchase between CLM and PFC Re: CLM Facility Located at 7300 S.W. 44th Street, Oklahoma City from Raptor Master LLC.

57.	Consulting Agreements between LSB Chemical Corp. (“LSB Chemical”) and various affiliates.

58.	Lease between Summit Machinery Company (“SMC”) and Trison for office space at 4000 N.W. 39th Street, OKC.

59.	Lease between XpediAir, Inc. and SMC at 4000 NW 39th Street, OKC.

60.	Warehouse Lease between CLM and SMC at 4000 NW 39th Street, OKC.

61.	Warehouse Lease between Summit Machine Tool Manufacturing Corp. (“Summit”) and ClimaCool Corp. at 518 North Indiana, OKC.

62.	Warehouse Lease between Summit and CLC at 1601 NW 4th Street, OKC.

63.	Capital Lease Agreement with Right of Transfer of Title between Summit and CLC for CLC facility in OKC.

64.	Lease of drilling equipment from LSB Holdings, Inc. to Trison.

65.	Lease of office space from SMC to TCI at 4000 NW 39th Street, OKC.

66.	Lease of office space from PFC to TCI at 16 South Pennsylvania Avenue, OKC.

67.	Lease of office space from TCI to LSB at 16 South Pennsylvania Avenue, OKC.

68.	Lease of building from LSB to Koax Corp. (“Koax”) at 510 North Indiana, OKC.

69.	Lease of warehouse space from Summit to Koax at 518 North Indiana, OKC.

Page 4 of 5

70.	Lease of office space from PFC to LSB Chemical at 16 South Pennsylvania Avenue, OKC.

71.	Lease of office space from SMC to The Climate Control Group, Inc. (“CCG”) at 4000 NW 39th Street, OKC.

72.	Lease of office space from SMC to IEC at 4000 NW 39th Street, OKC.

73.	Computer rental from LSB to TCI.

74.	Auto rental from LSB to TCI.

75.	Auto rental from LSB to CCG.

76.	Auto rental from PFC to CCG.

77.	See Schedules 5.05, 7.03 and 7.05.

Page 5 of 5

SCHEDULE 7.09

RESTRICTIVE AGREEMENTS

Amended and Restated Loan and Security Agreement dated as of November ____, 2007, by and among ThermaClime, Inc. and each of the Subsidiaries of ThermaClime identified on the signature pages thereof, LSB Industries, Inc., the lenders identified on the signature pages thereof and Wells Fargo Foothill, Inc., as the arranger and administrative agent for the Lenders, as amended.

2.	Equipment Purchase and Security Agreement between International Environmental Corporation and Amada America, Inc., dated June 27, 2003.*

3.	Capital Lease Agreement with Right of Transfer of Title by and between Summit Machine Tool Manufacturing Corp. and ClimateCraft, Inc., effective December 31, 1999, as amended.*

4.	Loan Agreement between The City of Oklahoma City and ClimateCraft, Inc., dated December 23, 1999.*

*These agreements relate to equipment and property not part of Collateral. The restrictions (including lien restrictions) are limited to the equipment and property that are the subject of such agreements.

Schedule 11.02

Addresses for Notices; Payment Information

BORROWERS: PARENT:

ThermaClime, Inc.

16 South Pennsylvania Avenue

Oklahoma City, Oklahoma 73107

Attention: Tony M. Shelby, Ex. V.P.

Tel: 405-235-4546

Fax: 405-235-5067

with copy to:

ThermaClime, Inc.

16 South Pennsylvania Avenue

Oklahoma City, Oklahoma 73107

Attention: David Shear, General Counsel

Tel: 405-235-4546

Fax: 405-236-1209

LSB Industries, Inc.

16 South Pennsylvania Avenue

Oklahoma City, Oklahoma 73107

Attention: Tony M. Shelby, Ex. V.P.

Tel: 405-235-4546

Fax: 405-235-5067

with copy to:

LSB Industries, Inc.

16 South Pennsylvania Avenue

Oklahoma City, Oklahoma 73107

Attention: David Shear, General Counsel

Tel: 405-235-4546

Fax: 405-236-1209

AGENTS:

Addresses for Notices	Payment Information

Banc of America Leasing & Capital LLC, as Collateral Agent Mail Code: GA3-003-04-01 Northeast Center Building 2059 Northlake Pkwy Tucker GA 30084-5399 Attn: Shelley B. LaCagnin Vice President - Operations Manager Tel: 770-270-8590 Fax: 770-270-8638	Bank: Bank of America Address: Concord, CA ABA: 026 009 593 Account No: 1233401992 Account Name: Banc of America Leasing & Capital, LLC Attention: Benny Sumardi Reference: ThermaClime
Banc of America Leasing & Capital LLC, as Administrative Agent Mail Code: MA5-100-32-01 100 Federal St Boston MA 02110 Attn: Annemarie L. Warren Vice President - Group Operations Manager Tel: 617-434-3611 Fax: 617-434-0532	Bank: Bank of America Address: Concord, CA ABA: 026 009 593 Account No: 1233401992 Account Name: Banc of America Leasing & Capital, LLC Attention: Benny Sumardi Reference: ThermaClime

Page 1 of 3

Addresses for Notices

Payment Information


Bank of Utah, as Payment Agent ATTN: Corporate Trust Services 200 E. South Temple, Suite 210 Salt Lake City, UT 84111 Phone: (801) 924-3690 Fax: (801) 746-3519	Bank: Bank of Utah ABA No. 124-300-107 Acct. No. 01020296 Re: ThermaClime Acct. No. 8000099
LENDERS:

Addresses for Notices

Banc of America Leasing & Capital LLC, Northeast Center Building Mail Code: GA3-003-04-01 2059 Northlake Pkwy Tucker GA 30084-5399 Attn: Shelley B. LaCagnin Vice President - Operations Manager Tel: 770-270-8590 Fax: 770-270-8638


With Copy to: Banc of America Leasing & Capital LLC One Financial Plaza, 2nd Floor Mail Code: R11-537-02-01 http://corpdir.bankofamerica.com/staffresults.asp?txtField1Name=mailunit&txtField1Type=is&txtField1V Providence, RI 02903 Attn: Lee Bonaldi Vice President - Credit Underwriting Tel: 401-278-7655 Fax: 401-719-8344

Page 2 of 3

Addresses for Notices


Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services Inc. 222 N. LaSalle Street, 16th Floor Chicago, IL 60601 Attention: Gary Modesto Vice President, Group Credit Manager Tel: 312-750-6204 Fax: 312-316-3422 Email: Gary_Modesto@ml.com


Arvest Bank 3900 N. Lincoln Boulevard Oklahoma City, OK 73105 Attn: Cindy Batt Sr. Vice President & Corporate Division Manager Tel: 405-523-4169 Fax: 405-523-4126 Email: cbatt@arvest.com

Page 3 of 3

EXHIBIT A

FORM OF TERM NOTE

$_____________ 60; _____________, 2007

FOR VALUE RECEIVED, each of THERMACLIME, INC. (“ThermaClime”) and each of the undersigned Affiliates of ThermaClime (each a “Borrower” and collectively the “Borrowers”) hereby jointly and severally promises to pay to _____________________ or registered assigns (the “Lender”), in accordance with the provisions of the Agreement (as hereinafter defined), the principal amount of the Term Loan made by the Lender to the Borrower under that certain Term Loan Agreement, dated as of ___________, 2007 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement;” the terms defined therein being used herein as therein defined), among the Borrowers, each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), Banc of America Leasing & Capital, LLC, as Administrative Agent and Collateral Agent, and Bank of Utah, as Payment Agent.

Each Borrower, jointly and severally, promises to pay interest on the unpaid principal amount of such Lender’s Term Loan from the date of such Term Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. All payments of principal and interest shall be made to the Collateral Agent for the account of the Lender at the Collateral Agent’s Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement.

This note is one of the Term Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. This Term Note is also entitled to the benefits of the Guaranty and is secured by the Collateral Documents. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Term Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. The Term Loan made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Term Note and endorse thereon the date, amount, currency and maturity of its Term Loans and payments with respect thereto.

Each Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Term Note.

Exhibit A-1

THIS TERM NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

THERMACLIME, INC.

