LSB Industries, Inc. Annual Report 2008

FY2008 Annual Report · LSB Industries, Inc.

Loading PDF…

2008 ANNUAL REPORT

Climate Control Business
We are the U.S. market leader for geothermal and water source heat pumps and hydronic fan coils. We
also provide modular chillers, custom air-handlers, and execute large scale geothermal installations. Our
products are targeted to commercial, industrial and residential new-building construction, renovation of
existing buildings, and replacement of existing systems. Our innovative products are used by millions of
people every day in prestigious buildings and homes throughout North America and around the world. Our
technologically advanced and environmentally responsible “green” geothermal heat pumps reduce energy
consumption and greenhouse gas emissions.

Chemical Business
We manufacture high density, prilled ammonium nitrate, anhydrous ammonia, and liquid fertilizers which
are used to fertilize food crops, biofuel feedstock crops, pasture land for grazing livestock and forage
production. Our anhydrous ammonia is also used to reduce emissions from power plants. We are the
leading merchant marketer of nitric acid in the U.S., offering various concentrations of nitric acid, high-
grade mixed acids, and sulfuric acid for industrial markets. Our industrial acids are used to produce
dozens of products, from clothing and paper products to advanced athletic gear made from high impact
polyurethane. We manufacture and sell low-density (industrial-grade) ammonium nitrate which is used to
surface mine coal vital to meeting the world’s growing demand for energy, and other natural resources.

Engineered Products & Services
We market precision machine tools and design, engineer, specify and furnish world-class chemical and
industrial manufacturing facilities for international clients.

Financial Highlights

(thousands, except per share amounts)

2008

2007

2006

2005

2004

Net Sales
Gross Proﬁ t
Operating Income
Net Income

$748,967 $586,407 $491,952 $397,115 $363,984
52,622
90,862
2,083
27,139
209
15,515

138,880 132,593
59,011
46,882

66,766
14,853
4,990

59,155
36,547

Net income (loss) Applicable to Common Stock
Earnings (loss) per Diluted Share
Weighted Average Diluted Shares Outstanding

36,241
1.58
24,133

41,274
1.84
23,496

12,885
0.76
20,872

2,707
0.18
14,907

(2,113)
(0.16)
12,888

Total Assets
Shareholders’ Equity
Long-term Debt Due After One Year

335,767 307,554
130,044
94,283
103,600 121,064

219,927
43,634
86,113

188,963
14,861
105,036

167,568
9,915
101,674

Depreciation and Amortization

15,016

14,353

12,549

12,026

11,295

Note: The above ﬁ nancial information was taken directly from, and should be read in connection with, our
ﬁ nancial statements, including notes thereto, included in this report and prior reports ﬁ led with the SEC.

To Our Fellow Shareholders:

LSB performed well in 2008 despite the challenging economic climate, achieving
record sales and the best pre-tax operating proﬁ t in our history. At the same time,
we strengthened our balance sheet by reducing long term debt and increasing LSB’s
total shareholders’ equity. We also continued to make investments in areas that we
believe will facilitate our long-term growth. Among the highlights:
(cid:962) Net sales were a record $749.0 million, up 27.7% over 2007, with both our Climate
Control and Chemical Businesses achieving their best ever sales performance.

(cid:962) Operating income was $59.2 million, slightly higher than 2007. Net income

applicable to common stock was $36.2 million, down from $41.3 million in 2007.
Diluted net income per share was $1.58, compared to $1.84 per share in 2007.
The lower net income on approximately the same operating income was primarily
because during 2008 we had provisions for income taxes that were $16.3 million
higher than 2007. In 2008 we began paying federal taxes at regular corporate
rates, whereas in 2007 we utilized net operating loss carry forwards from prior
years.

(cid:962) We repurchased $19.5 million aggregate principal amount of our 5.5% Convertible
Senior Subordinated Debentures due in 2012 and 400,000 shares of our common
stock. During the ﬁ rst quarter of 2009, we purchased an additional $5.7 million of
debentures reducing the remaining outstanding debentures to $34.8 million.
(cid:962) We strengthened our balance sheet, closing the year with a debt-to-equity ratio

of .81 to 1, a signiﬁ cant improvement from 1.29 to 1 a year earlier.

(cid:962) We continued to expand the production capacity of our Climate Control facilities
and made improvements at our Chemical plants, with total capital investments of
$32.6 million.

(cid:962) In June 2008, LSB Industries was again named to Business Week’s annual list
of “Hot Growth Companies”, ranking 38th. In October, LSB was ranked 27th of
“America’s 200 Best Small Companies” by Forbes magazine.

(cid:962) On October 28, 2008 LSB common stock began trading on the New York Stock

Exchange with the ticker symbol LXU.

Because our two primary businesses are in different industries, the best way to
understand LSB is to focus on each business separately.

(continued)

2008 Annual Report

Climate Control Business

Our Climate Control Business is comprised

The fastest growing part of our Climate Control

Business is our ultra high-efﬁ ciency geothermal

principally of two companies, which represented

heat pumps (GHPs). GHPs can be used in almost

88% of its sales in 2008. These companies are both

all types of commercial and residential buildings,

market leaders in their respective niches within the

heating, ventilation, and air-conditioning industry.

in any geographic location or climate, and for new

construction, renovation or replacement. The area

ClimateMaster is the world’s leading manufacturer

of most rapid growth for GHPs is in single-family

of geothermal and water source heat pumps.

residences. During 2008, sales of GHPs to single-

International Environmental is the leading U.S.

family residences represented 19% of our total

producer of hydronic fan coils.

Climate Control sales and were up 82% over 2007.

New orders were up 147% from one year earlier.

Our Climate Control Business’ 2008 sales increased

GHPs are considered a form of renewable energy

9% over 2007, despite the well publicized downturn

and can reduce energy costs up to 60%. They

in both commercial and residential construction. The

are so efﬁ cient that the recently enacted American

sales growth, combined with the improvement in

Recovery and Reinvestment Act of 2009 contains a

gross margin to 31%, accounted for the nearly 14%

30% tax credit for homeowners who install GHPs.

increase in this segment’s operating income, which

For businesses that install GHPs, the Act includes

rose to $38.9 million in 2008.

a 10% tax credit, 50% ﬁ rst year bonus depreciation,

and ﬁ ve year accelerated depreciation for the

During 2008, we enjoyed a strong new order level

balance of the system cost.

through the third quarter of 2008, but fourth quarter

bookings softened, affected by both the usual year-

The use of GHPs in the United States has grown

end seasonality and the current economic downturn.

substantially over the past several years. According

Our 2009 ﬁ rst quarter new orders were 22% below

the ﬁ rst quarter of 2008.

While we expect lower sales of our Climate Control

products during 2009 as a result of the economic

recession, we are encouraged that McGraw-Hill

to the Air Conditioning, Heating and Refrigeration

Institute, residential GHP unit shipments doubled

from 2005 to 2008, while unit shipments of

conventional air-conditioning and heat pump

systems declined 32%. Even with the rapid

sales growth in recent years, total industry GHP

forecasts that the construction levels of certain major

shipments in 2008 were only approximately 1.2% of

markets we serve are expected to bottom out in

2009 and begin to increase in 2010. Other major

markets we serve are projected to stabilize during

the 2009 to 2010 timeframe and then turn upward.

the entire 5.8 million units shipped into the market

for residential heating and cooling systems. This

represents a signiﬁ cant growth potential for GHPs.

2008 Annual Report

We believe that GHPs are the right product

the heating and air-conditioning system, many of

for our times, and that long-term rising energy

these buildings will require new systems that are

costs, electrical grid capacity issues, growing

both more energy efﬁ cient and environmentally

environmental consciousness, and energy security

friendly. Our products are particularly well-suited

concerns will continue to drive the growth of the

for this, and we believe that there will be many

GHP market. The new tax credits and other GHP

opportunities for LSB in this market over the next

incentives should also enhance the demand for

few years.

these “green” products.

Chemical Business

We have made substantial capital investments in

In 2008, about 36% of our Chemical Business’ dollar

our manufacturing capacity and we plan to make

sales volume was derived from the agricultural

further investments in 2009. Since 2006, we

have doubled our manufacturing ﬂ oor space for

sector, sold on a spot market pricing basis. The

remaining 64% was sold to non-seasonal industrial

geothermal and water source heat pumps, and we

and mining customers. For most of our industrial

have added fabrication equipment and assembly

and mining business we have sales agreements

line capacity. An additional 78,000 square foot

with customers who accept the commodity price

expansion is underway. We believe we are more

ﬂ uctuation risk inherent with natural gas and

vertically integrated than any other manufacturer of

anhydrous ammonia, our two primary raw material

geothermal or water source heat pumps in the U.S.

feedstocks. This eliminates much of the commodity

and that this is a competitive advantage.

price risk usually associated with a business of this

We have also dramatically increased our sales and

nature.

marketing organization dedicated to GHP sales and

Our Chemical Business produces concentrated and

will continue our strong focus on this area.

Despite the current economic headwinds for

commercial construction in general, there is one

blended nitric acids, anhydrous ammonia, mixed

acids, sulfuric acid and low density ammonium

nitrate for a wide range of industrial and mining

applications. We also manufacture high-density

particular area of optimism. The American Recovery

ammonium nitrate and urea ammonium nitrate

and Reinvestment Act contains provisions for billions

(UAN) which are used as fertilizers for row crops,

of dollars of spending to modernize federally owned

grains, grasslands and biofuel feedstock crops. A

and operated buildings, military installations, public

small but growing portion of our products is used to

housing and hospitals, with a focus on energy

abate objectionable emissions from power plants

efﬁ ciency and minimizing environmental impact.

and other noxious emissions.

Since the biggest energy user in most buildings is

(continued)

2008 Annual Report

During 2008, the volatility in worldwide commodity

However, to some degree, we are insulated by

prices impacted this business. Sales rose 47%

sales agreements with either minimum volume

over 2007, however, for the most part the increase

requirements or ﬁ xed proﬁ t arrangements. On the

in Chemical Business revenues was attributable to

agricultural side of our business, industry sources

signiﬁ cantly higher selling prices per ton, caused

are predicting improved demand after the spring

by the pass-through of the substantially higher raw

application depletes the fertilizer in storage.

material feedstock costs, rather than increased

Due to the steep price declines in most

volume. Operating income for the full year was

commodities, including anhydrous ammonia and

$31.3 million, down 10% from 2007, primarily as

natural gas, as well as the lower selling prices per

a result of inventory write-downs and

ton for our chemical products, sales dollars for our

mark-to-market adjustments caused by the steep

existing chemical operations should be less

fall in commodities. An analysis of these results is

than 2008.

discussed in the 2008 Form 10-K Annual Report

attached to this letter.

Moving on to what we believe should be a valuable

addition to our Chemical Business, we are taking

We believe that the long-term global demand for

all necessary steps to start up our idled chemical

corn and wheat will continue to drive the demand for

facility, located in Pryor, Oklahoma. Operating

nitrogen fertilizers. These favorable supply-demand

permits are now in place. Long-lead time equipment

fundamentals were the catalyst for signiﬁ cantly

is on order, and we have hired key personnel. We

higher fertilizer selling prices and better margins

are in the process of negotiating an agreement for

during the ﬁ rst part of 2008. However, in the fourth

the purchase and distribution of the planned UAN

quarter of 2008, there was a sudden price drop

production at the Pryor facility. We plan to initially

for most global commodities; and the price of our

reactivate part of the Pryor facility and produce

products in the market also declined. Fortunately,

approximately 325,000 tons of UAN and 35,000

the price of our raw material feedstocks have also

tons of anhydrous ammonia per year. Barring

declined; and we believe that we are currently able

unforeseen delays, we expect to start production at

to produce our fertilizer products at proﬁ table levels

the Pryor Facility during the third quarter of 2009.

at current market prices if we maintain reasonable

production rates.

We anticipate spending a total of $15.0 million to

$20.0 million to complete the Pryor plant start-up,

Looking ahead, we expect that many of our

including $7.5 million to $10.0 million for capital

industrial chemical customers will take less product

expenditures. With no offsetting sales revenues

in 2009 than in 2008 due to the downturn in

until the plant is up and running, we expect the

construction and most industrial sectors.

start-up costs for Pryor to negatively affect our

2008 Annual Report

operating results for much of 2009. We are looking

Our Balance Sheet

beyond 2009 for Pryor’s long-term sales and

During these challenging economic times, we have

earnings contribution.

Another area of growth potential for our Chemical

Business is the use of high purity urea to abate

diesel exhaust emissions. EPA Tier 2 Emission

continued to place an emphasis on strengthening

our balance sheet. We closed 2008 with working

capital of $135.9 million, including cash and cash

equivalents of $46.2 million. Over the course

of 2008, we reduced long-term borrowings to

Standards enacted in 2000 and 2001, mandate that

$105.2 million at December 31st, and our net worth

on-highway diesel and gasoline vehicles meet new

increased to $130.0 million. With cash on hand

strict emission control standards beginning

January 1, 2010. This high-grade urea, also

referred to as “Diesel Exhaust Fluid” or “DEF”,

is used in Selective Catalytic Reduction (SCR)

technology to convert noxious nitrogen oxide into

and $50.0 million borrowing availability under our

working capital revolver, we believe that we are in

ﬁ nancially sound condition and prepared to execute

our 2009 growth initiatives, as well as weather

the current economic downturn and prepare for a

harmless nitrogen gas. According to the Petroleum

resumption of strong growth when the economy

Institute Journal, projections indicate that between

turns the corner.

50% and 75% of all diesel vehicles will use SCR

technology and require DEF to operate at the rate

of 2% of diesel usage. This is expected to create a

huge market for DEF starting in 2010 and for many

years to come.

We renewed our agreements with two important

Chemical Business customers during 2008. Our

El Dorado Nitrogen, L.P. subsidiary reached a

ﬁ ve year strategic supply agreement with Bayer

MaterialScience LLC, a decade long customer,

to supply Bayer with its total requirements for

nitric acid for its Baytown, Texas polyurethane

intermediates complex. Cherokee Nitrogen

Company, another Chemical Business subsidiary,

also extended its agreement for ﬁ ve years with

Nelson Brothers, LLC to supply ammonium nitrate

for use in the production of explosives used

primarily for surface mining.

Managing in a Recession

The current business environment may prove to be

the most difﬁ cult we have faced in many years, with

the prospect of lower 2009 sales and corresponding

lower proﬁ ts. All present indications are that the

general level of near-term future activity will be less

in certain parts of our business than it was in 2008.

The initial reaction by many companies to times

like these is to absolutely minimize all expenses

in an effort to maximize current earnings, to the

detriment of future growth and earnings. We will

certainly attempt to minimize most controllable or

variable costs during a downturn. However, we will

not adopt a “slash and burn” approach for the sake

of increasing short-term earnings at the expense of

long-term growth and proﬁ tability.

(continued)

2008 Annual Report

We believe there are certain initiatives we have

Of Special Note

undertaken that are strategically important to the

There are approximately eighteen hundred people

long-term continued growth of LSB. We have

discussed two good examples of programs like

who make up the LSB team at the time of this

writing. The credit for our performance in 2008

these: the Pryor project and the continued expansion

goes to the workers, technicians, engineers,

of our GHP program. These initiatives, as well

as new product development efforts, represent

manufacturing staff, sales and ﬁ nancial personnel

and our experienced management team. We would

signiﬁ cant medium and long-term growth potential

like to thank all of them for their contribution in

for LSB, but also bear costs that could diminish

making 2008 the success that it was.

short-term earnings.

At LSB, we have historically made our decisions

Sincerely,

based on a long-term perspective when we have

been able to do so. We will continue to do what

we believe is in the best long-term interest of our

shareholders.

Jack E. Golsen
Chairman of the Board
& CEO

Barry H. Golsen
Vice Chairman of the
Board, President & COO

This letter contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally are identiﬁ able by use of the words “believe”, “expects”, “intends”, “anticipates”, “plans to”, “estimates”,
“projects” or similar expressions, and such forward-looking statements include, but are not limited to: lower sales during 2009 of our Climate
Controlled products as a result of the economic recession; our GHPs are the right product for our times; that the new tax credits and other
GHP incentives should enhance the demand for these green products; capital investments for 2009 in our Climate Control Business; we
will continue our strong focus relating to sales and marketing dedicated to our GHPs; many opportunities for LSB over the next few years to
modernize federally owned and operated facilities with energy efﬁ cient and minimize environmental impact products; long-term global demand
for corn and wheat will continue to drive the demand for nitrogen fertilizers; our indsutrial chemical customers will take less products in 2009
than 2008; sales dollars for our existing chemical products in 2009 should be less than 2008; expected time to start production at our Pryor
Chemical facility; amount of products produced at the Pryor facility; negotiation of an agreement for the purchase and distribution of UAN
products at the Pryor facility; ﬁ nancial condition to execute our 2009 growth initiatives, as well as weather the current economic downturn;
strong growth when the economy turns the corner; prospect of lower sales and proﬁ ts in 2009 and long-term growth potential for LSB. Please
see “A Special Note Regarding Forward-Looking Statement” contained in the Form 10-K for a discussion of a variety of factors which could
cause the future outcome to differ materially from the forward-looking statements contained in this letter.

2008 ANNUAL REPORT
10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

[ ] 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
(State of Incorporation)

16 South Pennsylvania Avenue
Oklahoma City, Oklahoma
(Address of Principal Executive Offices)

73-1015226
(I.R.S. Employer)
Identification No.)