CHEROKEE NITROGEN HOLDINGS, INC.,

NORTHWEST FINANCIAL CORPORATION,

CHEMEX I CORP.,

CHEMEX II CORP.,

CHEROKEE NITROGEN COMPANY,

CLIMACOOL CORP.,

CLIMATECRAFT, INC.,

CLIMATE MASTER, INC.,

DSN CORPORATION,

EL DORADO CHEMICAL COMPANY,

INTERNATIONAL ENVIRONMENTAL CORPORATION,

KOAX CORP.,

LSB CHEMICAL CORP.,

THE CLIMATE CONTROL GROUP, INC.,

TRISON CONSTRUCTION, INC.,

THERMACLIME TECHNOLOGIES, INC.,

XPEDIAIR, INC.

By:

Name:

Title:

Exhibit A-2

LOANS AND PAYMENTS WITH RESPECT THERETO

Date	Type of Loan Made	Amount of Loan Made	End of Interest Period	Amount of Principal or Interest Paid This Date	Outstanding Principal Balance This Date	Notation Made By
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________
_________	_________	_________	_____________	_____________	___________	________

Exhibit A of 3

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

Financial Statement Date: ______, ____

To: Bank of Utah, as Payment Agent

Ladies and Gentlemen:

Reference is made to that certain Term Loan Agreement, dated as of ____________, 2007 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement;” the terms defined therein being used herein as therein defined), among THERMACLIME, INC. (“ThermaClime”) and certain Affiliates of ThermaClime, as borrowers (with ThermaClime, collectively, the “Borrowers” and each a “Borrower”), LSB Industries, Inc., as guarantor (“Parent”), each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), Banc of America Leasing & Capital, LLC, as Administrative Agent and Collateral Agent, and Bank of Utah, as Payment Agent.

The undersigned hereby certifies as of the date hereof that he/she is the [chief executive officer/chief financial officer/treasurer/controller] of each of Parent and ThermaClime, and that, as such, he/she is authorized to execute and deliver this Certificate to the Collateral Agent on the behalf of each of Parent and ThermaClime, and that:

[Use following paragraph 1 for fiscal year-end financial statements]

1. Each of Parent and ThermaClime has delivered the year-end audited financial statements required by Section 6.01(a) of the Agreement for the fiscal year of Parent or ThermaClime, as applicable, ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section.

[Use following paragraph 1 for fiscal quarter-end financial statements]

1. Each of Parent and ThermaClime has delivered the unaudited financial statements required by Section 6.01(b) of the Agreement for the fiscal quarter of Parent or ThermaClime, as applicable, ended as of the above date. Such financial statements fairly present the financial condition, results of operations and cash flows of Parent or ThermaClime, as applicable, and its Subsidiaries in accordance with GAAP as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes.

2. The undersigned has reviewed and is familiar with the terms of the Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of Parent and the Borrowers during the accounting period covered by such financial statements.

3. A review of the activities of Parent and the Borrowers during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period a Default has occurred under the Loan Documents, and

Exhibit B-1

[select one:]

[to the knowledge of the undersigned, during such fiscal period each of Parent and the Borrowers was in compliance with each covenant and condition of the Loan Documents applicable to it, and no Default has occurred and is continuing.]

--or--

[to the knowledge of the undersigned, during such fiscal period the following is a list of each Default that occurred and its nature and status:]

4. The financial covenant analyses and information set forth on Schedule 1 attached hereto are true and accurate on and as of the date of this Certificate.

IN WITNESS WHEREOF, the undersigned has executed this Certificate as of _________, 200[_].

THERMACLIME, INC.

By:

Name:

Title:

LSB INDUSTRIES, INC.

By:

Name:

Title:

Exhibit B-2

SCHEDULE 1

to the Compliance Certificate

1. Consolidated Leverage Ratio. [If applicable.]

(a) The Consolidated Leverage Ratio of ThermaClime and its Subsidiaries (the “ThermaClime Entities”) for such period is calculated as follows:

(i)

Consolidated Total Indebtedness as of the financial statement date:

$______________

(ii)

Borrowers’ Consolidated EBITDA for such period:

$______________

The ratio of item (i) to (ii) = Consolidated Leverage Ratio = ___ : ___

(b) The Consolidated Leverage Ratio set forth above [is/is not] greater than or equal to the amount set forth in Section 7.11(a) of the Loan Agreement for such period, which is 4.50 to 1.00.

2. Consolidated Fixed Charge Coverage Ratio.

(a) The Consolidated Fixed Charge Coverage Ratio of the ThermaClime Entities for such period is calculated as follows:

(i)

Consolidated EBITDA of the ThermaClime Entities for the most recently completed four fiscal quarters (the “Measurement Period”):

$_________________

(ii)

Aggregate amount of all Capital Expenditures made during the Measurement Period by the ThermaClime Entities on a consolidated basis ($_________________), but excluding any such payments to the extent financed through the incurrence of additional Indebtedness ($_________________):$________________

(iii)

Aggregate amount of federal, state, local and foreign income taxes paid in cash, in each case of or by the TheramClime Entities for the most recently completed Measurement Period:

$________________

(iv)

Consolidated Interest Charges:

$________________

(v)

Aggregate principal amount of all regularly scheduled principal payments or redemptions or similar acquisitions for value of outstanding debt for borrowed money for ThermaClime on a consolidated basis during such Measurement Period1:

$________________

1 Excluding (a) prepayments of principal under the Revolving Credit Agreement which are not accompanied by or give rise to a reduction in the aggregate outstanding commitments under the Revolving Credit Agreement and not

Exhibit B-3

(vi)

All amounts paid or payable by the ThermaClime Entities on Capitalized Lease Obligations having a scheduled due date during such Measurement Period:

$_____________

(vii)

Dividends paid by ThermaClime to Parent during such Measurement Period:

$_____________

The ratio of items (i) minus (ii) minus (iii) divided by the sum of items (iv) plus (v) plus (vi) = Consolidated Fixed Charge Coverage Ratio ___ : ___

(b) The Consolidated Fixed Charge Coverage Ratio set forth above [is/is not] greater than or equal to the amount set forth in Section 7.11(b) of the Loan Agreement for the Measurement Period, which is 1.10 to 1.00.

including the final scheduled payment of amounts due under the Revolving Credit Agreement at maturity and (b) payment at maturity of the Indebtedness of ThermaClime to Parent under the $6,950,000 10 3/4 % bonds maturing in November 2007, provided that Parent is the sole holder of such Indebtedness and such Indebtedness is at all times subject to the terms of the Intercompany Loan Subordination Agreement.

Exhibit B-4

EXHIBIT C

FORM OF BORROWING NOTICE

Date: ___________, 2007

To: Bank of Utah, as Payment Agent

Ladies and Gentlemen:

Reference is made to that certain Term Loan Agreement, dated as of __________, 2007 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement;” the terms defined therein being used herein as therein defined), among THERMACLIME, INC. (“ThermaClime”) and certain Affiliates of ThermaClime, as borrowers (collectively, the “Borrowers” and each a “Borrower”), LSB Industries, Inc., as guarantor, each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), Banc of America Leasing & Capital, LLC, as Administrative Agent and Collateral Agent, and Bank of Utah, as Payment Agent.

The undersigned Borrowers hereby request the borrowing of the Term Loans:

1. On ______________________ (a Business Day at least one (1) Business Day following the date of this notice).

2. In the amount of $________________.

3. The proceeds of which shall be disbursed as follows:

[INCLUDE WIRE TRANSFER INSTRUCTIONS]

THERMACLIME, INC.

CHEROKEE NITROGEN HOLDINGS, INC.,

NORTHWEST FINANCIAL CORPORATION,

CHEMEX I CORP.,

CHEMEX II CORP.,

CHEROKEE NITROGEN COMPANY,

CLIMACOOL CORP.,

CLIMATECRAFT, INC.,

CLIMATE MASTER, INC.,

DSN CORPORATION,

EL DORADO CHEMICAL COMPANY,

INTERNATIONAL ENVIRONMENTAL CORPORATION,

KOAX CORP.,

LSB CHEMICAL CORP.,

THE CLIMATE CONTROL GROUP, INC.,

TRISON CONSTRUCTION, INC.,

THERMACLIME TECHNOLOGIES, INC.,

XPEDIAIR, INC.

By:

Name:

Title:

EXHIBIT D

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (this “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between [the][each] 2 Assignor identified in item 1 below ([the][each, an] “Assignor”) and [the][each] 3 Assignee identified in item 2 below ([the][each, an] “Assignee”). [It is understood and agreed that the rights and obligations of [the Assignors][the Assignees] 4 hereunder are several and not joint.] 5 Capitalized terms used but not defined herein shall have the meanings given to them in the Term Loan Agreement identified below (the “Loan Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, [the][each] Assignor hereby irrevocably sells and assigns to [the Assignee][the respective Assignees], and [the][each] Assignee hereby irrevocably purchases and assumes from [the Assignor][the respective Assignors], subject to and in accordance with the Standard Terms and Conditions and the Loan Agreement, as of the Effective Date inserted by the Collateral Agent as contemplated below (i) all of [the Assignor’s][the respective Assignors’] rights and obligations in [its capacity as a Lender][their respective capacities as Lenders] under the Loan Agreement, the Loan Documents and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of [the Assignor][the respective Assignors] under the respective facilities identified below and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of [the Assignor (in its capacity as a Lender)][the respective Assignors (in their respective capacities as Lenders)] against any Person, whether known or unknown, arising under or in connection with the Loan Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned by [the][any] Assignor to [the][any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as [the][an] “Assigned Interest”). Each such sale and assignment is without recourse to [the][any] Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by [the][any] Assignor.

________________________________________

2 For bracketed language here and elsewhere in this form relating to the Assignor(s), if the assignment is from a single Assignor, choose the first bracketed language. If the assignment is from multiple Assignors, choose the second bracketed language.

3 For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language. If the assignment is to multiple Assignees, choose the second bracketed language.

4 Select as appropriate.

5 Include bracketed language if there are either multiple Assignors or multiple Assignees.

Exhibit D-1

Assignor[s]:

Assignee[s]:

[for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]]

Borrower(s):

ThermaClime, Inc. and certain of its Affiliates

4.	Collateral Agent: Banc of America Leasing & Capital, LLC, as the collateral agent under the Loan Agreement

Loan Agreement: Term Loan Agreement, dated as of ___________, 2007, among THERMACLIME, INC. and certain Affiliates of ThermaClime, as borrowers (collectively, the “Borrowers” and each a “Borrower”), LSB Industries, Inc., as guarantor, each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), Banc of America Leasing & Capital, LLC, as Administrative Agent and Collateral Agent, and Bank of Utah, as Payment Agent.

6.	Assigned Interest[s]:

Assignor[s] 6	Assignee[s] 7	Facility Assigned	Aggregate Amount of Term Loans for all Lenders 8	Amount of Term Loans Assigned	Percentage Assigned of Term Loans 9
		Term Loans	$___________	$___________	_________%
		Term Loans	$___________	$___________	_________%
		Term Loans	$___________	$___________	_________%

[Trade Date:

__________________]10

Effective Date: __________________, 20__ [TO BE INSERTED BY COLLATERAL AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

6 List each Assignor, as appropriate.

7 List each Assignee, as appropriate.

8 Amounts in this column and in the column immediately to the right to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

9 Set forth, to at least 9 decimals, as a percentage of the Term Loans of all Lenders thereunder.

10 To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date.

Exhibit D-2

The terms set forth in this Assignment and Assumption are hereby agreed to:

ASSIGNOR

[NAME OF ASSIGNOR]

By:

Title:

ASSIGNEE

[NAME OF ASSIGNEE]

By:

Title:

[Consented to and]11 Accepted:

BANC OF AMERICA LEASING & CAPITAL, LLC,

as Collateral Agent

By:

Title:

[Consented to:]12

THERMACLIME, INC.

By:

Title:

10 To be added only if the consent of the Collateral Agent is required by the terms of the Loan Agreement.

11 To be added only if the consent of the Company is required by the terms of the Loan Agreement.

Exhibit D-3

ANNEX 1 TO ASSIGNMENT AND ASSUMPTION

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties.

1.1. Assignor. [The][Each] Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of [the][[the relevant] Assigned Interest, (ii) [the][such] Assigned Interest is free and clear of any lien, encumbrance or other adverse claim created by Assignor and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Loan Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of any Borrower, any of their Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by any Borrower, any of their Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee. [The][Each] Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Loan Agreement, (ii) it meets all the requirements to be an assignee under the definition of “Eligible Assignee” and Sections 11.06(b)(iii), (v) and (vi) of the Loan Agreement (subject to such consents, if any, as may be required under Section 11.06(b)(iii) of the Loan Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Loan Agreement and other Loan Documents to which it is bound as a Lender thereunder and, to the extent of [the][the relevant] Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by [the][such] Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire [the][such] Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Loan Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Section 6.01 thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, (vi) it has, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, and (vii) if it is a Foreign Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms of the Loan Agreement, duly completed and executed by [the][such] Assignee; and (b) agrees that (i) it will, independently and without reliance upon any Agent, [the][any] Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

Exhibit D-4

2. Payments. From and after the Effective Date, the Collateral Agent shall make all payments in respect of [the][each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the][the relevant] Assignor for amounts which have accrued to but excluding the Effective Date and to [the][the relevant] Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

Exhibit D-5

EXHIBIT E

SECURITY AGREEMENT

This SECURITY AGREEMENT, dated as of November 2, 2007 (as amended, supplemented, amended and restated or otherwise modified from time to time, this “Security Agreement”), is made by CHEROKEE NITROGEN HOLDINGS, INC., an Oklahoma corporation, NORTHWEST FINANCIAL CORPORATION, an Oklahoma corporation, CHEROKEE NITROGEN COMPANY, an Oklahoma corporation, DSN CORPORATION, an Oklahoma corporation, and EL DORADO CHEMICAL COMPANY, an Oklahoma corporation, (each individually a “Grantor” and collectively, the “Grantors”), in favor of BANC OF AMERICA LEASING & CAPITAL LLC, as the collateral agent (together with its successor(s) thereto in such capacity, the “Collateral Agent”) for each of the Secured Parties.

W I T N E S S E T H :

WHEREAS, pursuant to a Term Loan Agreement, dated as of November 2, 2007 (as amended, supplemented, amended and restated or otherwise modified from time to time, the “Loan Agreement”), among ThermaClime, Inc., an Oklahoma corporation (“ThermaClime”), and certain subsidiaries and an affiliate of ThermaClime including each of the Grantors, as borrowers (collectively, together with ThermaClime, the “Borrowers”), LSB Industries, Inc., as guarantor, the various financial institutions and other Persons from time to time party thereto, Banc of America Leasing & Capital, LLC, as administrative agent, and the Collateral Agent, the Lenders have agreed, subject to the terms and conditions set forth in the Loan Agreement, to make Term Loans to the Borrowers; and

WHEREAS, as a condition precedent to the making of the Term Loans under the Loan Agreement, each Grantor is required to execute and deliver this Security Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders to make Term Loans to the Grantors and the other Borrowers, each Grantor agrees, for the benefit of each Secured Party, as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Security Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof):

“Accounts” means all of Borrowers’ now owned or hereafter acquired right, title and interest with respect to “accounts” (as that term is defined in the UCC), and any and all supporting obligations in respect thereof.

“Books” means all of each Borrower’s now owned or hereafter acquired books and records (including all of its records indicating, summarizing, or evidencing its assets (including the UCC Collateral) or liabilities, all of its records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information).

“Cherokee Collateral” means (a) the Cherokee Plant, (b) all Material Contracts, Assigned Agreements, Support Rights and Interests, Intellectual Property Collateral, and Permits, (c) all data bases, skill, experience, processes, models, drawings, manuals, materials, records and all other Cherokee General Intangibles, (d) all insurance proceeds arising in connection with the Cherokee Plant or used in or necessary to conduct the Facility Business or the operation or maintenance of the Facility Assets, and (e) all Proceeds of the Cherokee Collateral described in clauses (a) through (d) above; provided, however, the Cherokee Collateral shall not include any of the Excluded Assets.

“Cherokee General Intangibles” means the General Intangibles which, in whole or in part, relate to the Cherokee Plant or are used in or necessary to conduct the Facility Business or the operation or maintenance of the Facility Assets.