73107
(Zip Code)

Registrant's Telephone Number, Including Area Code: (405) 235-4546

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

Title of Each Class
Common Stock, Par Value $.10
Preferred Share Purchase Rights

Name of Each Exchange
On Which Registered
New York Stock Exchange
New York Stock Exchange

(Facing Sheet Continued)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. [ ] Yes [X] No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. [ ] Yes [X] No

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter
period that the Registrant has had to file the reports), and (2) has been subject to the filing
requirements for the past 90 days. [X] Yes [ ] No

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

Indicate by check mark whether the Registrant is 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 aggregate market value of the Registrant’s voting common equity held by non-affiliates of
the Registrant, computed by reference to the price at which the voting common stock was last
sold as of June 30, 2008, was approximately $338 million. As a result, the Registrant is an
accelerated filer as of December 31, 2008. For purposes of this computation, shares of the
Registrant’s common stock beneficially owned by each executive officer and director of the
Registrant were deemed to be owned by affiliates of the Registrant as of June 30, 2008. Such
determination should not be deemed an admission that such executive officers and directors of
our common stock are, in fact, affiliates of the Registrant or affiliates as of the date of this Form
10-K.

As of March 6, 2009, the Registrant had 21,109,812 shares of common stock outstanding
(excluding 3,848,518 shares of common stock held as treasury stock).

FORM 10-K OF LSB INDUSTRIES, INC.

TABLE OF CONTENTS

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Submission of Matters to a Vote of Security Holders

Item 4A.

Executive Officers of the Registrant

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

Item 6.

Selected Financial Data

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

PART III

Page

FORM 10-K OF LSB INDUSTRIES, INC.

TABLE OF CONTENTS

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

Item 15.

Exhibits and Financial Statement Schedules

PART IV

Page

105

111

112

114

PART I

ITEM 1. BUSINESS

General

LSB Industries, Inc. (the "Company", “Registrant”, “LSB”, "We", "Us", or "Our") was formed in
1968 as an Oklahoma corporation, and became a Delaware corporation in 1977. We are a
diversified holding
Inc.
(“ThermaClime”) through its subsidiaries, owns substantially all of our core businesses
consisting of the:

company. Our wholly-owned

subsidiary, ThermaClime,

• Climate Control Business engaged in the manufacturing and selling of a broad range of
heating, ventilation and air conditioning (“HVAC”) products for the niche markets we
serve. These products are used in commercial and residential new building construction,
renovation of existing buildings and replacement of existing systems.

• Chemical Business engaged in the manufacturing and selling of chemical products
produced from plants in Texas, Arkansas and Alabama for the industrial, mining and
agricultural markets.

Certain statements contained in this Part I may be deemed to be forward-looking statements. See
"Special Note Regarding Forward-Looking Statements."

We believe our Climate Control Business has developed leadership positions in certain niche
markets by offering extensive product lines, customized products and improved technologies.
Under this focused strategy, we have developed what we believe to be the most extensive line of
geothermal and water source heat pumps and hydronic fan coils in the United States. Further, we
believe that we were a pioneer in the use of geothermal technology in the climate control
industry and have used it to create what we believe to be the most energy efficient climate
control systems commercially available today. We employ highly flexible production capabilities
that allow us to custom design units for new construction as well as the retrofit and replacement
markets.

Our Chemical Business has three chemical production facilities located in El Dorado, Arkansas
(the “El Dorado Facility”), Cherokee, Alabama (the “Cherokee Facility”) and Baytown, Texas
(the “Baytown Facility”). Our products include industrial and fertilizer grade ammonium nitrate
(“AN”), urea ammonium nitrate (“UAN”), nitric acid in various concentrations, nitrogen
solutions and various other products. Our Chemical Business is a supplier to some of the world’s
leading chemical and industrial companies. By focusing on specific geographic areas, we have
developed freight and distribution advantages over many of our competitors, and we believe our
Chemical Business has established leading regional market positions, a key element in the
success of this business.

Current State of the Economy

The current state of the economy creates significant uncertainty relative to the industrial,
construction and agricultural markets that we serve. We based our 2009 business plan upon our

assumption that during most of 2009, the economy will continue to contract due to additional
loss of jobs, declining consumer demand and limited credit availability. However, our 2009
business plan is a moving target that will be adjusted frequently as we measure customer demand
during the first and second quarters. We plan to adjust our controllable costs when and as market
conditions dictate. See further discussion relating to the economy under various risk factors
under Item 1A of this Part 1 and “Overview-Economic Conditions” of the Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained
in this report.

Website Access to Company's Reports

Our internet website address is www.lsb-okc.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge
through our website as soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission.

Segment Information and Foreign and Domestic Operations and Export Sales

Schedules of the amounts of net sales, gross profit, operating income (loss) and identifiable
assets attributable to each of our lines of business and of the amount of our export sales in the
aggregate and by major geographic area for each of the last three years appear in Note 21 of the
Notes to Consolidated Financial Statements included elsewhere in this report.

Climate Control Business

General

Our Climate Control Business manufactures and sells a broad range of standard and custom
designed geothermal and water source heat pumps and hydronic fan coils as well as large custom
air handlers and modular chiller systems. These products are for use in commercial and
residential HVAC systems. Our products are currently installed in some of the most recognizable
commercial developments in the country, including Prudential Tower, Rockefeller Plaza, Trump
Tower, and Time Warner Center, and are slated to be in a number of developments currently
under construction. In addition, we have a significant presence in the lodging industry with
installations in numerous Hyatt, Marriott, Four Seasons, Starwood, Ritz Carlton and Hilton
hotels. We also have a substantial share of resort destinations in Las Vegas where we have units
installed in over 70,000 rooms for a number of premier properties, including the MGM Grand,
Luxor, Venetian, Treasure Island, Bellagio, Mandalay Bay, Caesar’s Palace, Monte Carlo,
Mirage, Golden Nugget, Hard Rock, Wynn resorts, and many others.

The following table summarizes net sales information relating to our products of the Climate
Control Business:

Percentage of net sales of the Climate Control Business:

Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products

Percentage of our consolidated net sales:

Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products

Market Conditions for Climate Control Business

2008

2007

2006

61 %
27 %
12 %
100 %

25 %
11 %
5 %
41 %

58 %
30 %
12 %
100 %

28 %
15 %
6 %
49 %

61 %
27 %
12 %
100 %

27 %
12 %
6 %
45 %

We discuss below certain details of our marketing, distribution, production, backlog, competition
and new products relative to our geothermal and water source heat pumps, hydronic fan coils and
other products produced by our Climate Control Business. At this time, we are unable to assess
the possible impact to our Climate Control Business’ sales level as a result of the well
documented downturn in commercial and residential construction. For the short term, we do
expect to see lower demand for most of our products.

We believe that tax credits and incentives, and certain planned direct spending by the federal
government contained in the recently enacted American Reinvestment and Recovery Act of
2009, could stimulate sales of our geothermal heat pump products, as well as other products that
could be used to modernize federally owned and operated buildings, military installations, public
housing and hospitals.

The longer term outlook after 2009, to a significant extent, will depend on the recovery of the
credit and capital markets and the general economy.

Geothermal and Water Source Heat Pumps

We believe we are a leading provider of geothermal and water source heat pumps to the
commercial construction and renovation markets in the United States. Water source heat pumps
are highly efficient heating and cooling products, which enable individual room climate control
through the transfer of heat using a water pipe system, which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a broad range of commercial
applications, particularly in medium to large sized buildings with many small, individually
controlled spaces. Despite the current economic downturn, we believe the market share for
commercial water source heat pumps relative to other types of heating and air-conditioning
systems will continue to grow due to the relative efficiency and longevity of such systems, as
well as due to the emergence of the replacement market for those systems.

Our Climate Control Business has also developed the use of geothermal heat pumps in
residential and commercial applications. Geothermal systems, which circulate water and
antifreeze through an underground heat exchanger, are among the most energy efficient systems
currently available in the market. We believe the energy efficiency, longer life, and relatively
short payback periods of geothermal systems, as compared with air-to-air systems, will continue
to increase demand for our geothermal products. In addition, we believe the recently enacted
American Reinvestment and Recovery Act of 2009 contains significant incentives for the
installation of our geothermal products. We specifically target commercial and institutional new
construction and renovation and replacements as well as single-family new construction,
renovation and replacement.

Hydronic Fan Coils

We believe that our Climate Control Business is a leading provider of hydronic fan coils. Our
Climate Control Business targets the commercial and institutional markets. Hydronic fan coils
use heated or chilled water provided by a centralized chiller or boiler, through a water pipe
system, to condition the air and allow individual room control. Hydronic fan coil systems are
quieter, have longer lives and lower maintenance costs than other comparable systems used
where individual room control is required. Important components of our strategy for competing
in the commercial and institutional renovation and replacement markets include the breadth of
our product line coupled with customization capability provided by a flexible manufacturing
process. Hydronic fan coils enjoy a broad range of commercial applications, particularly in
medium to large sized buildings with many small, individually controlled spaces.

Geothermal and Water Source Heat Pump and Hydronic Fan Coil Market

We estimate the annual United States market for water source heat pumps and hydronic fan coils
was approximately $700 million in 2008 based on December 2008 data supplied by the Air-
Conditioning, Heating and Refrigeration Institute (“AHRI”). Levels of repair, replacement, and
new construction activity generally drive demand in these markets. However, this market could
be impacted by the current economic conditions.

Production and Backlog

We manufacture our products in many sizes and configurations, as required by the purchaser, to
fit the space and capacity requirements of hotels, motels, schools, hospitals, apartment buildings,
office buildings and other commercial or residential structures. In addition, most of these
customer orders are placed well in advance of required delivery dates.

During 2008, we invested approximately $12.1 million primarily for property, production
equipment and other upgrades for additional capacity relating to our Climate Control Business.

For 2009, we currently have committed to spend an additional $3.5 million primarily for
production equipment and facilities upgrades. Our investment in the Climate Control Business
will continue if order intake levels continue to warrant. These investments have and will increase
our capacity to produce and distribute our Climate Control products. Additional investments will
depend upon our long-term outlook for the economic conditions that might affect our markets.

See discussions under “Liquidity and Capital Resources-Capital Expenditures” of Item 7 of Part
II of this report.

As of December 31, 2008 and 2007, the backlog of confirmed orders for our Climate Control
Business was approximately $68.5 million and $54.5 million, respectively. We expect to ship
substantially all the orders in the backlog within the next twelve months.

Marketing and Distribution

Distribution

Our Climate Control Business sells its products to mechanical contractors, original equipment
manufacturers (“OEMs”) and distributors. Our sales to mechanical contractors primarily occur
through independent manufacturers' representatives, who also represent complementary product
lines not manufactured by us. OEMs generally consist of other air conditioning and heating
equipment manufacturers who resell under their own brand name the products purchased from
our Climate Control Business in competition with us. The following table summarizes net sales
to OEMs relating to our products of the Climate Control Business:

Net sales to OEMs as a percentage of:

Net sales of the Climate Control Business
Consolidated net sales

Market

2008

2007

2006

20 %
9 %

19 %
9 %

17 %
8 %

Our Climate Control Business depends primarily on the commercial construction industry,
including new construction and the remodeling and renovation of older buildings, and on the
residential construction industry and existing homes for both new and replacement markets
relating to their geothermal products.

Raw Materials

Numerous domestic and foreign sources exist for the materials used by our Climate Control
Business, which materials include copper, compressors, steel, aluminum, electric motors, and
valves. Periodically, our Climate Control Business enters into futures contracts for copper. We
do not anticipate any difficulties in obtaining necessary materials for our Climate Control
Business. However, changes in market volatility, supply and demand could result in increased
costs, lost production and/or delayed shipments. Although we believe we will be able to pass to
our customers the majority of any cost increases in the form of higher prices, the timing of these
price increases could lag the increases in the cost of materials. While we believe we will have
sufficient sources for materials, a shortage of raw materials could impact production of our
Climate Control products.

Competition

Our Climate Control Business competes primarily with six companies, some of whom are also
our customers. Some of our competitors serve other markets and have greater financial and other
resources than we do. Our Climate Control Business manufactures a broader line of geothermal
and water source heat pump and fan coil products than any other manufacturer in the United
States, and we believe that we are competitive as to price, service, warranty and product
performance.

Continue to Introduce New Products

Our Climate Control Business plans to continue to launch new products and product upgrades in
an effort to maintain and increase our current market position and to establish a presence in new
markets.

Chemical Business

General

Our Chemical Business manufactures products for three principal markets:

• concentrated, blended and regular nitric acid, mixed nitrating acids, metallurgical grade
anhydrous ammonia, sulfuric acid, and high purity ammonium nitrate (“AN”) for
industrial applications,

• anhydrous ammonia, fertilizer grade AN, urea ammonium nitrate (“UAN”), and
ammonium nitrate ammonia solution (“ANA”) for the agricultural applications, and
industrial grade AN and solutions for the mining industry.

•

The following table summarizes net sales information relating to our products of the Chemical
Business:

Percentage of net sales of the Chemical Business:
Industrial acids and other chemical products
Agricultural products
Mining products

Percentage of our consolidated net sales:

Industrial acids and other chemical products
Agricultural products
Mining products

2008

2007

2006

38 %
36 %
26 %
100 %

22 %
20 %
15 %
57 %

33 %
41 %
26 %
100 %

16 %
20 %
13 %
49 %

37 %
34 %
29 %
100 %

19 %
18 %
16 %
53 %

Market Conditions for Chemical Business

We discuss below certain details of our industrial acids and other chemical products, agricultural
products, mining products, major customers, raw materials and other sales and industry issues
affecting our Chemical Business.

As discussed in more detail under “Overview-Economic Conditions” of the MD&A contained in
this report, we are unable to definitively assess the impact to our Chemical Business sales level
as a result of the current economic recession. At this time, we believe that our sales volumes
expressed in tons will be lower than in 2008 and our sales dollars per unit will be less due to
significantly lower raw material costs and selling prices.

Industrial Acids and Other Chemical Products

Our Chemical Business manufactures and sells industrial acids and other chemical products
primarily to the polyurethane, paper, fibers and electronics industries. We are a major supplier of
concentrated nitric acid and mixed nitrating acids, specialty products used in the manufacture of
fibers, gaskets, fuel additives, ordnance, and other chemical products. In addition, at the El
Dorado Facility, we produce and sell blended and regular nitric acid and we are a niche market
supplier of sulfuric acid, primarily to the region’s key paper manufacturers. At the Cherokee
Facility, we are also a niche market supplier of industrial and high purity ammonia for many
specialty applications, including chemicals to treat emissions from power plants.

We compete based upon service, price, location of production and distribution sites, product
quality and performance. We also believe we are the largest domestic merchant marketer of
concentrated and blended nitric acids and provide inventory management as part of the value-
added services offered to certain customers.

The Baytown Facility is one of the two largest nitric acid manufacturing units in the United
States, with demonstrated capacity exceeding 1,350 short tons per day. The majority of the
Baytown Facility’s production is sold pursuant to a long-term contract. See discussion below
under “Bayer Agreement” of this Item 1 concerning the future replacement of the Original Bayer
Agreement with the Bayer Agreement.

Agricultural Products

Our Chemical Business produces AN at the El Dorado Facility and anhydrous ammonia, UAN,
and ANA at the Cherokee Facility; all of which are nitrogen based fertilizers. The Cherokee
Facility also has the ability to produce agricultural grade AN. Although, to some extent, the
various forms of nitrogen-based fertilizers are interchangeable, each has its own characteristics,
which produce agronomic preferences among end users. Farmers and ranchers decide which type
of nitrogen-based fertilizer to apply based on the crop planted, soil and weather conditions,
regional farming practices and relative nitrogen fertilizer prices. Our agricultural markets include
a high concentration of pastureland and row crops, which favor our products. We sell these
agricultural products to farmers, ranchers, fertilizer dealers and distributors located in the Central
and Southeastern United States, which are in relatively close proximity to the El Dorado and
Cherokee Facilities. We develop our market position in these areas by emphasizing high quality

products, customer service and technical advice. During the past two years, we have been
successful in expanding outside our traditional markets by barging to distributors on the
Tennessee and Ohio rivers, and by railing into certain Western States. The El Dorado Facility
produces a high performance AN fertilizer that, because of its uniform size, is easier to apply
than many competing nitrogen-based fertilizer products. The El Dorado Facility establishes long-
term relationships with end-users through its network of wholesale and retail distribution centers
and the Cherokee Facility sells directly to agricultural customers.

Mining Products

Our Chemical Business manufactures industrial grade AN and 83% AN solution for the mining
industry. The El Dorado Facility is a party to a long-term cost-plus supply agreement. Under this
supply agreement, the El Dorado Facility supplies Orica USA, Inc. (“Orica”) with a significant
volume of industrial grade AN per year for a term through at least June 2011, with provisions for
renewal thereafter.

Major Customers

The following summarizes net sales to our major customers relating to our products of the
Chemical Business:

Net sales to Bayer as a percentage of:

Net sales of the Chemical Business
Consolidated net sales

Net sales to Orica as a percentage of:

Net sales of the Chemical Business
Consolidated net sales

Raw Materials

2008

2007

2006

19%
11%

15%
7%

19%
9%

14 %
7 %

20 %
10 %

The products our Chemical Business manufacture are derived from the following raw material
feedstocks: anhydrous ammonia, natural gas and sulfur. These raw material feedstocks are
commodities, subject to price fluctuations.