“Cherokee Plant” means (a) the Cherokee Site and (b) the land, land improvements, buildings, Fixtures, Equipment (including, without limitation, chemical processing equipment, office equipment, barge unloading equipment and laboratory equipment), the Kellogg Company ammonia processing plant, the Chemical Industrial Engineers Company nitric acid plant, the D.M. Weatherly Company nitric acid plant, the Technip Company UREA plant, the ammonium nitrate prill plant, a pollution control and irrigation system, cooling towers, a demineralizer, transformers, substations, storage tanks, office furniture, computers and software, vehicles and forklift trucks (other than rolling stock or titled vehicles), an auxiliary boiler, a deaerator system, product storage tanks, air compressors, an electrical substation and transformers, process plant piping, pumps and wiring, and other tangible assets located on the Cherokee Site or used in or necessary to the conduct of the Facility Business or the operation or maintenance of the Facility Assets at the Cherokee Site from time to time, including, without limitation, as described on Part A of Schedule 1.1(a).

“Cherokee Site” means the real property described on Schedule 1.1(b).

“Collateral” is defined in Section 2.1.

“Collateral Agent” is defined in the preamble.

“El Dorado Collateral” means (a) the El Dorado Plant, (b) all Material Contracts, Assigned Agreements, Support Rights and Interests, Intellectual Property Collateral, and Permits, (c) all data bases, data, skill, experience, processes, models, drawings, manuals, materials, records and all other El Dorado General Intangibles, (d) all insurance proceeds arising in connection with the El Dorado Plant or used in or necessary to conduct the Facility Business or the operation or maintenance of the Facility Assets, and (e) all Proceeds of the El Dorado Collateral described in clauses (a) through (d) above; provided, however, the El Dorado Collateral shall not include any of the Excluded Assets.1

______________________________________________

1 Final Collateral descriptions are subject to final update and modification by the Appraiser.

- 2 - -

“El Dorado General Intangibles” means General Intangibles which, in whole or in part, relate to the El Dorado Plant or are used in or necessary to conduct the Facility Business or the operation or maintenance of the Facility Assets.

“El Dorado Plant” means (a) the El Dorado Site and (b) the land, land improvements, buildings, Fixtures, Equipment (including, without limitation, chemical processing equipment, office equipment, maintenance and machine shop equipment and laboratory equipment), the Chemico east/west weak nitric plant, the Chemico sulfuric acid plant, the Chemico E2 high-density ammonium nitrate prill plant, the K-T lo-density ammonium nitrate prill plant, a 100 TPD mixed acids plant, the D.M. Weatherly nitric acid plant, the UHDE 285 TPD direct strong nitric acid processing plant, the CB&I tank farm including ammonia storage spheres, a refrigerated ammonia tank and ammonia storage tanks, a plant steam generation system including Babcock & Wilcox processing boilers, a plant electrical generation system including substations and transformers, a wastewater ph neutralization system, a pollution control and irrigation system, cooling towers, air compressors, transformers, substations, storage tanks, office furniture, computers and software, vehicles, forklift trucks (other than rolling stock or titled vehicles), process plant piping, pumps and wiring, and other tangible assets located on the El Dorado Site or used in or necessary to the conduct of the Facility Business or the operation or maintenance of the Facility Assets at the El Dorado Site from time to time, including, without limitation, as described on Part B of Schedule 1.1(a).

“El Dorado Site” means the real property described on Schedule 1.1(c).

“Equipment” means all “equipment” as such term is defined in the UCC, now owned or hereafter acquired by any Grantor and located on the Cherokee Site or the El Dorado Site or used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets at either of the Sites, including all such Grantor’s machinery and equipment, including processing equipment, conveyors, machine tools, data processing and computer equipment, including embedded software and peripheral equipment, and all engineering, processing and manufacturing equipment, office machinery, furniture, materials, handling equipment, tools, attachments, accessories, automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor vehicles (other than rolling stock or titled vehicles), other equipment of every kind and nature, trade fixtures and fixtures not forming a part of real property, together with all additions and accessions thereto, replacements therefor, all parts therefor, all substitutes for any of the foregoing, fuel therefor, and all manuals, drawings, instructions, warranties and rights with respect thereto, and all products and proceeds thereof and condemnation awards and insurance proceeds with respect thereto.

“Excluded Assets” means (i) all titled vehicles, railcars, rolling stock, Accounts, Non Facility General Intangibles and Books, Inventory, Investment Property, and Negotiable Collateral, (ii) all insurance proceeds relating to the assets described in clause (i) above, and (iii) all Proceeds of the assets described in clauses (i) and (ii) above.

“Facility Business” means the business conducted by the Borrowers at the Cherokee Site and the El Dorado Site.

- 3 - -

“Fixtures” means all “fixtures” as such term is defined in the UCC, now owned or hereafter acquired by any Grantor.

“General Intangibles” means all of Grantor’s now owned or hereafter acquired right, title, and interest with respect to “general intangibles” as that term is defined in the UCC (including contract rights, proprietary rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, and catalogs) and any and all supporting obligations in respect thereof.

“Grantor” and “Grantors” are defined in the preamble.

“Intellectual Property Collateral” means patents, patent rights, copyrights, works which are the subject matter of copyrights, trademarks, service marks, trade names, trade styles, patent applications, trademark applications and service mark applications, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge and know-how used in or necessary to the conduct of the Facility Business or the operation and maintenance of the Facility Assets from time to time, and any licenses and rights related to any of the foregoing, including without limitation, with respect to the Grantors, those patents, trademarks, service marks, trade names, and copyright registrations set forth on Schedule 3.4 to this Security Agreement and all other rights under any of the foregoing, all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing.

“Inventory” means all Borrowers’ now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by a Borrower as lessor, goods that are furnished by a Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in a Borrower’s business.

“Investment Property” means all of Borrowers’ now owned or hereafter acquired right, title and interest with respect to “investment property” as that term is defined in the UCC, and any and all supporting obligations in respect thereof.

“Loan Agreement” is defined in the first recital.

“Negotiable Collateral” means all of Borrowers’ now owned or hereafter acquired right, title and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof.

- 4 - -

“Non Facility General Intangibles and Books” means General Intangibles and Books of Borrowers, but excluding all (i) Cherokee General Intangibles, (ii) El Dorado General Intangibles and (iii) Intellectual Property Collateral.2

“Proceeds” has the meaning set forth in Article 9 of the UCC.

“Security Agreement” is defined in the preamble.

SECTION 1.2. Loan Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Security Agreement, including its preamble and recitals, have the meanings provided in the Loan Agreement.

ARTICLE II

SECURITY INTEREST

SECTION 2.1. Grant of Security Interest. Each Grantor hereby grants to the Collateral Agent, for its benefit and the ratable benefit of each other Secured Party, a continuing security interest in all of such Grantor’s following property, whether now or hereafter existing, owned or acquired by such Grantor, and wherever located (collectively, the “Collateral”):

(a) the Cherokee Collateral;

(b) the El Dorado Collateral;

(c) all books, records, writings, databases, information and other property relating to or used in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing in this Section or the Facility Business; and

(d) all Proceeds of the foregoing and, to the extent not otherwise included,

(i) all payments under insurance (whether or not the Collateral Agent is the loss payee thereof) and (ii) all tort claims relating to the foregoing.

Notwithstanding anything hereto the contrary, the Collateral shall not include any of the Excluded Assets.

SECTION 2.2. Security for Obligations. This Security Agreement and the Collateral in which the Collateral Agent for the benefit of the Secured Parties is granted a security interest hereunder by the Grantors secure the payment and performance of all of the Obligations.

SECTION 2.3. Grantors Remain Liable. Anything herein to the contrary notwithstanding:

__________________________________

2 Note to Foothill: As we discussed, to the extent that any books, records or intellectual property items are carved out of your collateral by clauses (i), (ii) and (iii), Foothill is given access and a license to use these items in the Inter-Lender Agreement.

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(a) the Grantors will remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and will perform all of their duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed;

(b) the exercise by the Collateral Agent of any of its rights hereunder will not release any Grantor from any of its duties or obligations under any such contracts or agreements included in the Collateral; and

(c) no Secured Party will have any obligation or liability under any contracts or agreements included in the Collateral by reason of this Security Agreement, nor will any Secured Party be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

SECTION 2.4. Security Interest Absolute, etc. This Security Agreement shall in all respects be a continuing, absolute, unconditional and irrevocable grant of security interest, and shall remain in full force and effect until the Obligations have been indefeasibly paid in full. All rights of the Secured Parties and the security interests granted to the Collateral Agent (for its benefit and the ratable benefit of each other Secured Party) hereunder, and all obligations of the Grantors hereunder, shall, in each case, be absolute, unconditional and irrevocable irrespective of:

(a) any lack of validity, legality or enforceability of any Loan Document;

(b) the failure of any Secured Party (i) to assert any claim or demand or to enforce any right or remedy against any Loan Party or any other Person (including any other Grantor) under the provisions of any Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor (including any other Grantor) of, or collateral securing, any Obligations;

(c) any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations, or any other extension, compromise or renewal of any Obligations;

(d) any reduction, limitation, impairment or termination of any Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and each Grantor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations or otherwise;

(e) any amendment to, rescission, waiver, or other modification of, or any consent to or departure from, any of the terms of any Loan Document;

(f) any addition, exchange or release of any collateral or of any Person that is (or will become) a grantor (including the Grantors hereunder) of the Obligations, or any surrender or non-perfection of any collateral, or any amendment to or waiver or release or addition to, or consent to or departure from, any other guaranty held by any Secured Party securing any of the Obligations; or

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(g) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, any Loan Party, any surety or any guarantor.