The El Dorado Facility purchases approximately 200,000 tons of anhydrous ammonia and
45,000 tons of sulfur annually and produces and sells approximately 470,000 tons of nitrogen-
based products and approximately 150,000 tons of sulfuric acid per year. The anhydrous
ammonia is purchased pursuant to a supply agreement whereby the El Dorado Facility secures
the majority of its requirements of anhydrous ammonia from one supplier. Although anhydrous
ammonia is produced from natural gas, the price does not necessarily follow the spot-price of
natural gas in the U.S. because anhydrous ammonia is an internationally traded commodity and
the relative price is set in the world market while natural gas is primarily a nationally traded
commodity. The ammonia supply to the El Dorado Facility is transported from the Gulf of
Mexico by pipeline. Our cost of anhydrous ammonia is based upon formulas indexed to
published industry prices, primarily tied to import prices. Prices for anhydrous ammonia were
volatile during 2008, ranging from $125 to $931 per metric ton. Historically, the sulfur costs

have been relatively stable; however, the recent world fertilizer market instability has led to
significant volatility in the cost of this raw material. During 2008, the average prices for sulfur
ranged from $150 to $617 per long ton.

The Cherokee Facility normally consumes 5 to 6 million MMBtu’s of natural gas annually and
produces and sells approximately 300,000 to 370,000 tons of nitrogen-based products per year.
Natural gas is a primary raw material for anhydrous ammonia. Natural gas prices continue to
exhibit volatility. In 2008, daily spot prices per MMBtu, excluding transportation, ranged from
$5.36 to $13.16.

The Baytown Facility consumes more than 100,000 tons of purchased anhydrous ammonia per
year. The majority of the Baytown Facility’s production is sold pursuant to a long-term contract
that provides for a pass-through of certain costs, including the anhydrous ammonia costs, plus a
profit. See discussion concerning a new long-term contract below under “Bayer Agreement” of
this Item 1.
Spot anhydrous ammonia, natural gas and sulfur costs have fluctuated dramatically in recent
years. The following table shows, for the periods indicated, the high and low published prices
for:

• ammonia based upon the low Tampa metric price per ton as published by Fertecon and

FMB Ammonia reports,

• natural gas based upon the daily spot price at the Tennessee 500 pipeline pricing point,

and

• sulfur based upon the average quarterly Tampa price per long ton as published in Green

Markets.

Ammonia Price
Per Metric Ton

2008
2007
2006

High
$931
$460
$395

Low
$125
$295
$270

Daily Spot Natural Gas

Prices Per MMBtu
Low
High
$5.36
$13.16
$5.30
$10.59
$3.54
$9.90

Sulfur Price
Per Long Ton

High
$617
$112
$ 75

Low
$150
$ 56
$ 60

As of March 6, 2009, the published price, as described above, for ammonia was $275 per metric
ton and natural gas was $4.15 per MMBtu. The price per long ton for sulfur was minimal.

Effective January 1, 2009, under an agreement with its principal supplier of anhydrous ammonia,
the El Dorado Facility will purchase the majority of all of its anhydrous ammonia requirements
using a market price-based formula plus transportation to the El Dorado Facility through at least
December 2010. We believe that we can obtain anhydrous ammonia from other sources in the
event of an interruption of service under the above-referenced contract. The Cherokee Facility’s
natural gas feedstock requirements are generally purchased at spot market price. Periodically,
the El Dorado and Cherokee Facilities will hedge certain of their anhydrous ammonia and natural
gas requirements with futures/forward contracts as discussed below.

Sales Strategy

Our Chemical Business has pursued a strategy of developing customers that purchase substantial
quantities of products pursuant to sales agreements and/or pricing arrangements that provide for
the pass through of raw material costs in order to minimize the impact of the uncertainty of the
sales prices of our products in relation to the cost of anhydrous ammonia, natural gas and sulfur.
These pricing arrangements help mitigate the commodity risk inherent in the raw material
feedstocks of natural gas, anhydrous ammonia and sulfur. For 2008, approximately 62% of the
Chemical Business’ sales were made pursuant to these types of arrangements. The remaining
sales are primarily into agricultural markets at the price in effect at time of shipment. However,
we enter into futures/forward contracts to hedge the cost of natural gas and anhydrous ammonia
for the purpose of securing the profit margin on a significant portion of our sales commitments
with firm sales prices in our Chemical Business. The sales prices of our agricultural products
have only a moderate correlation to the anhydrous ammonia and natural gas feedstock costs and
reflect market conditions for like and competing nitrogen sources. This can compromise our
ability to recover our full cost to produce the product in this market. Additionally, the lack of
sufficient non-seasonal sales volume to operate our manufacturing facilities at optimum levels
can preclude the Chemical Business from reaching full performance potential. Our primary
efforts to improve the results of our Chemical Business include emphasizing our marketing
efforts to customers that will accept the commodity risk inherent with natural gas and anhydrous
ammonia, while maintaining a strong presence in the agricultural sector. We are also pursing the
opportunity to start an idle chemical process facility as discussed in the MD&A contained in this
report.

Bayer Agreement

On October 23, 2008, El Dorado Nitrogen, L.P. (“EDN”), and El Dorado Chemical Company
(“EDC”), both subsidiaries of the Company, entered into a new Nitric Acid Supply Operating
and Maintenance Agreement (the “Bayer Agreement”) with Bayer MaterialScience, LLC
(“Bayer”). The Bayer Agreement will replace the current Baytown Nitric Acid Project and
Supply Agreement, dated June 27, 1997 (the “Original Bayer Agreement”), as of June 24, 2009.
The Bayer Agreement is for a term of five years, with renewal options.

Under the terms of the Bayer Agreement, Bayer will purchase from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex located in
Baytown, Texas. Bayer will also supply ammonia as required for production of nitric acid at the
Baytown Facility, in addition to certain utilities, chemical additives and services that are required
for such production. Any surplus nitric acid manufactured at the Baytown Facility that is not
required by Bayer may be marketed to third parties by EDN.

Pursuant to the terms of the Original Bayer Agreement, Bayer has provided notice of exercise of
its option to purchase from a third party all of the assets comprising the Baytown Facility, except
certain assets that are owned by EDN for use in the production process (the “EDN Assets”).
EDN will continue to be responsible for the maintenance and operation of the Baytown Facility
in accordance with the terms of the Bayer Agreement. In addition, EDC will continue to
guarantee the performance of EDN’s obligations under the Bayer Agreement.

If there is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment of certain fees to EDN. See further discussion of the Bayer Agreement
under “Liquidity and Capital Resources - Bayer Agreement” of Item 7 of Part II of this report.

Seasonality

We believe that the 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 AN and UAN 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.

Regulatory Matters

Our Chemical Business is subject to extensive federal, state and local environmental laws, rules
and regulations as discussed under “Environmental Matters" of this Item and various risk factors
under Item 1A.

Competition

Our Chemical Business competes with several chemical companies in our markets, such as
Agrium, CF Industries, Dyno Nobel North America and Terra Industries, many of whom have
greater financial and other resources than we do. We believe that competition within the markets
served by our Chemical Business is primarily based upon service, price, location of production
and distribution sites, and product quality and performance.

Employees

As of December 31, 2008, we employed 1,878 persons. As of that date, our Climate Control
Business employed 1,411 persons, none of whom was represented by a union, and our Chemical
Business employed 397 persons, with 129 represented by unions under agreements that expire in
July through November of 2010.

Environmental Matters

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 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.

1. Discharge Water Matters

The El Dorado Facility generates process wastewater, which includes storm water. 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 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 believes it has demonstrated its ability to comply with the more
restrictive permit limits, and the rules that support the more restrictive dissolved minerals rules
have been revised to authorize a permit modification to adopt achievable dissolved minerals
permit limits. The ADEQ and EDC have entered into a consent administration 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 dispose of the El Dorado
Facility’s wastewater into the creek adjacent to the El Dorado Facility. We believe the El Dorado
Facility can comply with the revised permit; however, as of December 31, 2008, the ADEQ has
not issued the revised permit.

In addition, EDC has entered into a consent administrative order (“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 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. 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 December 31, 2008.

2. Air Matters

An air permit modification was issued to EDC by the ADEQ on August 26, 2008, which sets
new limits for ammonia emissions for the nitric acid units at the El Dorado Facility. EDC
recently completed required compliance testing but the results are still pending. Based on a
previous study, the nitric acid units can meet these new limits.

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 but retained ownership of the real
property. 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 with the
state of Kansas. 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
facility has agreed, within certain limitations, to pay and has been paying one-half of the costs
incurred under the consent order subject to reallocation.

Based on additional modeling of the site, our subsidiary and Chevron are pursuing a course with
the state of Kansas of long-term surface and ground water monitoring to track the natural decline
in contamination, instead of the soil excavation proposed previously. The state of Kansas
approved our proposal to perform two years of surface and groundwater monitoring and to
implement a Mitigation Work Plan to acquire additional field data in order to more accurately
characterize the nature and extent of contaminant migration off-site. The two-year monitoring
requirement expired in February 2009. The data from the monitoring program has not been
evaluated by the state of Kansas and the potential costs of additional monitoring or required
remediation, if any, is unknown.

At December 31, 2008, the total estimated liability (which is included in current accrued and
other liabilities) in connection with this remediation matter is approximately $84,000 and
Chevron’s share for these costs (which is included in accounts receivable) is approximately
$45,000. These amounts are not discounted to their present value. It is reasonably possible that a
change in estimate of our liability and receivable will occur in the near term.

ITEM 1A. RISK FACTORS

Risks Related to Us and Our Business

Cost and the lack of availability of raw materials could materially affect our profitability
and liquidity.

Our sales and profits are heavily affected by the costs and availability of primary raw materials.
These primary raw materials, which are purchased from unrelated third parties, are subject to
considerable price volatility. Historically, when there have been rapid increases in the cost of
these primary raw materials, we have sometimes been unable to timely increase our sales prices
to cover all of the higher costs incurred. While we periodically enter into futures/forward

contracts to hedge against price increases in certain of these raw materials, there can be no
assurance that we will effectively manage against price fluctuations in those raw materials.

Anhydrous ammonia, natural gas and sulfur represent the primary raw material feedstocks in the
production of most of the products of the Chemical Business. Although our Chemical Business
has a program to enter into contracts with certain customers that provide for the pass-through of
raw material costs, we have a substantial amount of sales that do not provide for the pass-through
of raw material costs. In addition, the Climate Control Business depends on raw materials such
as copper and steel, which have shown considerable price volatility. As a result, in the future, we
may not be able to pass along to all of our customers the full amount of any increases in raw
material costs. There can be no assurance that future price fluctuations in our raw materials will
not have an adverse effect on our financial condition, liquidity and results of operations.

Additionally, we depend on certain vendors to deliver the primary raw materials and other key
components that are required in the production of our products. Any disruption in the supply of
the primary raw materials and other key components could result in lost production or delayed
shipments. We have suspended in the past, and could suspend in the future, production at our
chemical facilities due to, among other things, the high cost or lack of availability of such
primary raw materials. Accordingly, our financial condition, liquidity and results of operations
could be materially affected in the future by the lack of availability of primary raw materials and
other key components.

Our Climate Control and Chemical Businesses and their customers are sensitive to adverse
economic cycles.

Our Climate Control Business can be affected by cyclical factors, such as interest rates, inflation
and economic downturns. Our Climate Control Business depends on sales to customers in the
construction and renovation industries, which are particularly sensitive to these factors. Due to
the current recession, we expect a decline in both commercial and residential construction. A
decline in the economic activity in the United States has in the past, and could in the future, have
a material adverse effect on us and our customers in the construction and renovation industries in
which our Climate Control Business sells a substantial amount of its products. Such a decline
could result in a decrease in revenues and profits, and an increase in bad debts, in our Climate
Control Business and could have a material adverse effect on our operating results, financial
condition and liquidity.

Our Chemical Business also can be affected by cyclical factors such as inflation, global energy
policy and costs, global market conditions and economic downturns in specific industries.
Certain sales of our Chemical Business are sensitive to the level of activity in the agricultural,
mining, automotive and housing industries. We expect that certain of our industrial and mining
customers will be affected by the current economic recession and could substantially reduce their
purchases. A substantial decline in the activity of our Chemical Business has in the past, and
could in the future, have a material adverse effect on the results of our Chemical Business and on
our liquidity and capital resources.

Weather conditions adversely affect our Chemical Business.

The agricultural products produced and sold by our Chemical Business have in the past, and
could in the future, be materially affected by adverse weather conditions (such as excessive rains
or drought) in the primary markets for our fertilizer and related agricultural products. If any of
these unusual weather events occur during the primary seasons for sales of our agricultural
products (March-June and September-November), this could have a material adverse effect on
the agricultural sales of our Chemical Business and our financial condition and results of
operation.

Environmental and regulatory matters entail significant risk for us.

Our Chemical Business is subject to numerous environmental laws and regulations. The
manufacture and distribution of chemical products are activities, which entail environmental
risks and impose obligations under environmental laws and regulations, many of which provide
for substantial fines and potential criminal sanctions for violations. Although we have
established processes to monitor, review and manage our businesses to comply with the
numerous environmental laws and regulations, our Chemical Business has in the past, and may
in the future, be subject to fines, penalties and sanctions for violations and substantial
expenditures for cleanup costs and other liabilities relating to the handling, manufacture, use,
emission, discharge or disposal of effluents at or from the Chemical Business’ facilities. Further,
a number of our Chemical Business’ facilities are dependent on environmental permits to
operate, the loss or modification of which could have a material adverse effect on its operations
and our financial condition.

We may be required to expand our security procedures and install additional security
equipment for our Chemical Business in order to comply with current and possible future
government regulations, including the Homeland Security Act of 2002.

The chemical industry in general, and producers and distributors of anhydrous ammonia and AN
specifically, are scrutinized by the government, industry and public on security issues. Under
current and proposed regulations, including the Homeland Security Act of 2002, we may be
required to incur substantial additional costs relating to security at our chemical facilities,
distribution centers, and our customers, as well as in the transportation of our products. These
costs could have a material impact on our financial condition and results of operation. The cost
of such regulatory changes, if significant enough, could lead some of our customers to choose
alternate products to anhydrous ammonia and AN, which would have a significant impact on
our Chemical Business.

A substantial portion of our sales is dependent upon a limited number of customers.

During 2008, five customers of our Chemical Business accounted for 51% of its net sales and
29% of our consolidated sales, and our Climate Control Business had one customer that
accounted for 18% of its net sales and 7% of our consolidated sales. The loss of, or a material
reduction in purchase levels by, one or more of these customers could have a material adverse
effect on our business and our results of operations, financial condition and liquidity if we are
unable to replace a customer on substantially similar terms.

There is intense competition in the Climate Control and Chemical industries.

Substantially all of the markets in which we participate are highly competitive with respect to
product quality, price, design innovations, distribution, service, warranties, reliability and
efficiency. We compete with a number of established companies that have greater financial,
marketing and other resources. Competitive factors could require us to reduce prices or increase
spending on product development, marketing and sales that would have a material adverse effect
on our business, results of operation and financial condition.

Potential increase of imported ammonium nitrate from Russia

In 2000, the United States and Russia entered into a suspension agreement limiting the quantity
of, and setting the minimum prices for, fertilizer grade AN sold from Russia into the United
States.

The Russians have requested that the suspension agreement be changed to only require that the
prices of its imported AN reflect the Russian producers full production costs, plus profit. The
Russian producers of AN could benefit from state set prices of natural gas, the principal raw
material for AN, which could be less than what U.S. producers are required to pay for their
natural gas. Other factors, however, such as transportation costs may partially offset natural gas
and production cost advantages. This change, if accepted by the United States, could result in a
substantial increase in the amount of AN imported into the United States from Russia at prices
that could be less than the cost to produce AN by U.S. producers plus a profit. Russia is the
world’s largest producer of fertilizer grade AN, and we are led to believe that it has substantial
excess AN production capacity.

For 2008, net sales of fertilizer grade AN accounted for 18% and 10% of our Chemical Business
net sales and consolidated net sales, respectively. If the suspension agreement is changed, as
discussed above, this change could result in Russia substantially increasing the amount of AN
sold in the United States at prices less than the U.S. producers are required to charge in order to
cover their cost plus a profit, and could have an adverse effect on our revenues and operating
results.

We are effectively controlled by the Golsen Group.

Jack E. Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members of
his immediate family (spouse and children), including Barry H. Golsen, our Vice Chairman and
President, entities owned by them and trusts for which they possess voting or dispositive power
as trustee (collectively, the “Golsen Group”) beneficially owned as of February 28, 2009, an
aggregate of 3,624,843 shares of our common stock and 1,020,000 shares of our voting preferred
stock (1,000,000 of which shares have .875 votes per share, or 875,000 votes), which together
votes as a class and represent approximately 20.5% of the voting power of our issued and
outstanding voting securities as of that date. In addition, the Golsen Group also beneficially
owned options and other convertible securities that allowed its members to acquire an additional
208,500 shares of our common stock within 60 days of February 28, 2009. Thus, the Golsen
Group may be considered to effectively control us. As a result, the ability of other stockholders
to influence our management and policies could be limited.

Loss of key personnel could negatively affect our business.

We believe that our performance has been and will continue to be dependent upon the efforts of
our principal executive officers. We cannot promise you that our principal executive officers will
continue to be available. Jack E. Golsen has an employment agreement with us. No other
principal executive has an employment agreement with us. The loss of some of our principal
executive officers could have a material adverse effect on us. We believe that our future success
will depend in large part on our continued ability to attract and retain highly skilled and qualified
personnel.