SECTION 2.5. Postponement of Subrogation. Each Grantor agrees that it will not exercise any rights against another Grantor which it may acquire by way of rights of subrogation under any Loan Document to which it is a party until the Indefeasible Payment and Performance of All Obligations has occurred. No Grantor shall seek or be entitled to seek any contribution or reimbursement from any Loan Party, in respect of any payment made under any Loan Document, until after the Indefeasible Payment and Performance of All Obligations has occurred. Any amount paid to such Grantor on account of any such subrogation rights prior to the indefeasible payment in full of the Obligations shall be held in trust for the benefit of the Secured Parties and shall immediately be paid and turned over to the Collateral Agent for the benefit of the Secured Parties in the exact form received by such Grantor (duly endorsed in favor of the Collateral Agent, if required), to be credited and applied against the Obligations, whether matured or unmatured, in accordance with Section 6.1. In furtherance of the foregoing, at all times prior to the Indefeasible Payment and Performance of All Obligations, such Grantor shall refrain from taking any action or commencing any proceeding against any Loan Party (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Security Agreement to any Secured Party. The foregoing provisions of this Section 2.5 are in addition to and not by way of limitation of the provisions set forth in Article XI of the Loan Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

In order to induce the Secured Parties to enter into the Loan Agreement and make the Term Loans, the Grantors represent and warrant to each Secured Party as of the date hereof, the date of the Borrowing Notice and the Borrowing Date, as set forth below.

SECTION 3.1. Grantor Name, Location, etc.

(a) The jurisdiction in which each Grantor is located for purposes of Sections 9-301 and 9-307 of the UCC is set forth in Part A of Schedule 3.1.

(b) Each location a secured party would have filed a UCC financing statement in the five years prior to the date hereof to perfect a security interest in Equipment and General Intangibles owned by such Grantor is set forth in Part B of Schedule 3.1.

(c) The Grantors do not have any trade names (other than the respective corporate names of the Grantors except to the extent such names or portions thereof are used in any other trade names) other than those set forth in Part C of Schedule 3.1.

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(d) During the four months preceding the date hereof, no Grantor has been known by any legal name different from the one set forth on the signature page hereto, nor has such Grantor been the subject of any merger or other corporate reorganization, except as set forth in Part D of Schedule 3.1 hereto.

(e) Each Grantor’s federal taxpayer identification number is (and, during the four months preceding the date hereof, such Grantor has not had a federal taxpayer identification number different from that) set forth in Part E of Schedule 3.1 hereto.

(f) The name set forth on the signature page attached hereto is the true and correct legal name (as defined in the UCC) of each Grantor.

SECTION 3.2. Ownership, No Liens, etc. Each Grantor has rights in or the power to transfer the Collateral, and owns its Collateral free and clear of any Lien, except for any security interest (a) created by this Security Agreement or (b) that is a Permitted Encumbrance. No effective UCC financing statement or other filing similar in effect (other than Permitted Encumbrances solely with respect to a filing similar in effect) covering all or any part of the Collateral is on file in any recording office, except those filed in favor of the Collateral Agent relating to this Security Agreement or as to which a duly authorized termination statement relating to such UCC financing statement or other instrument has been delivered to the Collateral Agent on the Closing Date. There are no parties to the Intercompany Leases other than the Grantors.

SECTION 3.3. Possession of Equipment. Each Grantor has, and agrees that it will maintain, exclusive possession of its Equipment constituting Collateral, other than (i) Equipment in transit in the ordinary course of business and (ii) Equipment that is in the possession or control of a warehouseman, bailee agent or other Person (other than a Person controlled by or under common control with the applicable Grantor) which other Person holds such Equipment in the ordinary course of its business for purposes of repairing or maintaining such Equipment. In the case of Equipment described in clause (ii) above, no lessor or warehouseman of any premises or warehouse upon or in which such Equipment is located has (i) issued any warehouse receipt or other receipt in the nature of a warehouse receipt in respect of any such Equipment, (ii) issued any document for any such Equipment, (iii) received notification of any Secured Party’s interest (other than the security interest granted hereunder) in any such Equipment or (iv) any Lien on any such Equipment.

SECTION 3.4. Intellectual Property Collateral.

(a) In respect of the Intellectual Property Collateral:

(i) set forth in Part A of Schedule 3.4 hereto is a complete and accurate list of all issued and applied-for patents and all patent licenses owned by each Grantor and used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets, including those that have been issued by or are on file with the United States Patent and Trademark Office;

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(ii) set forth in Part B of Schedule 3.4 hereto is a complete and accurate list all registered and applied-for trademarks and all trademark licenses owned by each Grantor and used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets, including those that are registered, or for which an application for registration has been made, with the United States Patent and Trademark Office;

(iii) set forth in Part C of Schedule 3.4 hereto is a complete and accurate list of all registered and applied-for copyrights and all copyright licenses owned by each Grantor and used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets, including those that are registered, or for which an application for registration has been made, with the United States Copyright Office;

(iv) the Grantors are the sole and exclusive owners of the entire and unencumbered rights, title and interest in and to the Intellectual Property Collateral (except for the Permitted Encumbrances), and no claim has been made that any such Grantor is or may be, in conflict with, infringing, misappropriating, diluting, misusing or otherwise violating any of the rights of any third party or that challenges the ownership, use, protectability, registerability, validity, enforceability of any Intellectual Property Collateral and, to such Grantor’s knowledge, there is no valid basis for any such claims, and the Grantors have not licensed the Intellectual Property Collateral to any Affiliates or any third parties.

(b) In respect of each Grantor:

(i) the Intellectual Property Collateral owned by it is valid, subsisting, and enforceable and has not been abandoned or adjudged invalid or unenforceable, in whole or in part, and no consents from third parties are required in connection with the collateral assignment to the Collateral Agent of any licenses constituting Intellectual Property Collateral;

(ii) such Grantor has made all necessary filings and recordings, including recordings in the United States Patent and Trademark Office and the United States Copyright Office, as appropriate, to protect its interest in (x) the Intellectual Property Collateral that is set forth in Part B of Schedule 3.4 and (y) all other Intellectual Property used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets, which in the case of clause (y) would have a Material Adverse Effect if Grantor failed to make such filings or recordings;

(iii) no action by such Grantor is currently pending or threatened in writing which asserts that any third party is infringing, misappropriating, diluting, misusing or voiding any Intellectual Property Collateral and, to such Grantor’s knowledge, no third party is infringing upon, misappropriating, diluting, misusing or voiding any Intellectual Property Collateral owned or used by such Grantor in any material respect, or any of its respective licensees;

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(iv) no settlement or consents, covenants not to sue, nonassertion assurances, or releases have been entered into by such Grantor or to which such Grantor is bound that adversely affects its rights to own or use any Intellectual Property Collateral;

(v) such Grantor has executed and delivered to the Collateral Agent, Intellectual Property Collateral security agreements for all Intellectual Property Collateral owned by such Grantor;

(vi) the consummation of the transactions contemplated by the Loan Agreement and this Security Agreement will not result in the termination or material impairment of any of the Intellectual Property Collateral;

(vii) such Grantor owns directly or is entitled to use by license or otherwise, all Intellectual Property used in, or necessary for or of importance to the business conducted at the Cherokee Plant and the El Dorado Plant.

SECTION 3.5. Validity, etc.

(a) This Security Agreement creates a valid security interest in the Collateral securing the payment of the Obligations.