We may have inadequate insurance.

liability

insurance,

While we maintain
including certain coverage for environmental
contamination, it is subject to coverage limits and policies may exclude coverage for some types
of damages (which may include warranty and product liability claims). Although there may
currently be sources from which such coverage may be obtained, it may not continue to be
available to us on commercially reasonable terms or the possible types of liabilities that may be
incurred by us may not be covered by our insurance. In addition, our insurance carriers may not
be able to meet their obligations under the policies or the dollar amount of the liabilities may
exceed our policy limits. Even a partially uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of operations, financial
condition and liquidity.

Many of our insurance policies are written by AIG, which has experienced and is
continuing to experience financial difficulties.

It has been publicly reported that American International Group, Inc. (“AIG”) has experienced
significant financial difficulties and is continuing to experience significant financial difficulties.
AIG is a holding company for several different subsidiary insurance companies. AIG’s insurance
subsidiary or subsidiaries provide many of our casualty, workers compensation and other
insurance policies, including, but not limited to, our general liability policy, which includes
certain pollution coverage, excess umbrella policy, and officer and director liability policy
covering us and our officers and directors against certain securities’ law claims. We and one of
our executive officers are currently involved in certain legal proceeding in which AIG or its
subsidiaries has agreed to defend and to indemnify against loss under a reservation of rights. In
the event of a failure of AIG and/or its subsidiaries, it is unknown whether AIG or the applicable
subsidiary that is the insurer under our policies or the applicable regulatory authorities can
comply with the insurer’s obligations under our policies. Further, in the event of a failure by
AIG and/or its subsidiaries, we could be required to replace these policies. If it becomes
necessary to replace the policies written by subsidiaries of AIG, it may difficult or impossible to
replace these policies or, if we can replace these policies, to replace them on substantially similar
terms as our existing insurance policies.

We have not paid dividends on our outstanding common stock in many years.

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

foreseeable future. However, our board of directors has not made a definitive decision whether or
not to pay such dividends in 2009.

Terrorist attacks and other acts of violence or war, and natural disasters (such as
hurricanes, pandemic health crisis, etc.), have and could negatively impact the U.S. and
foreign companies, the financial markets, the industries where we operate, our operations
and profitability.

Terrorist attacks and natural disasters (such as hurricanes) have in the past, and can in the future,
negatively affect our operations. We cannot predict further terrorist attacks and natural disasters
in the United States and elsewhere. These attacks or natural disasters have contributed to
economic instability in the United States and elsewhere, and further acts of terrorism, violence,
war or natural disasters could further affect the industries where we operate, our ability to
purchase raw materials, our business, results of operations and financial condition. In addition,
terrorist attacks and natural disasters may directly impact our physical facilities, especially our
chemical facilities, or those of our suppliers or customers and could impact our sales, our
production capability and our ability to deliver products to our customers. In the past, hurricanes
affecting the Gulf Coast of the United States have negatively impacted our operations and those
of our customers. The consequences of any terrorist attacks or hostilities or natural disasters are
unpredictable, and we may not be able to foresee events that could have an adverse effect on our
operations.

We are the subject of an SEC enforcement action.

In August 2006, we were notified that the SEC was conducting an informal inquiry primarily in
connection with the change in inventory accounting from LIFO to FIFO of approximately
$500,000 by one of our subsidiaries that resulted in our restatement of our 2004 audited financial
statements and our interim financial statements contained in our Form 10-Q’s for the quarters
ended March 31, 2005 and June 30, 2005. We responded to that inquiry. During April 2008, the
staff of the SEC delivered a formal Wells Notice to us informing us that the staff has
preliminarily decided to recommend to the SEC that it institute a civil enforcement action against
us in connection with the above described matter. All assertions against us involve alleged
violations of Section 13 of the 1934 Act and do not assert allegations of fraudulent conduct nor
seek a monetary civil fine against us. During May 2008, we made a written submission to the
senior staff of the SEC, and we have had discussions with the senior staff after such submission.
The staff has indicated that it is still their intention to recommend to the SEC to bring a civil
injunction action against us and seek authority from the SEC to file such action. In addition, the
SEC has also made assertions against our former principal accounting officer based on Section
13 of the 1934 Act, and the SEC staff has also stated its intention to recommend civil
proceedings against him. The former principal accounting officer resigned as principal
accounting officer, effective August 15, 2008, but remains with the Company as a senior vice
president in charge of lending compliance and cash management and will be involved in our
banking relationships, acquisitions and corporate planning. We are currently in discussions with
the staff of the SEC regarding the settlement of this matter. There are no assurances this matter
will be settled.

We are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness.

Because we are a holding company and operations are conducted through our subsidiaries,
principally ThermaClime and its subsidiaries, our ability to make scheduled payments of
principal and interest on our indebtedness depends, in large part, on the operating performance
and cash flows of our subsidiaries and the ability of our subsidiaries to make distributions and
pay dividends to us. Under its loan agreements, ThermaClime and its subsidiaries may only
make distributions and pay dividends to us under limited circumstances and in limited amounts.

Our net operating loss carryforwards are subject to certain limitations and examination.

We had generated significant net operating loss (“NOL”) carryforwards from certain historical
losses. As of December 31, 2008, we have utilized all of the remaining federal NOL
carryforwards and a portion of our state NOL carryforwards. The utilization of these NOL
carryforwards has reduced our income tax liabilities. The federal tax returns for 1994 through
2004 remain subject to examination for the purpose of determining the amount of remaining tax
NOL and other carryforwards. With few exceptions, the 2005-2007 years remain open for all
purposes of examination by the IRS and other major tax jurisdictions.

Future issuance or potential issuance of our common stock could adversely affect the price
of our common stock, our ability to raise funds in new stock offerings and dilute your
percentage interest in our common stock.

Future sales of substantial amounts of our common stock or equity-related securities in the public
market, or the perception that such sales could occur, could adversely affect prevailing trading
prices of our common stock and could impair our ability to raise capital through future offerings
of equity or equity-related securities. No prediction can be made as to the effect, if any, that
future sales of shares of common stock or the availability of shares of common stock for future
sale, will have on the trading price of our common stock. Such future sales could also
significantly reduce the percentage ownership of our existing common stockholders.

We are subject to a variety of factors that could discourage other parties from attempting
to acquire us.

Our certificate of incorporation provides for a staggered board of directors and, except in limited
circumstances, a two-thirds vote of outstanding voting shares to approve a merger, consolidation
or sale of all, or substantially all, of our assets. In addition, we have entered into severance
agreements with our executive officers and some of the executive officers of our subsidiaries that
provide, among other things, that if, within a specified period of time after the occurrence of a
change in control of our company, these officers are terminated, other than for cause, or the
officer terminates his employment for good reason, we must pay such officer an amount equal to
2.9 times the officer’s average annual gross salary for the last five years preceding the change in
control.

We have authorized and unissued (including shares held in treasury) 53,890,188 shares of
common stock and 4,229,454 shares of preferred stock as of December 31, 2008. These unissued

shares could be used by our management to make it more difficult, and thereby discourage an
attempt to acquire control of us.

We have adopted a preferred share purchase plan, which is designed to protect us against certain
creeping acquisitions, open market purchases and certain mergers and other combinations with
acquiring companies.

The foregoing provisions and agreements are designed to discourage a third party tender offer,
proxy contest, or other attempts to acquire control of us and could have the effect of making it
more difficult to remove incumbent management.

Delaware has adopted an anti-takeover law which, among other things, will delay for three years
business combinations with acquirers of 15% or more of the outstanding voting stock of
publicly-held companies (such as us), unless;

• prior to such time the board of directors of the corporation approved the business

•

combination that results in the stockholder becoming an invested stockholder;
the acquirer owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction;
two-thirds of the stockholders, other than the acquirer, vote to approve the business
combination after approval thereof by the board of directors; or
the stockholders of the corporation amends its articles of incorporation or by-laws
electing not to be governed by this provision.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Climate Control Business

Our Climate Control Business manufactures most of its heat pump products in a 270,000 square
foot facility in Oklahoma City, Oklahoma. We lease this facility, with an option to buy, through
May 2016, with options to renew for three additional five-year periods. For 2008, approximately
78% of the productive capacity of this manufacturing facility was being utilized, based primarily
on two ten-hour shifts per day and a four-day work week. In addition, we own a 46,000 square
foot building subject to a mortgage, which is adjacent to our existing heat pump manufacturing
facility, primarily used for storage of raw material inventory. Also we utilize approximately
110,000 square feet of an existing facility for a distribution center, which facility is subject to a
mortgage.

Our Climate Control Business conducts its fan coil manufacturing operation in a facility located
in Oklahoma City, Oklahoma, consisting of approximately 265,000 square feet. We own this
facility subject to a mortgage. For 2008, our fan coil manufacturing operation was using 81% of
the productive capacity, based on one ten-hour shift per day and a four-day work week and a
limited second shift in selected areas.

Our Climate Control Business conducts its large air handler manufacturing operation in a facility
located in Oklahoma City, Oklahoma, consisting of approximately 110,000 square feet. We own
this facility subject to a mortgage. For 2008, approximately 58% of the productive capacity of
this manufacturing facility was being utilized, based on one eight-hour shift on a five-day work
week and a partial second shift in selected areas.

All of the properties utilized by our Climate Control Business are considered by our management
to be suitable to meet the current needs of that business. However, based on our long-term
strategy, we are planning an expansion of our geothermal and water source heat pump plant
facility with a 78,000 square foot addition and another 40,000 square foot addition to our air coil
production facility.

Chemical Business

Our Chemical Business primarily conducts manufacturing operations (a) on 150 acres of a 1,400
acre tract of land located at the El Dorado Facility, (b) on 160 acres of a 1,300 acre tract of land
located at the Cherokee Facility and (c) on leased property within Bayer’s complex in the
Baytown, Texas. The Company and/or its subsidiaries own all of its manufacturing facilities
except the Baytown Facility. The Baytown Facility is currently leased pursuant to a long-term
lease with an unrelated third party. See discussion above concerning the notice provided by
Bayer to exercise its option to purchase from this third party all of the assets comprising the
Baytown Facility, except the EDN assets, under “Bayer Agreement” of Item 1. Certain real
property and equipment located at the El Dorado and Cherokee Facilities are being used to
secure a $50 million term loan. For 2008, the following facilities were utilized based on
continuous operation:

Percentage of
Capacity

El Dorado Facility (1)
Cherokee Facility (2)
Baytown Facility

86 %
89 %
81 %

(1) The percentage of capacity for the El Dorado Facility relates to its nitric acid capacity. The El
Dorado Facility has capacity to produce other nitrogen products in excess of its nitric acid
capacity.

(2) The percentage of capacity for the Cherokee Facility relates to its ammonia production
capacity. The Cherokee Facility has additional capacity for nitric acid, AN and urea in excess of
its ammonia capacity.

In addition to the El Dorado and Cherokee Facilities, our Chemical Business distributes its
agricultural products through 15 wholesale and retail distribution centers, with 13 of the centers
located in Texas (10 of which we own and 3 of which we lease); 1 center located in Tennessee
(owned); and 1 center located in Missouri (owned).

All of the properties utilized by our Chemical Business are considered by our management to be
suitable and adequate to meet the current needs of that business.

ITEM 3. LEGAL PROCEEDINGS

1. Environmental See “Business-Environmental Matters” for a discussion as to:

• certain environmental matters relating to air and water issues at our El Dorado Facility;

and

• certain environmental remediation matters at our former Hallowell Facility.

2. Other

MEI Drafts

Cromus, as an assignee of Masinexportimport Foreign Trade Company (“MEI”), filed a lawsuit
against us, our subsidiary, Summit Machine Tool Manufacturing Corp. (“Summit”), certain of
our other subsidiaries, our chief executive officer and another officer of our Company, Bank of
America, and others, alleging that it was owed $1,533,000, plus interest from 1990, in
connection with Cromus’ attempted collection of ten non-negotiable bank drafts payable to the
order of MEI. The bank drafts were issued by Aerobit Ltd. (“Aerobit”), a non-U.S. company,
which at the time of issuance of the bank drafts, was one of our subsidiaries. Each of the bank
drafts has a face value of $153,300, for an aggregate principal face value of $1,533,000. The
bank drafts were issued in September 1992, and had a maturity date of December 31, 2001. Each
bank draft was endorsed by LSB Corp., which at the time of endorsement, was also one of our
subsidiaries. The complaint also seeks $1,000,000 from us and Summit for failure to purchase
certain equipment and $1,000,000 in punitive damages. During May 2008, the court dismissed
the complaint against us and our subsidiaries and our officers (including our Chief Executive
Officer). Cromus has appealed this dismissal against our subsidiaries and our officers but did not
appeal the dismissal against us.

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 $3.25 Convertible Exchangeable Class
C Preferred Stock, Series 2 (“Series 2 Preferred”) or to issue our common stock for a portion of
our Series 2 Preferred pursuant to a private exchange, that it 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 is 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:

•

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. The complaint alleges 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 14(d) of the Securities and Exchange Act of 1934 and Rule 14d-10,
• violation of 10(b) of the Exchange Act and Rule 10b-5,
• violation of 18 of the Exchange Act,
• violation of 17-12A501 of the Kansas Uniform Securities Act, and
• breach of fiduciary duty.

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 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. 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, 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. As of December 31, 2008, a liability of $100,000 has
been established for the Jayhawk claims.

Securities and Exchange Commission

We have previously disclosed that the SEC was conducting an informal inquiry of us relating to
the change in inventory accounting from LIFO to FIFO during 2004 involving approximately
$500,000 by one of our subsidiaries, which change resulted in the restatement of our financial
statements for each of the three years in the period ended December 31, 2004 and our March 31,
2005 and June 30, 2005 quarterly financial statements. During April 2008, the staff of the SEC
delivered a formal Wells Notice to us informing us that the staff has preliminarily decided to
recommend to the SEC that it institute a civil enforcement action against us in connection with
the above described matter. All assertions against us involve alleged violations of Section 13 of
the 1934 Act and do not assert allegations of fraudulent conduct nor seek a monetary civil fine
against us. During May 2008, we made a written submission to the senior staff of the SEC, and
we have had discussions with the senior staff after such submission. The staff has indicated that
it is still their intention to recommend to the SEC to bring a civil injunction action against us and
seek authority from the SEC to file such action. In addition, the SEC has also made assertions
against our former principal accounting officer based on Section 13 of the 1934 Act, and the
SEC staff has also stated its intention to recommend civil proceedings against him. The former
principal accounting officer resigned as principal accounting officer, effective August 15, 2008,
but remains with the Company as a senior vice president in charge of lending compliance and
cash management and will be involved in our banking relationships, acquisitions and corporate
planning. We are currently in discussions with the staff of the SEC regarding the settlement of
this matter. There are no assurances this matter will be settled.

Other Claims and Legal Actions

Wetherall v. Climate Master is a proposed class action was filed in the Illinois state district court
in September 2007 alleging that certain evaporator coils sold by one of our subsidiaries in the
Climate Control Business, Climate Master, Inc. (“Climate Master”) in the state of Illinois from
1990 to approximately 2003 were defective. The complaint requests certification as a class action
for the State of Illinois, which request has not yet been heard by the court. The plaintiffs asserted
claims based upon negligence, strict liability, breach of implied warranties, unjust enrichment
and the Illinois Consumer Fraud and Deceptive Business Practices Act. The plaintiffs have
dismissed the first three of these claims and the last two of these claims remain pending. Climate
Master has filed a motion for summary judgment as to the remaining claims, and that motion is
pending. Climate Master has removed this action to federal court. Climate Master has also filed
its answer denying the plaintiffs’ claims and asserting several affirmative defenses. Climate
Master’s insurers have been placed on notice of this matter. One of these insurers has denied
coverage, and one is out of business and has been liquidated and one insurer advised that it will
monitor the litigation subject to a reservation of rights to decline coverage. The policies
associated with insurers that have not declined coverage in this matter and remain in business
have deductible amounts ranging from $100,000 to $250,000. Climate Master intends to
vigorously defend itself in connection with this matter. Currently, the Company is unable to
determine the amount of damages or the likelihood of any losses resulting from this claim.
Therefore, no liability has been established at December 31, 2008.

Patent Litigation Matter - On December 7, 2007, Huntair Inc. filed a lawsuit against our
subsidiary, ClimateCraft, Inc., alleging patent infringement in the United States District Court for
the Northern District of Illinois, Eastern Division. In January 2009, this lawsuit was settled and
we paid an immaterial amount that was accrued as of December 31, 2008.

We are also involved in various other claims and legal actions which in the opinion of
management, after consultation with legal counsel, if determined adversely to us, would not have
a material effect on our business, financial condition or results of operations.

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

No matters were submitted to a vote of our shareholders during the fourth quarter of 2008.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Our officers serve one-year terms, renewable on an annual basis by the board of directors.
Information regarding the Company's executive officers is as follows:

Jack E. Golsen (1)

Chairman of the Board and Chief Executive Officer. Mr. Golsen, age 80
first became a director in 1969. His term will expire in 2010. Mr. Golsen,
founder of the Company, is our Chairman of the Board of Directors and
Chief Executive Officer and has served in those capacities since our
inception in 1969. Mr. Golsen served as our President from 1969 until
2004. During 1996, he was inducted into the Oklahoma Commerce and
Industry Hall of Honor as one of Oklahoma’s leading industrialists. Mr.
Golsen has a Bachelor of Science degree from the University of New
Mexico. Mr. Golsen is a Trustee of Oklahoma City University. During
his career, he acquired or started the companies which formed LSB. He
has served on the boards of insurance companies, several banks and was
Board Chairman of Equity Bank for Savings N.A. which was formerly
owned by LSB.