(b) Each Grantor has filed or caused to be filed all UCC-1 financing statements in the filing office for each Grantor’s jurisdiction of organization listed in Part A of Schedule 3.1 (collectively, the “Financing Statements”) (or has authenticated and delivered to the Collateral Agent the Financing Statements suitable for filing in such offices) and has taken all other:

(i) actions necessary to obtain control of the Collateral as provided in Sections 9-104, 9-105, 9-106 and 9-107 of the UCC in accordance with Article IV; and

(ii) actions necessary to perfect the Collateral Agent’s security interest with respect to any Collateral evidenced by a certificate of ownership.

(c) Upon the filing of the Financing Statements with the appropriate agencies therefor the security interests created under this Security Agreement shall constitute a perfected first priority security interest in the Collateral described on such Financing Statements in favor of the Collateral Agent on behalf of the Secured Parties to the extent that a security interest therein may be perfected by filing pursuant to the relevant UCC, subject only to Permitted Encumbrances.

SECTION 3.6. Authorization, Approval, etc. Except as have been obtained or made and are in full force and effect, no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority, except for the Assignments and Consents to be delivered pursuant to Section 4.01(a)(iii)(D) of the Loan Agreement, or any other third party is required either

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(a) for the grant by the Grantors of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by the Grantors;

(b) for the perfection or maintenance of the security interests hereunder including the first priority nature of such security interest (except with respect to the Financing Statements or UCC-3 Continuation Statements required to be filed in the future with respect thereof or, with respect to Intellectual Property Collateral, the recordation of any agreements with the United States Patent and Trademark Office or the United States Copyright Office) or the exercise by the Collateral Agent of its rights and remedies hereunder; or

ARTICLE IV

COVENANTS

Each Grantor covenants and agrees that, until the indefeasible payment in full of the Obligations, such Grantor will perform, comply with and be bound by the obligations set forth below.

SECTION 4.1. Change of Name, etc. No Grantor will change its name or place of incorporation or organization or federal taxpayer identification number except upon 30 days’ prior written notice to the Collateral Agent.

SECTION 4.2. Equipment.

(a) Each Grantor shall promptly inform the Collateral Agent of any material additions to or deletions from its Equipment constituting Collateral. No Grantor shall permit any of its Equipment constituting Collateral to become a Fixture with respect to real property or to become an accession with respect to other personal property with respect to which real or personal property the Collateral Agent does not have a Lien except as provided for in the final paragraph of Section 7.01 of the Loan Agreement. No Grantor will, without the Collateral Agent’s prior written consent, alter or remove any identifying symbol or number on any of such Grantor’s Equipment constituting Collateral.

(b) Except as set forth in the Loan Agreement, no Grantor shall, without the Collateral Agent’s prior written consent, sell, license, lease as a lessor, or otherwise dispose of any of the Grantor’s Equipment.

SECTION 4.3. As to Intellectual Property Collateral. Each Grantor covenants and agrees to comply with the following provisions as such provisions relate to any Intellectual Property Collateral used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets:

(a) such Grantor shall not (i) do or fail to perform any act whereby any of the patents or patent licenses may lapse or become abandoned or dedicated to the public or

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unenforceable, (ii) itself or permit any of its licensees to (A) fail to continue to use any of the trademarks, trade names or trademark licenses in order to maintain the Intellectual Property Collateral in full force free from any claim of abandonment for non-use, (B) fail to maintain as in the past the quality of products and services offered under the trademarks, trade names or trademark licenses, or (C) do or permit any act or knowingly omit to do any act whereby any of the trademarks, trade names or trademark licenses may lapse or become invalid or unenforceable, or (iii) do or permit any act or knowingly omit to do any act whereby any of the copyrights or copyright licenses or any of the trade secrets may lapse or become invalid or unenforceable or placed in the public domain except upon expiration of the end of an unrenewable term of a registration thereof, unless, in the case of any of the foregoing requirements in clauses (i), (ii) and (iii), such Grantor shall reasonably and in good faith determine that any of such Intellectual Property Collateral is of negligible economic value to such Grantor or is no longer used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets, and the loss of such Intellectual Property Collateral would not have a Material Adverse Effect on the business;

(b) such Grantor shall promptly notify the Collateral Agent if it knows, or reasonably suspects, that any application or registration relating to any material item of the Intellectual Property Collateral may become abandoned or dedicated to the public or placed in the public domain or invalid or unenforceable, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any foreign counterpart thereof or any court) regarding such Grantor’s ownership of any Intellectual Property Collateral, its right to register the same or to keep and maintain and enforce the same except with respect to such Intellectual Property which such Grantor reasonably determines is of negligible economic value to such Guarantor or is no longer used in or necessary to the conduct of the Facility Business or the operation of the Facility Assets;

(c) such Grantor shall notify Collateral Agent within a reasonable period (i) of such Grantor or any of its agents, employees, designees or licensees filing an application for the registration of any patent or trademark constituting Intellectual Property Collateral with the United States Patent and Trademark Office or (ii) of such Grantor receiving, as owner or exclusive licensee, a copyright registration constituting Intellectual Property Collateral with the United States Copyright Office, and upon request of the Collateral Agent, promptly execute and deliver the Trademark Security Agreement and other documents as the Collateral Agent may request to evidence the Collateral Agent’s security interest in such Intellectual Property Collateral;

(d) except as permitted under clause (a) and (b) above, such Grantor shall take all reasonable steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office, to maintain and pursue any application (and to obtain the relevant registration) filed with respect to, and to maintain any registration of, the Intellectual Property Collateral, including the filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings and the payment of fees and taxes; and

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(e) such Grantor shall promptly, but within sixty (60) days, after it obtains an ownership interest in any patent or trademark constituting Intellectual Property Collateral, execute and deliver to the Collateral Agent an IP Security Agreement, and Grantor shall promptly, but within thirty (30) days, after it obtains an ownership interest or an exclusive license in any copyright constituting Intellectual Property Collateral, execute and deliver to the Collateral Agent an IP Security Agreement, and in each case such Grantor shall execute and deliver to the Collateral Agent any other document required to acknowledge or register, record or perfect the Collateral Agent’s interest in any part of such item of Intellectual Property Collateral unless such Grantor shall determine in good faith using its commercially reasonable business judgment that any such Intellectual Property Collateral is not material and is of negligible economic value to such Grantor.

SECTION 4.4. Further Assurances, etc. Each Grantor agrees that, (i) from time to time at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Collateral Agent may request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, such Grantor will

(a) file (and hereby authorize the Collateral Agent to file) such Financing Statements or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or that the Collateral Agent may request in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Collateral Agent hereby; and

(b) furnish to the Collateral Agent, from time to time at the Collateral Agent’s request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may request, all in reasonable detail.

With respect to the foregoing and the grant of the security interest hereunder, each Grantor hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral; and to make all relevant filings with the United States Patent and Trademark Office and the United States Copyright Office in respect of the Intellectual Property Collateral. Each Grantor agrees that a carbon, photographic or other reproduction of this Security Agreement or any UCC financing statement covering the Collateral or any part thereof shall be sufficient as a UCC financing statement where permitted by law.

ARTICLE V

THE COLLATERAL AGENT

SECTION 5.1. Collateral Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints the Collateral Agent its attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time in the

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Collateral Agent’s discretion, following the occurrence and during the continuance of an Event of Default, to take any action and to execute any instrument which the Collateral Agent may deem necessary or advisable to accomplish the purposes of this Security Agreement, including:

(a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral;

(b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above;

(c) to file any claims or take any action or institute any proceedings which the Collateral Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Collateral Agent with respect to any of the Collateral; and

(d) to perform the affirmative obligations of such Grantor hereunder.

Each Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest.

SECTION 5.2. Grant of License to Use Intellectual Property Collateral. For the purpose of enabling Collateral Agent to exercise rights and remedies under Article VI hereof (including, without limiting the terms of Article VI hereof, in order to take possession of, hold, preserve, process, assemble, prepare for sale, market for sale, sell or otherwise dispose of Collateral) at such time as Collateral Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to Collateral Agent, for the benefit of Collateral Agent and Lenders, which shall be effective upon the occurrence of an Event of Default and during the continuance thereof, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Grantor) to use, license or sublicense any Intellectual Property Collateral now owned or hereafter acquired by such Grantor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

SECTION 5.3. Collateral Agent Has No Duty. The powers conferred on the Collateral Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral or responsibility for taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral.