Barry H. Golsen (1) Vice Chairman of the Board, President, and President of the Climate
Control Business. Mr. Golsen, age 58, first became a director in 1981.
His term will expire in 2009. Mr. Golsen was elected President of the
Company in 2004. Mr. Golsen has served as our Vice Chairman of the
Board of Directors since August 1994, and has been the President of our
Climate Control Business for more than five years. Mr. Golsen also
served as a director of the Oklahoma branch of the Federal Reserve Bank.
Mr. Golsen has both his undergraduate and law degrees from the
University of Oklahoma.

David R. Goss

Tony M. Shelby

Executive Vice President of Operations and Director. Mr. Goss, age 68,
first became a director in 1971. His term will expire in 2009. Mr. Goss, a
certified public accountant, is our Executive Vice President of Operations
and has served in substantially the same capacity for more than five
years. Mr. Goss is a graduate of Rutgers University.

Executive Vice President of Finance and Director. Mr. Shelby, age 67,
first became a director in 1971. His term will expire in 2011. Mr. Shelby,
a certified public accountant, is our Executive Vice President of Finance
and Chief Financial Officer, a position he has held for more than five
years. Prior to becoming our Executive Vice President of Finance and
Chief Financial Officer, he served as Chief Financial Officer of a
subsidiary of the Company and was with the accounting firm of Arthur
Young & Co., a predecessor to Ernst & Young LLP. Mr. Shelby is a
graduate of Oklahoma City University.

Jim D. Jones

Senior Vice President and Treasurer. Mr. Jones, age 66, has been Senior
Vice President and Treasurer since July 2003, and has served as an
officer of the Company since April 1977. Mr. Jones is a certified public
accountant and was with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young LLP. Mr. Jones is a graduate of the
University of Central Oklahoma.

David M. Shear (1) Senior Vice President and General Counsel. Mr. Shear, age 49, has been
Senior Vice President since July 2004 and General Counsel and Secretary
since 1990. Mr. Shear attended Brandeis University, graduating cum
laude in 1981. At Brandeis University, Mr. Shear was the founding
Editor-In-Chief of Chronos, the first journal of undergraduate scholarly
articles. Mr. Shear attended the Boston University School of Law, where
he was a contributing Editor of the Annual Review of Banking Law. Mr.
Shear acted as a staff attorney at the Bureau of Competition with the
Federal Trade Commission from 1985 to 1986. From 1986 through 1989,
Mr. Shear was an associate in the Boston law firm of Weiss, Angoff,
Coltin, Koski and Wolf.

Michael G. Adams

Vice President and Corporate Controller. Mr. Adams, age 59, was
appointed to this position effective October 16, 2008 and has served as an
officer of the Company since March 1990. Mr. Adams is a certified
public accountant and was with the accounting firm of Arthur Young &
Co., a predecessor to Ernst & Young LLP. Mr. Adams is a graduate of
the University of Oklahoma.

Harold L. Rieker Jr.

. Vice President and Principal Accounting Officer. Mr. Rieker, age 48, was
appointed to this position effective October 16, 2008 and has served as an
officer of the Company since March 2006. Mr. Rieker is a certified public
accountant and was with the accounting firm of Grant Thornton LLP. Mr.
Rieker is a graduate of the University of Central Oklahoma.

(1) Barry H. Golsen is the son of Jack E. Golsen and David M. Shear is married to the niece of

Jack E. Golsen.

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

PART II

Market Information

On October 28, 2008, our common stock began trading on the New York Stock Exchange under
the symbol “LXU”. Prior to that date, our common stock traded on the American Stock
Exchange under the same symbol. The following table shows, for the periods indicated, the high
and low sales prices.

Year Ended
December 31,

2008

High
$ 28.80
$ 20.83
$ 24.59
$ 14.67

Low
$ 13.80
$ 13.45
$ 13.11
$ 6.65

2007

High
$ 15.71
$ 23.70
$ 25.25
$ 28.85

Low
$ 11.41
$ 14.76
$ 17.00
$ 20.54

Quarter
First
Second
Third
Fourth

Stockholders

As of March 6, 2009, we had 679 record holders of our common stock. This number does not
include investors whose ownership is recorded in the name of their brokerage company.

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 revolving credit facility (the “Working Capital Revolver Loan”) and
the $50 million loan agreement due 2012 (the “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;

•

• amounts under a certain management agreement between us and ThermaClime,

provided certain conditions are met, and

• outstanding loans entered into subsequent to November 2, 2007 in excess of $2.0

million at any time.

In 2001, we issued shares of Series D 6% cumulative, convertible Class C preferred stock
(“Series D Preferred”) and in 1985, we issued shares of Series B 12% convertible, cumulative
preferred stock ("Series B Preferred"). As of December 31, 2008, we have issued and
outstanding 1,000,000 shares of Series D Preferred, 20,000 shares of Series B Preferred, and 547
shares of noncumulative redeemable preferred stock (“Noncumulative Preferred”). 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 payable on October 9, which dividend is

cumulative;

• Series B Preferred at the rate of $12.00 a share payable January 1, which dividend is

cumulative; and

• Noncumulative Preferred at the rate of $10.00 a share payable April 1, which is

noncumulative.

On February 9, 2009, our board of directors declared the following dividends to holders of
record on March 20, 2009:

• $0.06 per share on our outstanding Series D Preferred for an aggregate dividend of

$60,000, payable on March 31, 2009;

• $12.00 per share on our outstanding Series B Preferred for an aggregate dividend of

$240,000, payable on March 31, 2009; and

• $10.00 per share on our outstanding Noncumulative Preferred for an aggregate

dividend of approximately $5,500, payable on April 1, 2009.

All shares of Series D Preferred and Series B Preferred are owned by the Golsen Group.

Holders of our common stock are entitled to receive dividends only when declared by our board
of directors. 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 definitive decision whether or
not to pay such dividends in 2009.

Sale of Unregistered Securities

During the three months ended December 31, 2008, we issued the following unregistered equity
securities:

On November 14, 2008, we issued 160 shares of common stock upon the holder’s conversion
of 4 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 were 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 December 31, 2008, the Company and affiliated purchasers, as
defined, purchased treasury stock as shown in the following table:

(a) Total
number of
shares of
common
stock
acquired (1)

(b) Average
price paid
per share
of common
stock (1)

(d) Maximum number
(or approximate
dollar value) of
shares of common
stock that may yet
be purchased under
the plans or programs

Period
October 1, 2008 -
October 31, 2008

November 1, 2008 -
November 30, 2008

December 1, 2008 -
December 31, 2008

Total

260,000

$ 7.07

200,000

90,000
350,000

$ 7.02
$ 7.06

-
200,000

See (2)

(1) During the fourth quarter of 2008, we purchased 200,000 shares of common stock at market
prices from an unrelated third party and are being held as treasury stock. In addition, the Golsen
Group purchased 150,000 shares of our common stock in the open market.

(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 December 31, 2008, the Company and affiliated purchasers, as
defined, purchased its 5.5% Convertible Senior Subordinated Notes due 2012 (“2007
Debentures”) as shown in the following table:

(a) Total
number
of units
acquired (A)

(b) Average
price paid
per unit (A)

(d) Maximum number
(or approximate
dollar value) of
units that may yet
be purchased under
the plans or programs

Period
October 1, 2008 -
October 31, 2008

November 1, 2008 -
November 30, 2008

December 1, 2008 -
December 31, 2008

Total

20,000

$ 694.25

15,000

4,500
24,500

$ 649.17
$ 685.97

4,500
19,500

40,500

(A) One unit represents a $1,000 principal amount of the debenture. During the fourth quarter of
2008, we acquired $19.5 million aggregate principal amount of the debentures. In addition, the
Golsen Group acquired $5.0 million aggregate principal amount of the debentures.

Preferred Share Rights Plan

In December 2008, we adopted a renewed shareholder rights plan which will impact a potential
acquirer unless the acquirer negotiates with our Board of Directors and the Board of Directors
approves the transaction. The rights plan became effective on January 5, 2009, upon the
expiration of our previous shareholder rights plan. Pursuant to the renewed plan, one preferred
share purchase right (a “Right”) is attached to each currently outstanding or subsequently issued
share of our common stock. Prior to becoming exercisable, the Rights trade together with our
common stock. In general, the Rights will become exercisable if a person or group (other than
the acquirer) acquires or announces a tender or exchange offer for 15% or more of our common
stock. Each Right entitles the holder to purchase from us one one-hundredth of a share of Series
4 Junior Participating Preferred Stock, no par value (the “Preferred Stock”), at an exercise price
of $47.75 per one one-hundredth of a share, subject to adjustment. If a person or group acquires
15% or more of our common stock, each Right will entitle the holder (other than the acquirer) to
purchase shares of our common stock (or, in certain circumstances, cash or other securities)
having a market value of twice the exercise price of a Right at such time. Under certain
circumstances, each Right will entitle the holder (other than the acquirer) to purchase the
common stock of the acquirer having a market value of twice the exercise price of a Right at
such time. In addition, under certain circumstances, our Board of Directors may exchange each
Right (other than those held by the acquirer) for one share of our common stock, subject to
adjustment. If the Rights become exercisable, holders of our common stock (other than the
acquirer), will receive the number of Rights they would have received if their units had been
redeemed and the purchase price paid in our common stock. Our Board of Directors may redeem
the Rights at a price of $0.01 per Right generally at any time before 10 days after the Rights
become exercisable.

,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e

s
r
a
e
Y

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

)
a
t
a
D
e
r
a
h
S
r
e
P
t
p
e
c
x
E

,
s
d
n
a
s
u
o
h
T
n
I

s
r
a
l
l
o
D

(

3
9
3
,
7

4
8
9
,
3
6
3

5
4
7

)
6
3
5
(

9
0
2

)
3
1
1
,
2
(

)
2
1
.
(

)
4
0
.
(

)
6
1
.
(

)
2
1
.
(

)
4
0
.
(

)
6
1
.
(

7
9

8
6
5
,
7
6
1

5
1
9
,
9

7
0
5
,
6
0
1

8
1
1

7
0
4
,
1
1

5
1
1
,
7
9
3

4
3
6
,
5

0
9
9
,
4

7
0
7
,
2

5
2
.

)
5
0
.
(

0
2
.

2
2
.

)
4
0
.
(

8
1
.

3
8

3
6
9
,
8
8
1

1
6
8
,
4
1

4
2
1
,
2
1
1

1
0
9

5
1
9
,
1
1

2
5
9
,
1
9
4

8
6
7
,
5
1

5
1
5
,
5
1

5
8
8
,
2
1

2
9
.

)
2
0
.
(

0
9
.

7
7
.

)
1
0
.
(

6
7
.

5
6

2
9
6
,
7
9

4
3
6
,
3
4

7
2
9
,
9
1
2

0
4
5
,
2

8
7
0
,
2
1

7
0
4
,
6
8
5

4
3
5
,
6
4

2
8
8
,
6
4

4
7
2
,
1
4

2
0
.

9
0
.
2

1
1
.
2

2
0
.

2
8
.
1

4
8
.
1

6
5

4
5
5
,
7
0
3

3
8
2
,
4
9

7
0
1
,
2
2
1

1
8
3
,
1
1

6
7
7
,
8
1

7
6
9
,
8
4
7

0
6
5
,
6
3

7
4
5
,
6
3

1
4
2
,
6
3

1
7
.
1

8
5
.
1

2
5

7
6
7
,
5
3
3

0
6
1
,
5
0
1

4
4
0
,
0
3
1

g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
c

e
r
o
f
e
b

s
n
o
i
t
a
r
e
p
o

g
n
i
u
n
i
t
n
o
c
m
o
r
f

e
m
o
c
n
I

:
a
t
a
D
e
m
o
c
n
I

f
o

t
n
e
m
e
t
a
t
S
d
e
t
c
e
l
e
S

)
3
(

s
e
x
a
t

e
m
o
c
n
i

r
o
f

s
n
o
i
s
i
v
o
r
P

)
2
(

e
s
n
e
p
x
e

t
s
e
r
e
t
n
I

s
e
l
a
s

t
e
N

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
c

e
r
o
f
e
b

s
n
o
i
t
a
r
e
p
o
g
n
i
u
n
i
t
n
o
c
m
o
r
f

)
s
s
o
l
(

e
m
o
c
n
I

s
n
o
i
t
a
r
e
p
o

d
e
u
n
i
t
n
o
c
s
i
d
m
o
r
f

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

e
g
n
a
h
c
g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
C

e
g
n
a
h
c
g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
c

e
r
o
f
e
b

s
n
o
i
t
a
r
e
p
o
g
n
i
u
n
i
t
n
o
c
m
o
r
f

)
s
s
o
l
(

e
m
o
c
n
I

s
n
o
i
t
a
r
e
p
o

d
e
u
n
i
t
n
o
c
s
i
d
m
o
r
f

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

e
g
n
a
h
c
g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
C

e
g
n
a
h
c
g
n
i
t
n
u
o
c
c
a

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

:
d
e
t
u
l
i

k
c
o
t
s

n
o
m
m
o
c
o
t

e
l
b
a
c
i
l
p
p
a

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

o
t

e
l
b
a
c
i
l
p
p
a

e
r
a
h
s

n
o
m
m
o
c

r
e
p

)
s
s
o
l
(

e
m
o
c
n
I

e
g
n
a
h
c
g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
C

)
4
(

)
1
(

e
g
n
a
h
c

e
m
o
c
n
i

t
e
N

:
k
c
o
t
s

n
o
m
m
o
c

:
c
i
s
a
B

n
o
i
t
r
o
p

t
n
e
r
r
u
c
g
n
i
d
u
l
c
n
i

,
t
b
e
d
m
r
e
t
-
g
n
o
L

y
t
i
u
q
e

s
r
e
d
l
o
h
k
c
o
t

:
a
t
a
d
r
e
h
t
o
d
e
t
c
e
l
e
S

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
R

s
t
e
s
s
a

l
a
t
o
T

:
a
t
a
D

t
e
e
h
S
e
c
n
a
l
a
B
d
e
t
c
e
l
e
S

)
1
(

A
T
A
D
L
A
I
C
N
A
N
I
F
D
E
T
C
E
L
E
S

.
6
M
E
T
I

.
t
r
o
p
e
r

s
i
h
t

f
o
I
I

t
r
a
P
f
o

7
m
e
t
I
n
i
d
e
d
u
l
c
n
i

s
n
o
i
s
s
u
c
s
i
d

e
e
S

e
r
a
h
s

n
o
m
m
o
c

r
e
p
d
e
r
a
l
c
e
d
s
d
n
e
d
i
v
i
d

h
s
a
C

)
1
(

)
2
(

t
s
e
r
e
t
n
i

t
n
e
u
q
e
s
b
u
s

,
t
l
u
s
e
r

s
A

.
g
n
i
r
u
t
c
u
r
t
s
e
r

t
b
e
d

y
r
a
t
n
u
l
o
v

s
a

r
o
f

d
e
t
n
u
o
c
c
a

s
a
w

t
n
e
m
e
e
r
g
a

g
n
i
c
n
a
n
i
f

a
m
o
r
f

s
d
e
e
c
o
r
p

g
n
i
s
u

s
e
t
o
n

d
e
r
u
c
e
s
n
u

r
o
i
n
e
s

f
o

e
s
a
h
c
r
u
p
e
r

e
h
t

,
2
0
0
2

y
a

M
n
I

r
e
b
m
e
t
p
e
S

n
i

d
i
a
p
e
r

s
a
w

t
b
e
d

t
n
e
m
e
e
r
g
a

g
n
i
c
n
a
n
i
f

e
h
T

.
n
o
i
t
c
a
s
n
a
r
t

e
h
t

n
o

n
i
a
g

d
e
z
i
n
g
o
c
e
r
n
u

e
h
t

t
s
n
i
a
g
a

d
e
z
i
n
g
o
c
e
r

e
r
e
w

t
b
e
d

t
n
e
m
e
e
r
g
a

g
n
i
c
n
a
n
i
f

e
h
t

h
t
i

w
d
e
t
a
i
c
o
s
s
a

s
t
n
e
m
y
a
p

.
4
0
0
2

L
O
N

l
a
r
e
d
e
f

n
o

e
c
n
a
w
o
l
l
a

n
o
i
t
a
u
l
a
v

e
h
t

g
n
i
s
r
e
v
e
r

f
o

t
l
u
s
e
r

e
h
t

s
a

s
e
x
a
t

e
m
o
c
n
i

l
a
r
e
d
e
f

r
a
l
u
g
e
r

r
o
f

n
o
i
s
i
v
o
r
p

g
n
i
z
i
n
g
o
c
e
r

n
a
g
e
b

e
w

,
7
0
0
2

f
o

r
e
t
r
a
u
q

h
t
r
u
o
f

e
h
t

n
i

g
n
i
n
n
i
g
e
B

)
3
(

,
4
0
0
2

d
n
a

8
0
0
2

r
o
f

n
o
i
l
l
i

m
4
.
4
$

d
n
a

n
o
i
l
l
i

m
5
.
5
$

f
o

t
b
e
d

f
o

t
n
e
m
h
s
i
u
g
n
i
t
x
e

n
o

n
i
a
g

s
e
d
u
l
c
n
i

e
g
n
a
h
c

g
n
i
t
n
u
o
c
c
a

f
o

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
c

e
r
o
f
e
b

s
n
o
i
t
a
r
e
p
o

g
n
i
u
n
i
t
n
o
c
m
o
r
f

e
m
o
c
n
I

)
4
(

.
s
d
r
a
w
r
o
f
y
r
r
a
c
L
O
N

l
a
r
e
d
e
f

e
h
t

f
o

n
o
i
t
a
z
i
l
i
t
u

d
e
t
a
i
c
o
s
s
a

e
h
t
d
n
a

s
e
c
n
e
r
e
f
f
i
d
g
n
i
m

i
t

r
e
h
t
o

d
n
a

s
d
r
a
w
r
o
f
y
r
r
a
c

.
y
l
e
v
i
t
c
e
p
s
e
r

6
3

ITEM 7. 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 a review of the other Items included
in this Form 10-K and our December 31, 2008 Consolidated Financial Statements included
elsewhere in this report. Certain statements contained in this MD&A may be deemed to be
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 subsidiary, ThermaClime, through its subsidiaries, owns
substantially all of our core businesses consisting of the:

• Climate Control Business engages in the manufacturing and selling of 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 in controlling the environment in commercial and
residential new building construction, renovation of existing buildings and
replacement of existing systems. For 2008, approximately 41% of our consolidated
net sales relates to the Climate Control Business.