ARTICLE VI

REMEDIES

SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing:

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(a) The Collateral Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a Secured Party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may

(i) take possession of any Collateral not already in its possession without demand and without legal process;

(ii) require each Grantor to, and each Grantor hereby agrees that it will, at its expense and upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place to be designated by the Collateral Agent that is reasonably convenient to both parties,

(iii) enter onto the property where any Collateral is located and take possession thereof without demand and without legal process;

(iv) without notice except as specified below, lease, license, sell or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent’s offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days’ prior notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

(b) All cash Proceeds received by the Collateral Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied by the Collateral Agent against, all or any part of the Obligations as set forth in Section 8.03 of the Loan Agreement.

(i) transfer all or any part of the Collateral into the name of the Collateral Agent or its nominee, with or without disclosing that such Collateral is subject to the Lien hereunder,

(ii) notify the parties obligated on any of the Collateral to make payment to the Collateral Agent of any amount due or to become due thereunder,

(iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or

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renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto,

(iv) endorse any checks, drafts, or other writings in any Grantor’s name to allow collection of the Collateral,

(v) take control of any Proceeds of the Collateral, and

(vi) execute (in the name, place and stead of any Grantor) endorsements, assignments and other instruments of conveyance or transfer with respect to all or any of the Collateral.

(d) Without limiting the foregoing, in respect of the Intellectual Property Collateral:

(i) upon the request of the Collateral Agent, each Grantor shall execute and deliver to the Collateral Agent an assignment or assignments of the Intellectual Property Collateral, subject (in the case of any licenses thereunder) to any valid and enforceable requirements to obtain consents from any third parties, and such other documents as are necessary or appropriate to carry out the intent and purposes hereof;

(ii) each Grantor agrees that the Collateral Agent may file applications and maintain registrations for the protection of the Intellectual Property Collateral and/or bring suit in the name of such Grantor, the Collateral Agent or any Secured Party to enforce the Intellectual Property Collateral and any licenses thereunder and, upon the request of the Collateral Agent, each Grantor shall use all commercially reasonable efforts to assist with such filing or enforcement (including the execution of relevant documents); and

(iii) in the event that the Collateral Agent elects not to make any filing or bring any suit as set forth in clause (ii), each Grantor shall, upon the request of Collateral Agent, use all commercially reasonable efforts, whether through making appropriate filings or bringing suit or otherwise, to protect, enforce and prevent the infringement, misappropriation, dilution, unauthorized use or other violation of the Intellectual Property Collateral.

Notwithstanding the foregoing provisions of this Section 6.1, for the purposes of this Section 6.1, “Collateral” and “Intellectual Property Collateral” shall include any “intent to use” trademark application only to the extent (i) that the business of such Grantor, or portion thereof, to which that mark pertains is also included in the Collateral and (ii) that such business is ongoing and existing.

SECTION 6.2. Compliance with Restrictions. Each Grantor agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Collateral Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of

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prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to Persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any Governmental Authority or official, and such Grantor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Collateral Agent be liable nor accountable to such Grantor for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction.

SECTION 6.3. Protection of Collateral. The Collateral Agent may from time to time, at its option (a) perform any act which any Grantor fails to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and (b) take any other action which the Collateral Agent deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein and, in each case, the expenses of the Collateral Agent incurred in connection therewith shall be payable by such Grantor pursuant to Section 11.04 of the Loan Agreement.

ARTICLE VII

MISCELLANEOUS PROVISIONS

SECTION 7.1. Loan Document. This Security Agreement is a Loan Document executed pursuant to the Loan Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof, including Article XI thereof.

SECTION 7.2. Binding on Successors, Transferees and Assigns; Assignment. This Security Agreement shall remain in full force and effect until the indefeasible payment in full of the Obligations has occurred, shall be binding upon the Grantors and their successors, transferees and assigns and shall inure to the benefit of and be enforceable by each Secured Party and its successors, transferees and assigns; provided that no Grantor may (unless otherwise permitted under the terms of the Loan Agreement or this Security Agreement) assign any of its obligations hereunder without the prior written consent of all Lenders.

SECTION 7.3. Amendments, etc. No amendment to or waiver of any provision of this Security Agreement, nor consent to any departure by any Grantor from its obligations under this Security Agreement, shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent (on behalf of the Lenders or the Required Lenders, as the case may be, pursuant to Section 11.01 of the Loan Agreement) and the Grantors and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

SECTION 7.4. Notices. All notices and other communications provided for hereunder shall be in writing or by facsimile and addressed, delivered or transmitted to the appropriate party at the address or facsimile number of such party specified in the Loan Agreement in accordance with the notice provisions set forth in the Loan Agreement.

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SECTION 7.5. Release of Liens and Termination of Rights. Upon (a) the Disposition of Collateral in accordance with the Loan Agreement or (b) the Indefeasible Payment and Performance of All Obligations, the security interests granted herein and the power of attorney and license granted pursuant to Sections 5.1, 5.2 and 5.3 shall automatically terminate with respect to (i) such Collateral (in the case of clause (a)) or (ii) all Collateral (in the case of clause (b)), without delivery of any instrument or performance of any act by any party. Upon any such Disposition or termination, the Collateral Agent will, at the Grantors’ sole expense, deliver to the Grantors, without any representations, warranties or recourse of any kind whatsoever, all Collateral held by the Collateral Agent hereunder, and execute and deliver to the Grantors such documents as the Grantors shall reasonably request to evidence such termination. This Section 7.5 is in addition to and without limitation of Grantors rights as set forth in the final paragraph of Section 7.01 of the Loan Agreement.

SECTION 7.6. No Waiver; Remedies. No failure on the part of any Secured Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 7.7. Headings. The various headings of this Security Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Security Agreement or any provisions thereof.

SECTION 7.8. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Security Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

SECTION 7.9. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK). This Security Agreement and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and thereof and supersede any prior agreements, written or oral, with respect thereto.

SECTION 7.10. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, ANY LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE COLLATERAL AGENT, THE ADMINISTRATIVE AGENT, THE LENDERS OR ANY GRANTOR IN CONNECTION HEREWITH OR THEREWITH MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY PROPERTY MAY BE BROUGHT,

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AT THE COLLATERAL AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH PROPERTY MAY BE FOUND. EACH GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. EACH GRANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK AT THE ADDRESS FOR NOTICES SPECIFIED FOR THE BORROWER IN SECTION 10.2 OF THE LOAN AGREEMENT. EACH GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ANY GRANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, SUCH GRANTOR HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS.

SECTION 7.11. Counterparts. This Security Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery of an executed counterpart of a signature page to this Security Agreement by facsimile or via other electronic means shall be effective as delivery of a manually executed counterpart of this Security Agreement.

SECTION 7.12. Reinstatement. This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against any Grantor for liquidation or reorganization, should any Grantor become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of any Grantor’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment or performance has not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

Remainder of page intentionally left blank.

Signatures on following page.

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IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be duly executed and delivered by its authorized officer as of the date first above written.

CHEROKEE NITROGEN HOLDINGS, INC., an Oklahoma corporation

By: _________________________________

Name:

Title:

NORTHWEST FINANCIAL CORPORATION, an Oklahoma corporation

By: _________________________________

Name:

Title:

CHEROKEE NITROGEN COMPANY, an Oklahoma corporation

By: _________________________________

Name:

Title:

DSN CORPORATION, an Oklahoma corporation

By: _________________________________

Name:

Title:

SIGNATURE PAGES TO SECURITY AGRE

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EL DORADO CHEMICAL COMPANY, an Oklahoma corporation

By: _________________________________

Name:

Title:

BANC OF AMERICA LEASING & CAPITAL LLC, as Collateral Agent

By: _________________________________

Name:

Title:

SIGNATURE PAGES TO SECURITY AGREEMENT

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SCHEDULE 1.1(a)

to Security Agreement

Part A – Cherokee Facility

The major personal property assets identified at this facility include a concrete dome prill storage facility with a storage capacity of 14,000 tons; a Kellogg 500 ton per day (“TPD”) rated capacity ammonia processing plant including six (6) compressors and sixteen (16) heat exchangers; Chemical Industrial Engineers 300 TPD nitric acid plant #1 which include two (2) air compressors and two (2) 38 ft high absorption towers; a D.M. Weatherly Company 500 TPD nitric acid plant #2 w/ 60 ft high absorption tower and steam turbine; two (2) Mississippi Chemical designed 830 TPD ammonium nitrate neutralizers including four (4) storage tanks and a truck load-out; a 430 TPD high density ammonium nitrate prilling operation consisting of a prill tower, a prill fattening operation, elevators, conveyors, sizing equipment, an environmental scrubber, bagging equipment, and climate control storage; a Technip designed 275 TPD UREA plant with an 83% ammonium nitrate mixing operation for urea ammonium nitrate (UAN) production and including a high pressure reactor, four (4) storage tanks, a barge, truck and rail load-out; other plant infrastructure and support equipment including a pollution control and irrigation system, cooling towers, a de-alkalizer; barge unloading equipment, storage tanks, forklift trucks, an auxiliary boiler, a de-aerator system, product storage tanks, air compressors, electrical power and distribution equipment including substations, transformers, and motor control centers, steam water facilities, process plant piping, various pumps, office furniture and equipment, and general plant equipment.