• Chemical Business engages in the manufacturing and selling of nitrogen based
chemical products produced from three plants located in Arkansas, Alabama and
Texas for the industrial, mining and agricultural markets. Our products include
industrial and fertilizer grade ammonium nitrate (“AN”), urea ammonium nitrate
(“UAN”), nitric acid in various concentrations, nitrogen solutions and various other
products. For 2008, approximately 57% of our consolidated net sales relates to the
Chemical Business.

Economic Conditions

The current state of the economy creates significant uncertainty relative to the industrial,
construction and agricultural markets that we serve. We based our 2009 business plan upon our
assumption that during most of 2009, the economy will continue to contract due to additional
loss of jobs, declining consumer demand and limited credit availability. However, our 2009
business plan is a moving target that will be adjusted frequently as we measure customer demand
during the first and second quarters. We plan to adjust our controllable costs when and as market
conditions dictate.

Since we serve several diverse markets, we have to consider market fundamentals for each
market individually as we plan our production levels.

In our Climate Control Business, approximately 81% of our 2008 Climate Control sales relate to
commercial construction and the balance, or 19%, relates to single-family residential geothermal
heat pumps. Based on published industry forecasts predicting significant declines in commercial

and residential construction, we expect to see lower volumes in Climate Control sales during
2009, as compared to 2008 for most of our products.

At this time, however, we are unable to assess the impact to our sales level. The longer term
outlook after 2009 will, in our opinion, depend upon the recovery of the credit and capital
markets and the general economy.

One bright spot is the recently enacted American Reinvestment and Recovery Act of 2009. We
believe that tax credits and incentives, and certain planned direct spending by the federal
government contained in the Act, could stimulate sales of our geothermal heat pump products, as
well as other products that could be used to modernize federally owned and operated buildings,
military installations, public housing and hospitals.

Orders received for all Climate Control products in the fourth quarter of 2008 were $59.1 million
compared to $53.9 million in the fourth quarter of 2007 and $82.3 million average for the first
three quarters of 2008. Our backlog at the end of 2008 was $68.5 million, which provides solid
support going into the first quarter of 2009. Beyond the first quarter, the potential sales level is
uncertain. Our orders for January and February of 2009 averaged $16 million per month
compared to a monthly average of $25 million for the same period of 2008.

In our Chemical Business, approximately 64% of our 2008 Chemical Business sales consisted of:

• nitric acid, sulfuric acid and anhydrous ammonia sold to industrial customers; and
•

industrial grade AN and nitrogen solutions sold to mining customers.

Most of these sales 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.

Approximately 85% of our 2008 industrial and mining sales were to customers that have
contractual obligations to purchase a minimum annual quantity or allow us to recover our costs
plus a profit, irrespective of the volume of product produced. We expect that many of these
mining and industrial customers will take significantly less product in 2009 than in 2008 due to
the downturn in housing, automotive and other sectors.

In 2008, approximately 36% of our Chemical Business sales were nitrogen fertilizer sold in the
agricultural markets including:

• AN produced at our El Dorado Facility from purchased anhydrous ammonia and,
• UAN produced at our Cherokee Facility from natural gas.

The agricultural product sales, unlike the majority of our industrial and mining sales, are not sold
at a formula price but instead at the market price in effect at the time of sale or at a negotiated
future price. Due to the unpredictable volatility in the commodity markets, it is difficult at this
point to predict with any certainty the 2009 volume level and profit margins.

We believe that our 2009 sales volume expressed in tons will be lower than in 2008 and, due to
the steep market price declines in most commodities in the latter half of 2008, including
anhydrous ammonia and natural gas, as well as our selling prices per unit, our sales dollars per
unit will also be lower.

Further beginning in June 2009 when the new Bayer Agreement takes effect, net sales will
decrease as a result of the reduction in the Baytown Facility’s lease expense that was a pass
through cost component in our sales price. This reduction will be the result of Bayer exercising
its option to purchase from a third party all of the assets comprising the Baytown Facility, except
certain assets owned by EDN.

We expect agricultural operating margins in dollars to be less based upon the current spread
between natural gas cost and UAN market prices and the current spread between anhydrous
ammonia cost and AN market prices. Due to unfavorable weather during the fall and the deferral
of nitrogen applications because of higher fertilizer prices, the fall fertilizer application was
below expectation. A significant amount of nitrogen fertilizer remained in the distribution and
storage systems and at very high costs. During the period leading up to the fourth quarter of
2008, the price of natural gas and anhydrous ammonia was very high relative to the preceding 12
months. Significant amounts of nitrogen fertilizer were put into storage and, due to the lower
than normal application of these fertilizers in the fall of 2008, the product did not move out of
storage. As a result, the distribution and storage systems in North America were full, causing a
number of producers to curtail production. Industry sources are predicting that due to plant
curtailments, fewer imports, the deferral of the 2008 fall nitrogen application, and low global
grain inventories, a decreased supply will be available to meet demand after the initial spring
application depletes the fertilizer in storage. However, we are unable to predict if product prices
and margins will respond favorably.

Irrespective of our assumptions, the actual results for agricultural products will depend upon the
global and domestic supply of and the demand for nitrogen fertilizer and agricultural products,
including but not limited to, corn and wheat.

Recent figures from the Commerce Department reflect that gross domestic product declined at a
6.2% annual rate in the fourth quarter of 2008, which is far worse than previously thought.
Economic indicators for the first two months of 2009 point to a deepening recession. These
indications would imply that a rebound in 2009 is unlikely. As a result, we will make changes to
our controllable cost structure, as conditions dictate.

2008 Results

Our consolidated net sales for 2008 were $749.0 million compared to $586.4 million for 2007,
our consolidated operating income was $59.2 million compared to $59.0 million in 2007, and our
consolidated net income was $36.5 million, after an income tax provision of $18.8 million,
compared to net income of $46.9 million, after an income taxes provision of $2.5 million, for
2007.

The sales increase of $162.6 million includes an increase of $25.0 million in our Climate Control
Business and an increase of $135.3 million in our Chemical Business. Our Chemical Business’
increase relates to significantly higher selling prices primarily reflecting higher raw material
costs. As a result of our ability to pass through most raw material cost increases in the sales price
on a significant portion of the sales of our Chemical Business, our Chemical Business was able
to maintain a consistent level of gross profit, excluding the significant items discussed below.
However, since the increase in sales was primarily a result of increases in raw material costs
instead of volume increases, the gross profit as a percent of sales declined significantly. In
addition, our Chemical Business recognized other significant items in 2008 that negatively
affected gross profit and operating income as discussed in the table below.

With respect to gross profit and operating income, there are a number of factors that affect the
comparability of 2008 to 2007. Our Chemical Business’ gross profit and operating income
includes the following significant income (loss) items:

Unrealized non-cash losses on commodities

contracts

Unplanned maintenance downtime of Cherokee

Facility

Insurance recoveries of business interruption claims
LCM provision on inventory
Net precious metals expense
Expense for Turnarounds

Total effect on gross profit

Expenses relating to the Pryor Facility
Other income from litigation judgment/settlement
Total effect on operating income (1)

2008

2007
(In Millions)

Effect

(5.3

)

(0.2

)

)
(5.1

(5.1
)
-
(3.6)
(6.3)
(6.0)
(26.3)
(2.4)
7.6

(21.1) $

(1.1
)
3.8

(4.0
)
(3.8)
(3.6)
-
(3.7)
(2.6)
(2.6)
(3.4)
(22.8)
(3.5)
(1.4)
(1.0)
3.3
4.3
(1.2) $ (19.9)

(1) See discussion of these items below under “Chemical Business.”

In addition, during 2008, we acquired $19.5 million aggregate principal amount of the 2007
Debentures for $13.2 million and recognized a gain on extinguishment of debt of $5.5 million,
after expensing $0.8 million of the unamortized debt issuance costs associated with the 2007
Debentures acquired.

Also income taxes have a significant effect on the comparability of net income for 2008
compared to 2007. For 2008, we recognized a provision for income taxes of $18.8 million
compared to $2.5 million in 2007. During 2008, we recognized current and deferred federal and
state income taxes due, in part, to increased taxable income, fewer NOL carryforwards available
to offset taxable income and higher effective tax rates. In addition during 2008, we performed a
detailed analysis of all our deferred tax assets and liabilities and determined that our deferred tax
assets were understated by approximately $1.8 million. As a part of our analysis, we reviewed
the realizability of these deferred tax assets and determined that a valuation allowance of
approximately $0.3 million was required. Accordingly, the addition of the deferred tax assets

and the associated valuation allowance resulted in an income tax benefit (a reduction to our
income tax provision) of approximately $1.6 million. This income tax benefit is included in our
net income tax provision of $18.8 million for 2008.

As previously reported, the 2007 provision included a current provision for federal income taxes
of approximately $5.3 million for regular federal income tax and alternative minimum income
tax (“AMT”). The 2007 provision also included a current provision of state income taxes of
approximately $2.0 million, which included the provision for 2007 state income taxes, as well as,
approximately $1.0 million for uncertain state income tax positions recognized in accordance
with FIN 48. The 2007 provisions were partially offset by a benefit for deferred income taxes of
approximately $4.7 million resulting from the reversal of valuation allowance on deferred tax
assets, the benefit of AMT credits, and other temporary differences as previously reported.

Climate Control Business

Our Climate Control Business has consistently generated annual profits and positive cash flows
and continued to do so during 2008.

Climate Control’s net sales were approximately $311.4 million compared to $286.4 million for
2007, an increase of $25.0 million or 8.7%. The improvement in net sales relates to a 15.7%
increase in geothermal and water source heat pump products and a 4.3% increase in other HVAC
products, partially offset by a 2.7% decline in sales of our fan coil products.

For 2008, the order level was $305.9 million as compared to $241.6 million for 2007, an increase
of $64.3 million or 26.6%. Consistent with net sales, the increase in orders was primarily for
geothermal and water source heat pump products. There was some softening in the order level
for hydronic fan coil products that was offset by orders for other HVAC products.

Due to the increase in net sales, Climate Control’s gross profit in 2008 increased to $96.6
million, or 31.0% of net sales, as compared to $83.6 million, or 29.2% of net sales, in 2007. For
2008, Climate Control’s operating income before allocation of corporate overhead was $38.9
million compared to $34.2 million in 2007. For 2008, gross profit and operating income, as a
percentage of net sales, were positively impacted by an increase of $1.3 million in copper futures
contracts gains as compared to 2007.

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

• Multi-Family
• Lodging
• Education
• Healthcare
• Offices
• Manufacturing

We expect continued volatility in material costs, especially for copper, steel, aluminum and
components that include those metals. Although we continue to monitor and take measures to
mitigate and control material cost fluctuations through hedging transactions, contract purchases
and volume agreements, there can be no assurance that our selling prices will track raw material
and component cost changes. During the fourth quarter of 2008, commodity prices, including
copper and aluminum, dropped considerably.

The majority of our Climate Control business is subject to the competitive bid process and the
opportunity to pass through cost increases for materials depends on market conditions at the time
we are bidding for a job. Once an order is accepted and entered into our backlog, the price
usually cannot be adjusted to pass through any subsequent changes in our costs.

Our Climate Control Business manufactures most of its products to customer orders that are
placed well in advance of required delivery dates. As a result, our Climate Control Business
maintains a significant backlog that reduces the amount of inventory required to warehouse. At
December 31, 2008, the backlog of confirmed orders was approximately $68.5 million compared
to $54.5 million at December 31, 2007. We expect to ship substantially all the orders in the
backlog within the next twelve months and have the production capacity in place to do so.

Our Climate Control Business will continue to launch new products and product upgrades in an
effort to maintain our current market position and to establish presence in new markets. Our
Climate Control Business' profitability over the last few years has been affected by operating
losses of certain product lines being developed during that time. Our emphasis has been to
increase the sales levels of these operations above the breakeven point. During 2007 and 2008,
the results for these products reflected modest improvement. Although these products have not
yet achieved profitability, we continue to believe that these products have good long-term
prospects.

Management focuses on the following objectives for Climate Control:

• monitoring and managing to the current economic environment,
•
increasing the sales and operating margins of all products,
• developing and introducing new and energy efficient products,
•
improving production and product delivery performance, and
• expanding the markets we serve, both domestic and foreign.

Chemical Business

Our Chemical Business has three chemical production facilities: the El Dorado Facility, the
Cherokee Facility and the Baytown Facility. The El Dorado and Baytown Facilities produce
nitrogen products from anhydrous ammonia that is delivered by pipeline and the El Dorado
Facility also produces sulfuric acid from recovered elemental sulfur delivered by truck and rail.
The Cherokee Facility produces anhydrous ammonia and nitrogen products from natural gas that
is delivered by pipeline. In addition, we own idle ammonia and downstream derivative chemical
process facility in Pryor, Oklahoma (the “Pryor Facility”), which we are in the process of
activating, subject to the Pryor Facility obtaining a sales or distribution agreement satisfactory to

us. When and if activated, this facility will produce anhydrous ammonia and UAN from natural
gas. See additional discussion of the Pryor Facility below under “Liquidity and Capital
Resources - Pryor Facility.”

Our Chemical Business reported net sales for 2008 of $424.1 million compared to $288.8 million
for 2007, an increase of $135.3 million. Operating income before allocation of corporate
overhead was $31.3 million compared to $35.0 million in the same period of 2007.

The increase in sales of $135.3 million is primarily attributable to significantly higher selling
prices for our products produced at our facilities.

As shown in the table above and discussed below, our Chemical Business’ operating income for
2008 decreased by a net $21.1 million for unrealized losses on outstanding commodities
contracts, costs relating to unplanned maintenance downtime of the Cherokee Facility, a lower of
cost or market provision on inventory, net expenses for precious metals, expenses associated
with Turnarounds, and expenses associated with the possible start up of the Pryor Facility,
partially offset by other income from litigation judgment and settlement. For 2007, significant
items decreased operating income by a net $1.2 million. Excluding these significant items for
both periods, results for 2008 are favorable compared to 2007.

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 2008, natural gas ranged in price from $5.36 to $13.16 per
MMBtu and averaged approximately $9.62 per MMBtu compared to an average price in 2007 of
$7.37 per MMBtu. At March 6, 2009, the price for natural gas was $4.15 per MMBtu. During
2008, anhydrous ammonia ranged in price based on the low Tampa metric price per ton from
$125 to $931 per metric ton and averaged approximately $587, compared to an average price in
2007 of $333 per metric ton. At March 6, 2009, the Tampa price for anhydrous ammonia was
$275 per metric ton. During 2008, sulfur ranged in price based on the quarterly Tampa long ton
price from $150 to $617 per long ton and averaged approximately $368, compared to an average
price in 2007 of $78 per long ton. At March 6, 2009, the Tampa price per long ton for sulfur was
minimal. Due to the volatility of these commodity markets, we continue to focus our sales efforts
on sales agreements and/or pricing formulas that provide for the pass through of raw material
and other variable costs and certain fixed costs.

We have entered into futures/forward contracts to hedge the cost of natural gas and anhydrous
ammonia for the purpose of securing the profit margin on a significant portion of our sales
commitments with firm sales prices in our Chemical Business. Recent extreme volatility in
natural gas and ammonia futures prices has created wide swings in the market value of our
natural gas and ammonia hedges. Due to a steep decline in natural gas and ammonia futures
prices, the unrealized non-cash losses on our outstanding natural gas and ammonia hedges
totaled approximately $5.3 million at December 31, 2008, of which approximately $2.5 million
relate to contracts that will settle during the first quarter of 2009. These hedges contractually
secure a large portion of the profit margin on significant orders for our Chemical Business by
locking in the cost of these raw material feedstocks as well as the ultimate sales price of the end
product. We believe the customers that have entered into these sales commitments with us will

fulfill their obligations to purchase the products at contracted prices. The mark-to-market
accounting adjustments produce volatility in our consolidated financial statements. The
unrealized gains or losses are non-cash items and economically hedge the profit margin of these
sales commitments.

During the third quarter of 2008, the Cherokee Facility experienced repeated unplanned
maintenance downtime, which downtime reduced production and sales by our Chemical
Business. As a result, interim repairs were made at the Cherokee Facility during this period. Due
to this repeated downtime, the Cherokee Facility lost approximately 20 days of operation
reducing our Chemical Business’ gross profit and operating income by an estimated $5.1 million
during the third quarter of 2008. During 2007, the Cherokee Facility experienced unplanned
maintenance downtime, which reduced gross profit and operating income by an estimated $1.1
million.

At December 31, 2008, our Chemical Business recognized a lower of cost or market (“LCM”)
provision of $3.6 million due to declines in global nitrogen prices as demand fell as the result of
buyers’ concerns over volatile commodity prices and the global economic crisis.