Part B – El Dorado Facility

The major personal property assets identified at this facility include a 285 ton per day (“TPD”) rated capacity UHDE direct strong nitric acid processing plant; a Chemical & Industrial Corporation (C&I Girdler/Chemico) East/West 750 TPD weak nitric acid plant with two (2) parallel trains (375 TPD each); a D.M. Weatherly 350 TPD nitric acid plant; a KT 600 TPD low density ammonium nitrate prill plant (capacity increased to 860 TPD); a Chemical & Industrial Corporation (C&I Girdler/Chemico) 1,100 TPD E2 high density ammonium nitrate prill plant with neutralizer; a Chemico 360 TPD sulfuric acid plant; a 100 TPD mixed acid plant; other plant infrastructure and support equipment includes a CB&I tank farm with ten (10) ammonia storage spheres, a refrigerated ammonia tank, and six (6) other ammonia nitrate solution storage tanks; a plant steam production system with two (2) Babcock & Wilcox processing boilers; a plant electrical power and distribution system including substations, transformers and motor control centers; maintenance machinery and equipment; a wastewater pH neutralization system; a pollution control and irrigation system; cooling towers; forklift trucks; air compressors; process plant piping, various pumps, office furniture and equipment, and general plant equipment.

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SCHEDULE 1.1(b)

to Security Agreement

Cherokee Site

The tract or lot of land lying in the County of Colbert, State of Alabama, known and described as follows, to wit:

PARCEL I:

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monuments of like character); thence north 00 degrees 24 minutes 16 seconds east a distance of 420.42 feet to U.S.-T.V.A. Monument No. 51; thence run north 33 degrees 37 minutes west 2,733.00 feet to U.S.-T.V.A. Monument No. 52 in the north line of Section 17, which is in the south line of Section 8; thence north 37 degrees 38 minutes west 416.00 feet to U.S.-T.V.A. Monument No. 53 at the northwest corner of the Southwest Quarter of the Southwest Quarter of the Southeast Quarter of the Southwest Quarter of Section 8; thence north 01 degree 35 minutes east 977.00 feet to U.S.-T.V.A. Monument No. 54 at the northwest corner of the Southeast Quarter of the Southwest Quarter of Section 8; thence north 35 degrees 59 minutes west 1,633.00 feet to U.S.-T.V.A. Monument No. 55 at the southeast corner of the Southwest Quarter of the Southwest Quarter of the Southwest Quarter of the Northwest Quarter of Section 8; thence north 88 degrees 50 minutes west 332.00 feet to U.S.-T.V.A. Monument No. 56 at the southwest corner of the Northwest Quarter of Section 8; thence with the south line of the Northeast Quarter of Section 7 north 88 degrees 50 minutes west 330.00 feet to U.S.-T.V.A. Monument No. 57; thence leaving the said south line north 01 degree 23 minutes 15 seconds east 1,966.31 feet to U.S.-T.V.A. Monument No. 58; thence run north 88 degrees 35 minutes west 336.33 feet to U.S.-T.V.A. Monument No. 59; thence run south 68 degrees 55 minutes 24 seconds west 1,751.46 feet, more or less, to a point on the south line of the north half of the north half of Section 7, Township 3 South, Range 13 West, which point is to be found by finding the intersection of said south line of said north half of the north half of said Section 7 with a line run south 00 degrees 39 minutes 12 seconds west a distance of 45 feet from U.S.-T.V.A. Monument No. 60; thence run north 00 degrees 39 minutes 12 seconds east 659.42 feet; thence run north 56 degrees 58 minutes 57 seconds east 1,150.50 feet, more or less, to U.S.-T.V.A. Monument No. 62 which is located in the north boundary of said Section 7 at a point 1,399.63 feet easterly from the northwest corner thereof; thence run north 88 degrees 39 minutes 30 seconds west with said section line 1,399.63 feet to the POINT OF BEGINNING.

LESS AND EXCEPT FROM THE FOLLOWING PARCELS: III, IV, V, VI, AND VII:

Parcel III:

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Parcel IV

Parcel V

Parcel VI

Parcel VII:

Commence at the southwest corner of Section 18, Township 3 South, Range 13 West, Colbert County, Alabama; thence south 89 degrees 14 minutes 26 seconds east along the South boundary of said Section 18 a distance of 1,397.26 feet; thence run North 00 degrees 21 minutes 39 seconds East a distance of 825.71 feet to the POINT OF BEGINNING; continue thence North 00 degrees 21 minutes 39 seconds East a distance of 505.52 feet; thence South 89 degrees 22 minutes 51 seconds East

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a distance of 1,116.70 feet; thence South 66 degrees 13 minutes 10 seconds West along said southeasterly right of way margin a distance of 1,223.71 feet to the POINT OF BEGINNING, containing 6.48 acres, more or less, and then being that same parcel of land described in Deed Book 264, Page 560 as recorded in the Probate Office of Colbert County, Alabama.

PARCEL II:

PARCEL III:

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89 degrees 58 minutes East with chain link fence a distance of 298.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 116.50 feet to a point; thence North 89 degrees 58 minutes East with chain link fence a distance of 52.00 feet to a point; thence South 0 degrees 02 minutes East with chain link fence a distance of 333.50 feet to a point; thence leaving said chain link fence South 89 degrees 58 minutes West a distance of 2.0 feet to a concrete monument; thence continuing South 89 degrees 58 minutes West a distance of 348.00 feet to the concrete monument at the point of beginning at the tract herein described.

PARCEL VIII:

PARCEL IX:

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southwesterly a distance of 43.45 feet (said curve having a radius of 1,000.00 feet, a chord bearing of N 87 deg 46 min 18 sec West a arc length of 43.45 feet) to the point of tangency; thence north 89 degrees 01 minutes 16 seconds West a distance 516.26 feet to the Point of a Curve; thence northwesterly along a curve concave north a distance of 622.86 feet (said curve having a radius of 1,975 feet, a chord bearing of North 79 degrees 59 minutes 24 seconds West, a chord distance of 620.28 feet) to the Point of Tangency; thence North 70 degrees 57 minutes 14 seconds West a distance of 240.04 feet to the POINT OF BEGINNING.

NON-EXCLUSIVE EASEMENT FOR PRIVATE ROAD

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concave southwest a distance of 566.33 feet (said curve having a radius of 950.00 feet, a chord bearing of North 71 degrees 56 minutes 27 seconds West, a chord distance of 557.98 feet) to the P.T. of said curve; thence North 89 degrees 01 minute 08 seconds West a distance of 517.34 feet to the P.C. of a curve; thence northwesterly along a curve concave northerly of 638.62 feet (said curve having a radius of 2,025.00 feet, a chord distance of 635.97 feet, a chord bearing of 79 degrees 59 minute 24 seconds west) to the P.T. of said curve, thence North 70 degrees 57 minutes 14 seconds West) to the P.T. of said curve; thence North 70 degrees 57 minutes 14 seconds West a distance of 233.95 feet to the POINT OF BEGINNING.

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SCHEDULE 1.1(c)

to Security Agreement

El Dorado Site

The land referred to herein below is all situated in Union County, Arkansas

Tract 1:

Beginning at the Northwest Corner of the Northeast Quarter of the Northwest Quarter of Section 8, Township 17 South, Range 15 West;

thence along said South right-of-way line for the railroad spur to a point which is 750 feet South of the North line of said Section 8;

thence East along a line which is parallel to the North line of said Section 8, and 750 feet distant therefrom to the intersection with the South right-of-way line for the railroad spur herein above described;