Our Chemical Business uses precious metals as a catalyst in the manufacturing process of nitric
acid. The market prices of these precious metals were highly volatile during 2008. During major
maintenance and capital projects performed in 2008 and 2007, we performed procedures to
recover precious metals (previously expensed) which had accumulated over time within our
manufacturing equipment. Also during 2007, we sold a portion of our precious metals that
exceeded our production requirements. As the result, precious metals expense, net of recoveries
and gains, increased $3.7 million as compared to 2007. Current prices for precious metals are
less than half the prices were a year ago and are significantly lower than the peak levels reached
in June 2008.

Our Chemical Business expenses the costs of Turnarounds as they are incurred. During 2008,
expenses for Turnarounds were approximately $6.0 million compared to $3.4 million during
2007. The increase in Turnaround costs relates primarily to certain Turnarounds that are
performed every 18-24 months compared to certain Turnarounds that are performed annually.
Based on our current plan for Turnarounds to be performed during 2009, we currently estimate
that we will incur approximately $5.0 million of Turnaround costs. However, it is possible that
the actual costs could be significantly different than our estimates.

As discussed below under “Liquidity and Capital Resources - Pryor Facility”, we are in the
process of activating the Pryor Facility, subject to obtaining a sales or distribution agreement. As
a result, our expenses associated with the Pryor Facility increased approximately $1.4 million in
2008 compared to 2007.

As previously reported, in 2008, our Chemical Business recognized income from a litigation
judgment of approximately $7.6 million, net of attorneys’ fees. On June 6, 2008, we received
proceeds of approximately $11.2 million for this litigation judgment, which includes interest of
approximately $1.4 million and from which we paid attorneys’ fees of approximately $3.6
million. During 2007, our Chemical Business reached a settlement with Dynegy, Inc. and one of
its subsidiaries, relating to a previously reported lawsuit. This settlement of $3.3 million reflects

the net proceeds of approximately $2.7 million received and the retention of a disputed accounts
payable amount of approximately $0.6 million.

Our Chemical Business continues to focus on growing our non-seasonal industrial customer base
with an emphasis on customers accepting the risk inherent with raw material costs, while at the
same time, maintaining a strong presence in the seasonal agricultural sector. A significant
percentage of the costs to operate process plants, other than costs for raw materials and utilities,
are fixed costs. Our long-term strategy includes optimizing production efficiency of our
facilities, thereby lowering the fixed cost of each ton produced.

Repurchase of Portion of 2007 Debentures

During 2008, we acquired $19.5 million aggregate principal amount of the 2007 Debentures for
$13.2 million and recognized a gain on extinguishment of debt of $5.5 million, after expensing
$0.8 million of the unamortized debt issuance costs associated with the 2007 Debentures
acquired. The repurchase of these debentures was funded by our working capital.

Liquidity and Capital Resources

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

Cash and cash equivalents

Long-term debt:

2007 Debentures due 2012
Secured Term Loan due 2012
Other
Total long-term debt

December 31,
2008

December 31,
2007

(In Millions)

46.2

$ 58.2

40.5
50.0
14.7
$ 105.2

$ 60.0
50.0
12.1
$ 122.1

Total stockholders’ equity

$ 130.0

$ 94.3

We believe our capital structure and liquidity reflect a reasonably sound financial position. At
December 31, 2008, our cash and cash equivalents were $46.2 million and our $50 million
Working Capital Revolver Loan with Wells Fargo Foothill was undrawn and available to fund
operations, if needed, subject to the financial viability of the lender. During 2008, we had no
outstanding borrowings under the Working Capital Revolver Loan. At December 31, 2008, the
ratio between long-term debt, before the use of cash on hand to pay down debt, and stockholders’
equity was approximately 0.8 to 1 as compared to 1.3 to 1 at December 31, 2007.

For 2009, 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 on hand, secured
property and equipment financing, and the borrowing availability under the Working Capital
Revolver Loan to fund operations and pay obligations. Due to the uncertainty relative to the

current recession, we are evaluating the effect upon our internally generated cash flows that
could occur if we experience significant declines in our sales volumes.

The 5.5% Convertible Senior Subordinated Notes due 2012 (the “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. As previously reported, our board of directors has granted
management the authority, commencing March 12, 2008, to repurchase all or a portion of the
2007 Debentures on favorable terms if an opportunity is presented on terms satisfactory to
management. Under this authority, we acquired $19.5 million aggregate principal amount of
these debentures during the fourth quarter of 2008 as discussed above under “Repurchase of
Portion of 2007 Debentures.”

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 December
31, 2008 was approximately 6.19%. The Secured Term Loan requires 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.

ThermaClime and certain of its 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.

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 (the “Borrowers”) may borrow on a revolving basis up to
$50.0 million based on specific percentages of eligible accounts receivable and inventories. At
December 31, 2008, we had approximately $49.5 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 “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 their non-ThermaClime affiliates and
certain ThermaClime subsidiaries. This limitation does not prohibit payment to the Company of
amounts due under a Services Agreement, Management Agreement and a Tax Sharing
Agreement. Based upon our current projections, we believe that cash and borrowing availability
under our Working Capital Revolver Loan is adequate to fund operations in 2009, subject to the
financial viability of the lender.

Income Taxes

As previously discussed, in 2007 and certain prior years, our effective tax rate had been minimal
due to the valuation allowances on federal NOL carryforwards and other deferred tax assets. In
the third quarter of 2007, due to our improved operating results, it was determined that the

valuation allowances were no longer necessary. At December 31, 2007, we had minimal federal
NOL carryforwards remaining, which were utilized during 2008. As a result, in 2008, we
recognized and paid federal income taxes at regular corporate tax rates, which we expect to
continue in 2009.

In addition, the utilization of the NOL carryforwards has reduced our income tax liabilities. The
federal tax returns for 1994 through 2004 remain subject to examination for the purpose of
determining the amount of remaining tax NOL and other carryforwards. With few exceptions,
the 2005-2007 years remain open for all purposes of examination by the IRS and other major tax
jurisdictions.

Capital Expenditures

General

Cash used for capital expenditures during 2008 was $32.6 million, including $8.7 million
primarily for property, production equipment, and other upgrades for additional capacity in our
Climate Control Business and $23.6 million for our Chemical Business, primarily for process
and reliability improvements of existing facilities.

As discussed below, our current commitment for 2009 is approximately $10.4 million. Other
capital expenditures for 2009 are believed to be discretionary. In addition, although not approved
or committed, we are considering numerous capital expenditures related to both our Chemical
and Climate Control Businesses that would utilize a significant amount of our existing cash on
hand, if not separately financed.

Current Commitments

As of the date of this report, we have committed capital expenditures of approximately $10.4
million for 2009. The expenditures include $6.9 million for process and reliability improvement
in our Chemical Business, including $2.9 million relating to the Pryor Facility (see discussion
below regarding our expected costs to activate the Pryor Facility). In addition, our current
commitments include $3.5 million primarily for production equipment and facilities upgrades 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 and other than Pryor Facility’s capital expenditures,
we have planned capital expenditures in our Climate Control Business of approximately $10
million and in our Chemical Business of approximately $12 million. These planned expenditures
are subject to economic conditions and approval. If these capital expenditures are approved, most
of the Climate Control’s expenditures will likely be financed and the Chemical Business’
expenditures will likely be funded from internal cash flows.

Certain events relating to our Chemical Business

Pryor Facility - As previously reported, we have been considering activating a portion of our
idle Pryor Facility subject to securing a sales agreement with a strategic customer to purchase

and distribute the majority of the UAN production. Based on our discussions with several large
strategic industry customers, we believe that in the near future we will be able to reach an
agreement to sell or distribute the UAN production at the Pryor Facility.

We received our permits to operate the Pryor Facility in February 2009. Based on the status of
discussions with potential customers and since we have received the necessary permits, we are
proceeding with the preparations to start the facility. We have hired key personnel to operate the
facility and have positioned the additional necessary personnel to be hired at appropriate
intervals during the start-up phases.

Barring unforeseen delays and subject to securing a sales or distribution agreement as discussed
above, we expect to start production at the Pryor Facility during the third quarter of 2009. If the
Pryor Facility becomes operational, we plan to produce and sell approximately 325,000 tons of
UAN and approximately 35,000 tons of anhydrous ammonia annually. As previously disclosed,
our initial cost estimate to activate the Pryor Facility was $15 million to $20 million, with
approximately 50% being for capital expenditures and the remainder for expenses. The
estimated start up costs include those cost to bring the plant up to full UAN production status.
Our estimate of the total remaining cost to activate the Pryor Facility, including $2.9 million of
current commitments discussed above, is approximately $13 million to $17 million.
Approximately $6 million to $8 million will be for capital expenditures and the remaining
portion will be expensed as incurred. We plan to fund this project from our available cash on
hand and working capital. However, the actual timeframe to begin production, the related
amount of production and sales and the total remaining cost to activate the facility could be
significantly different from our current estimates.

Bayer Agreement - On October 23, 2008, El Dorado Nitrogen, L.P. (“EDN”), and El Dorado
Chemical Company (“EDC”), both subsidiaries of the Company, entered into a new Nitric Acid
Supply Operating and Maintenance Agreement (the “Bayer Agreement”) with Bayer
MaterialScience, LLC (“Bayer”). The Bayer Agreement will replace the current Baytown Nitric
Acid Project and Supply Agreement, dated June 27, 1997 (the “Original Bayer Agreement”), as
of June 24, 2009. The Bayer Agreement is for a term of five years, with renewal options.

Under the terms of the Bayer Agreement, Bayer will purchase from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex located in
Baytown, Texas at a price covering EDN’s costs plus a profit, with certain performance
obligations on EDN’s part. Bayer will also supply ammonia as required for production of nitric
acid at the Baytown Facility, in addition to certain utilities, chemical additives and services that
are required for such production. Any surplus nitric acid manufactured at the Baytown Facility
that is not required by Bayer may be marketed to third parties by EDN.

If there is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment to EDN a termination fee of approximately $6.3 million plus 1.1 times
the current net book value of the EDN Assets. For 2008, EDN, a subsidiary of El Dorado Nitric
Company (“EDNC”), had sales to Bayer of approximately 19% and 11% of the Chemical
Business’ and the Company’s consolidated net sales, respectively.

Fire at Cherokee Facility - On February 5, 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 cause of the fire is under investigation and the extent of the damage
to the nitric acid plant is not yet determined. It is also not yet known when repair or replacement
will be completed and the nitric acid plant put back in operation. 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. While the volume of production of finished product at the
Cherokee Facility will be impacted, the Cherokee Facility continues production with the larger of
the nitric acid plants. Our insurance provides for business interruption coverage after a 30-day
waiting period for lost profits and extra expense coverage and a $1 million property loss
deductible.

Stock Repurchase Authorization

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 2008, we repurchased 400,000 shares of our common stock using funds
from our working capital.

Stock Options Granted in 2008

During the second quarter of 2008, our board of directors adopted our 2008 Incentive Stock Plan
(the “2008 Plan”), which plan was approved by our shareholders at our annual meeting of
shareholders held on June 5, 2008. The number of shares of our common stock available for
issuance under the 2008 Plan is 1,000,000 shares, subject to adjustment. Under the 2008 Plan,
awards may be made to any employee, officer or director of the Company and its affiliated
companies. An award may also be granted to any consultant, agent, advisor or independent
contractor for bona fide services rendered to the Company or any affiliate (as defined in the 2008
Plan), subject to certain conditions. The compensation and stock option committee of our board
of directors will administer the 2008 Plan.

During the fourth quarter of 2008, the compensation and stock option committee of our board of
directors approved the grants of 372,000 shares of qualified stock options to certain employees
and our board of directors (with each recipient abstaining as to himself) approved the grants of
45,000 shares of non-qualified stock options to our outside directors under the 2008 Plan (the
“2008 Options”). The exercise price of the 2008 Options was equal to the market value of our
common stock at the date of grant. The 2008 Options vest at the end of each one-year period at
the rate of 16.5% per year for the first five years and the remaining unvested options will vest at
the end of the sixth year. Pursuant to the terms of the non-qualified stock options, if a

termination event occurs, as defined, the non-vested stock options will become fully vested and
exercisable for a period of one year from the date of the termination event. Excluding non-
qualified stock options relating to a termination event, the 2008 Options expire in 2018.

At December 31, 2008, the total stock-based compensation expense not yet recognized is $7.2
million relating to non-vested stock options, which is expected to be amortized through 2016
(adjusted for forfeitures), based on the underlying vesting terms of the non-vested stock options.

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;

•

• amounts under a certain management agreement between us and ThermaClime,

provided certain conditions are met, and

• outstanding loans 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 definitive decision whether or not to pay such
dividends in 2009.

During 2008, the 2008 dividend requirements were declared and paid on our preferred stock
using funds from our working capital. Therefore, there were no unpaid dividends in arrears at
December 31, 2008. 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 payable on October 9, which dividend is

cumulative;

• Series B Preferred at the rate of $12.00 a share payable January 1, which dividend is

cumulative; and

• Noncumulative Preferred at the rate of $10.00 a share payable April 1, which is

noncumulative.

Compliance with Long-Term Debt Covenants

As discussed below under “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. ThermaClime's
forecasts for 2009 indicate that ThermaClime will be able to meet all financial covenant
requirements for 2009.

Loan Agreements - Terms and Conditions

5.5% Convertible Senior Subordinated Debentures - As previously reported, 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. We received
net proceeds of approximately $57.0 million, after discounts and commissions. As discussed
above under “Repurchase of Portion of 2007 Debentures”, we acquired $19.5 million aggregate
principal amount of the 2007 Debentures during the fourth quarter of 2008. As a result, only
$40.5 million remains outstanding at December 31, 2008.

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.

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.

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. As a result of using a portion of the proceeds from the 2007 Debentures to pay
down the Working Capital Revolver Loan, at December 31, 2008, there were no outstanding
borrowings. In addition, the net credit available for additional borrowings under our Working
Capital Revolver Loan was approximately $49.5 million. 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, which requirements
are measured quarterly on a trailing twelve-month basis and as defined in the agreement.
ThermaClime was in compliance with those covenants for 2008.

Secured Term Loan - As previously reported, 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 December 31, 2008 was approximately 6.19%. 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. The carrying value of the pledged assets is approximately $61 million at
December 31, 2008.

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 December 31,
2008, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was
approximately $75 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 measured quarterly on a trailing twelve-month
basis. The Secured Term Loan borrowers were in compliance with these financial covenants for
2008. 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.

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 the Secured Term Loan, the lender 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

During the fourth quarter of 2008, the Golsen Group acquired from an unrelated third party
$5,000,000 of the 2007 Debentures. At December 31, 2008, accrued interest of $137,500 relates
to the portion of debentures held by the Golsen Group.

In March 2008, we paid the dividends totaling approximately $60,000 and $240,000 on our
Series D Preferred and Series B Preferred, respectively, all of the outstanding shares of which are
owned by the Golsen Group.

Critical Accounting Policies and Estimates

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. In addition, the more critical areas of financial reporting impacted by
management's judgment, estimates and assumptions include the following:

Accounts Receivable and Credit Risk - Our sales to contractors and independent sales
representatives are generally subject to a mechanics lien in the Climate Control Business. Our
other sales are generally unsecured. Credit is extended to customers based on an evaluation of
the customer's financial condition and other factors. Credit losses are provided for in the
financial statements based on historical experience and periodic assessment of outstanding
accounts receivable, particularly those accounts which are past due (determined based upon how
recently payments have been received). Our periodic assessment of accounts and credit loss
provisions are based on our best estimate of amounts that are not recoverable. Concentrations of
credit risk with respect to trade receivables are limited due to the large number of customers
comprising our customer bases and their dispersion across many different industries and
geographic areas, however, six customers account for approximately 24% of our total net
receivables at December 31, 2008. We do not believe this concentration in these six customers
represents a significant credit risk due to the financial stability of these customers. At December
31, 2008 and 2007, our allowance for doubtful accounts of $0.7 million and $1.3 million,
respectively, were netted against our accounts receivable.

Inventory Valuations - 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 December 31, 2008 and
2007, the carrying value of certain nitrogen-based inventories produced by our Chemical
Business was reduced to market because cost exceeded the net realizable value by $3,627,000
and $13,000, respectively. In addition, the carrying value of certain slow-moving inventory items
(primarily Climate Control products) was reduced to market because cost exceeded the net
realizable value by $514,000 and $460,000 at December 31, 2008 and 2007, respectively.

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. As of December 31, 2008 and 2007, precious metals were $14.7 million and $10.9
million, respectively, and are included in supplies, prepaid items and other in the consolidated
balance sheets. 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. For 2008, 2007 and 2006, the
amounts expensed for precious metals were approximately $7.8 million, $6.4 million and $4.8
million, respectively. These precious metals expenses are included in cost of sales. 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 the

manufacturing equipment. For 2008, 2007 and 2006, we recognized recoveries of precious
metals at historical FIFO costs of approximately $1.5 million, $1.8 million and $2.1 million,
respectively. When we accumulate precious metals in excess of our production requirements, we
may sell a portion of the excess metals. We recognized gains of $2.0 million for 2007 (none in
2008 or 2006) from the sale of excess precious metals. These recoveries and gains are reductions
to cost of sales.

Impairment of Long-Lived Assets and Goodwill - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable and goodwill is reviewed for impairment at least annually. If assets to be held
and used are considered to be impaired, the impairment to be recognized is the amount by which
the carrying amounts of the assets exceed the fair values of the assets as measured by the present
value of future net cash flows expected to be generated by the assets or their appraised value.
Assets to be disposed of are reported at the lower of the carrying amounts of the assets or fair
values less costs to sell. At December 31, 2008, we had no long-lived assets that met the criteria
presented in SFAS 144 – Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS 144”) to be classified as assets held for sale. We have considered impairment of our
long-lived assets and goodwill. The timing of impairments cannot be predicted with reasonable
certainty and are primarily dependent on market conditions outside our control. Should sales
prices permanently decline dramatically without a similar decline in the raw material costs or
should other matters, including the environmental requirements and/or operating requirements
set by Federal and State agencies change substantially from our current expectations, a provision
for impairment may be required based upon such event or events. See Item 1 "Business-
Environmental Matters." Based on estimates obtained from external sources and internal
estimates based on inquiry and other techniques, we recognized impairments relating to certain
non-core equipment of $192,000 relating to Corporate assets during 2008 (none in 2007 and
2006) and $250,000 and $286,000 relating to certain capital spare parts and idle assets in our
Chemical Business during 2007 and 2006, respectively (none in 2008). These impairments are
included in other expense in the consolidated statements of income.

Accrued Insurance Liabilities - We are self-insured up to certain limits for group health,
workers’ compensation and general liability insurance claims. Above these limits, we have
commercial insurance coverage for our contractual exposure on group health claims and
statutory limits under workers’ compensation obligations. We also carry excess umbrella
insurance of $50 million for most general liability risks excluding environmental risks. We have
a separate $30 million insurance policy covering pollution liability at our El Dorado and
Cherokee Facilities. Our accrued insurance liabilities are based on estimates of claims, which
include the incurred claims amounts plus estimates of future claims development calculated by
applying our historical claims development factors to our incurred claims amounts. We also
consider the reserves established by our insurance adjustors and/or estimates provided by
attorneys handling the claims, if any. In addition, our accrued insurance liabilities include
estimates of incurred, but not reported, claims and other insurance-related costs. At December
31, 2008 and 2007, our accrued insurance liabilities were $2,971,000 and $2,975,000,
respectively, and are included in accrued and other liabilities in the consolidated balance sheets.
It is possible that the actual development of claims could exceed our estimates. Amounts
recoverable from our insurance carriers over the self-insured limits are included in accounts
receivable.

Product Warranty - Our Climate Control Business sells equipment for which we provide
warranties covering defects in materials and workmanship. Generally, the base warranty
coverage for most of the manufactured equipment is limited to 18 months from the date of
shipment or 12 months from the date of start-up, whichever is shorter, and to 90 days for spare
parts. In some cases, the customer may purchase an extended warranty. Our accounting policy
and methodology for warranty arrangements is to periodically measure and recognize the
expense and liability for such warranty obligations using a percentage of net sales, based on
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. At December 31, 2008 and 2007, our accrued product
warranty obligations were $2.8 million and $1.9 million, respectively and are included in current
and noncurrent accrued and other liabilities in the consolidated balance sheets.

Executive Benefit Agreements - We have entered into benefit agreements with certain key
executives. Costs associated with these individual benefit agreements are accrued based on the
estimated remaining service period when such benefits become probable that they will be paid.
Total costs accrued equal the present value of specified payments to be made after benefits
become payable. In 1992, we entered into individual benefit agreements with certain key
executives (“1992 Agreements”) that provide for annual benefit payments for life (in addition to
salary). The liability for these benefits under the 1992 Agreements is approximately $1.1 million
and $1.0 million as of December 31, 2008 and 2007, respectively, and is included in current and
noncurrent accrued and other liabilities in the consolidated balance sheets.

In 1981, we entered into individual death benefit agreements with certain key executives. In
addition, as part of the 1992 Agreements, should the executive die prior to attaining the age of
65, we will pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. In 2005, we entered into a death benefit
agreement with our CEO. As of December 31, 2008, the liability for death benefits is $2.7
million ($2.1 million at December 31, 2007) which is included in current and noncurrent accrued
and noncurrent liabilities in the consolidated balance sheets.

Income Taxes - We account for income taxes in accordance with SFAS 109 – Accounting
for Income Taxes (“SFAS 109”) and we adopted FIN No. 48 – Accounting for Uncertainty in
Income Taxes (“FIN 48”) on January 1, 2007. We recognize deferred tax assets and liabilities
for the expected future tax consequences attributable to tax net operating loss (“NOL”)
carryforwards, tax credit carryforwards, and differences between the financial statement carrying
amounts and the tax basis of our assets and liabilities. We establish valuation allowances if we
believe it is more-likely-than-not that some or all of deferred tax assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We do not recognize a tax benefit unless
we conclude that it is more likely than not that the benefit will be sustained on audit by the
taxing authority based solely on the technical merits of the associated tax position. If the
recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax
benefit that, in our judgment, is greater than 50% likely to be realized. We record interest related
to unrecognized tax positions in interest expense and penalties in operating other expense.

Income tax benefits credited to equity relate to tax benefits associated with amounts that are
deductible for income tax purposes but do not affect earnings. These benefits are principally
generated from exercises of non-qualified stock options.

Contingencies - We accrue for contingent losses when such losses are probable and
reasonably estimable. In addition, we recognize contingent gains when such gains are realized or
realizable and earned. We are a party to various litigation and other contingencies, the ultimate
outcome of which is not presently known. Should the ultimate outcome of these contingencies be
adverse, such outcome could create an event of default under ThermaClime's Working Capital
Revolver Loan and the Secured Term Loan and could adversely impact our liquidity and capital
resources.

Regulatory Compliance - The Chemical Business is subject to specific federal and state
regulatory compliance laws and guidelines. We have developed policies and procedures related
to regulatory compliance. We must continually monitor whether we have maintained compliance
with such laws and regulations and the operating implications, if any, and amount of penalties,
fines and assessments that may result from noncompliance. At December 31, 2008, liabilities
totaling $84,000 have been accrued relating to a CAO covering our former Kansas facility. These
liabilities are included in accrued and other liabilities and are based on current estimates that may
be revised in the near term based on results from our surface and groundwater monitoring and
mitigation work plan.

Asset Retirement Obligations - 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 in accordance with FIN 47 – Accounting for Conditional Asset
Retirement Obligations (“FIN 47”).

Revenue Recognition - We recognize revenue for substantially all of our operations at the
time title to the goods transfers to the buyer and there remains no significant future performance
obligations by us. Revenue relating to construction contracts is recognized using the percentage-
of-completion method based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Sales of warranty contracts are
recognized as revenue ratably over the life of the contract. See discussion above under “Product
Warranty” for our accounting policy for recognizing warranty expense.

Derivatives, Hedges and Financial Instruments - We account for derivatives in accordance
with SFAS 133 – Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”),
which requires the recognition of derivatives in the balance sheet and the measurement of these
instruments 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 types of contracts that are accounted for on a fair value basis, which are interest
rate contracts, commodities futures/forward contracts and foreign currency contracts. 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. The valuations of contracts classified as Level 3 are based on the
average ask/bid prices obtained from a broker relating to a low volume market. However at
December 31, 2008, the terms of contracts classified as Level 3 do not exceed three months. At
December 31, 2008, the fair value of Level 3 contracts (unrealized loss) was approximately $1.4
million.

Management's judgment and estimates in these areas are based on information available from
internal and external resources at that time. Actual results could differ materially from these
estimates and judgments, as additional information becomes known.

Results of Operations

The following Results of Operations should be read in conjunction with our Consolidated
Financial Statements for the years ended December 31, 2008, 2007 and 2006 and accompanying
notes and the discussions above under “Overview” And “Liquidity and Capital Resources.”

The following information about our results of operations is presented by our two industry
segments, Climate Control Business and Chemical Business. Gross profit by industry segment
represents net sales less cost of sales. In addition, our chief operating decision makers use
operating income by industry segment for purposes of making decisions that include resource
allocations and performance evaluations. Operating income by industry segment represents gross
profit by industry segment less selling, general and administrative 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.

The following table contains certain information about our continuing operations in different
industry segments for each of the three years ended December 31:

Net sales:

Climate Control
Chemical
Other

Gross profit:

Climate Control
Chemical
Other

Operating income (loss):
Climate Control
Chemical
General corporate expense and other business
operations, net

Interest expense
Gain on extinguishment of debt
Non-operating income, net:

Climate Control
Chemical
Corporate and other business operations

Provisions for income taxes
Equity in earnings of affiliate - Climate Control
Income from continuing operations

2008

2007
(In Thousands)

2006

$ 311,380
424,117
13,470
$ 748,967

96,633
37,991
4,256
$ 138,880

$ 286,365
288,840
11,202
$ 586,407

83,638
44,946
4,009
$ 132,593

38,944
31,340

34,194
35,011

)
(11,129
59,155
(11,381)
5,529

1
27
1,068
(18,776)
937

36,560

)
(10,194
59,011
(12,078)

2
109
1,153
(2,540)
877
46,534

$ 221,161
260,651
10,140
$ 491,952

65,496
22,023
3,343
90,862

25,428
9,785

)
(8,074
27,139
(11,915)
-

1
311
312
(901)
821
15,768

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Climate Control Business

The following table contains certain information about our net sales, gross profit and operating
income in our Climate Control segment for 2008 and 2007:

2008

2007
(Dollars In Thousands)

Change

Percentage
Change

Net sales:

Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products

Total Climate Control

$ 190,960
83,472
36,948
$ 311,380

$ 165,115 $ 25,845
(2,343 )
1,513
$ 286,365 $ 25,015

85,815
35,435

15.7 %
(2.7) %
4.3 %
8.7 %

Gross profit – Climate Control

96,633

$ 83,638 $ 12,995

15.5 %

Gross profit percentage – Climate Control (1)

31.0 %

29.2 %

1.8 %

Operating income – Climate Control

38,944

$ 34,194 $

4,750

13.9 %

(1) As a percentage of net sales

Net Sales – Climate Control

• Net sales of our geothermal and water source heat pump products increased primarily as a
result of a 19% increase in our average selling price per unit due to a change in product mix,
primarily more residential products that have higher selling prices and more accessories,
partially offset by a 3% decrease in the number of units sold. The number of units sold in
2008 was down slightly due to lower export sales and a decrease in domestic commercial
orders as the result of the weaker construction market. During 2008, we continued to
maintain a market share leadership position of approximately 40%, based on data supplied by
the Air-Conditioning, Heating and Refrigeration Institute (“AHRI”);

• Net sales of our hydronic fan coils decreased slightly primarily due to a 7% decrease in the
number of units sold partially offset by a 4% increase in our average selling price. During
2008, we continued to maintain a market share leadership position, of approximately 37%,
based on data supplied by the AHRI;

• Net sales of our other HVAC products increased slightly primarily as the result of an increase

in sales of large custom air handlers.

Gross Profit – Climate Control

The increase in gross profit in our Climate Control Business was primarily the result of the
increase in sales of our geothermal and water source heat pumps as discussed above and the
increase of $1.3 million in gains recognized on our futures contracts for copper partially offset by
the reduction in sales volumes discussed above. In addition, the above changes were also the
primary reasons for the increase in our gross profit percentage.

Operating Income – Climate Control

The net increase in operating income of our Climate Control Business resulted primarily from
the net increase of gross profit of $13.0 million as discussed above. This increase in operating
income was partially offset by an increase in variable operating expenses associated with higher
sales. Personnel costs increased by $3.9 million as the result of an increase in the number of
personnel and costs associated with group insurance and other employee benefits, warranty
expenses increased by $2.2 million due to the increase in sales volume and actual costs incurred,
and professional fees increased by $1.1 million primarily relating to legal expenses associated
with patent defense costs relating to potential new product development in the large air-handler
product line.

Chemical Business

The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2008 and 2007:

2008

2007
(Dollars In Thousands)

Change

Percentage
Change

Net sales:

Industrial acids and other chemical products
Agricultural products
Mining products
Total Chemical

$ 162,941
152,802
108,374
$ 424,117

$ 95,754 $ 67,187
35,644
32,446
$ 288,840 $ 135,277

117,158
75,928

70.2 %
30.4 %
42.7 %
46.8 %

Gross profit - Chemical

37,991

$ 44,946 $

(6,955 )

(15.5) %

Gross profit percentage – Chemical (1)

9.0 %

15.6 %

(6.6 ) %

Operating income - Chemical

31,340

$ 35,011 $

(3,671 )

(10.5) %

(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. For 2008, overall sales
prices for the Chemical Business increased 59% while the volume of tons sold decreased 6%,
compared with 2007.

• Sales prices at the El Dorado Facility increased 47% related, in part, to the high cost of raw
materials, anhydrous ammonia and sulfur, the majority of which we were able to pass
through to our customers and also to strong global agricultural market demand relative to
supply volumes during this period. Volume at the El Dorado Facility decreased 13% or
86,000 tons. The decrease in tons sold was primarily attributable to (i) 69,000 fewer tons of
agricultural AN and other bulk fertilizers sold primarily in the first half of 2008 compared to

the same period of 2007 due to poor weather conditions and lower demand for AN in favor
of urea, a competing product in El Dorado’s market area, as well as reduced forage
application due to poor conditions in the cattle market and (ii) 11,000 fewer tons of sulfuric
acid due primarily to the bi-annual Turnaround of the sulfuric acid plant.

• Sales prices and volumes at the Cherokee Facility increased 61% and 9%, respectively,
primarily related to the market-driven demand for UAN and mining products. Sales prices
also increased with the pass through of our higher natural gas costs in 2008 compared to
2007, recoverable under pricing arrangements with certain of our industrial customers. The
increase in volume was partially offset by the unplanned maintenance downtime experienced
during the third quarter of 2008 as discussed above under “Overview – Chemical Business”;
• Sales prices increased approximately 96% at the Baytown Facility due to higher global
ammonia pricing, which is recoverable under the Original Bayer Agreement but had a
minimum impact to gross profit and operating income. Overall volumes decreased 11% as
the result of a decline in customer demand after Hurricane Ike and following the economic
downturn.

Gross Profit - Chemical

As discussed above under “Overview-Chemical Business,” the decrease in gross profit of our
Chemical Business relates to several significant items. We recognized unrealized losses of $5.3
million on our natural gas and ammonia futures/forward contracts outstanding at December 31,
2008. In addition, we have estimated that the Cherokee Facility incurred costs of approximately
$5.1 million as the result of unplanned maintenance downtime during 2008 compared to $1.1
million in 2007. Also at December 31, 2008, we recognized a lower of cost or market provision
on inventory of $3.6 million due to declines in global nitrogen prices as demand fell as the result
of buyers’ concerns over volatile commodity prices and the global economic crisis. In addition
during 2008, the amount expensed for precious metals, net of recoveries and gains, was $6.3
million compared to $2.6 million during 2007. In general, other non-raw material manufacturing
expenses, including steam (produced from natural gas), maintenance and Turnarounds,
electricity and labor, increased during 2008 compared to 2007. Our Chemical Business incurred
expenses for Turnarounds of $6.0 million for 2008 compared to $3.4 million for 2007. This
decrease in gross profit was partially offset by the increase in sales prices of products sold by the
El Dorado and Cherokee Facilities, as discussed above, in relation to raw material costs. During
2007, we realized non-recurring insurance recoveries of $3.8 million relating to a business
interruption claim. These recoveries contributed to an increase in gross profit in 2007. As a result
of these changes discussed above, our overall gross profit percentage declined for 2008 as
compared to 2007.

Operating Income - Chemical

The net decrease of our Chemical Business’ operating income includes the net decrease in gross
profit of $7.0 million as discussed above. Also, we incurred an increase in expenses associated
with the Pryor Facility of $1.4 million due to the process of activating this facility as discussed
above under “Liquidity and Capital Resources – Pryor Facility.” The decrease in operating
income was partially offset by other income recognized by our Chemical Business of $7.6
million from a litigation judgment during 2008, as previously reported. During 2007, we
recognized income of $3.3 million relating to a litigation settlement.

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
2008 and 2007:

Net sales - Other

Gross profit - Other

2008

2007
(Dollars In Thousands)
$ 11,202 $

13,470

Change

Percentage
Change

2,268

20.2 %

4,256

4,009 $

247

6.2 %

Gross profit percentage – Other (1)

31.6 %

35.8 %

(4.2 ) %

General corporate expense and other business

operations, net

$ (11,129)

$ (10,194)

)
(935

9.2

(1) As a percentage of net sales

Net Sales - Other

The increase in net sales classified as “Other” relates primarily to increased customer demand for
our machine tool products.

Gross Profit - Other

The increase in gross profit classified as “Other” is due primarily to the increase in sales as
discussed above. The decline in our gross profit percentage was primarily due to additional costs
incurred relating to a large customized industrial machine tool, freight costs and the recognition
of losses of $0.2 million on our foreign currency contracts.

General Corporate Expense and Other Business Operations, Net

The net increase in our general corporate expense and other business operations, net relates
primarily to increased personnel costs of $1.1 million resulting from increased compensation and
other employee benefits, professional fees of $0.5 million due, in part, for assistance in our
evaluation of our internal controls and procedures and related documentation for Sarbanes-Oxley
requirements and to legal fees on various litigation matters and other expense of $0.6 million
relating primarily to potential litigation settlements, an impairment of long-lived assets and
income tax related penalties, partially offset by an increase in other income of $0.7 million due,
in part, to litigation settlements.

Interest Expense

Interest expense was $11.4 million for 2008 compared to $12.1 million for 2007, a decrease of
$0.7 million. This net decrease primarily relates to a decrease of $3.4 million as the result of
obtaining a lower interest rate associated with the Secured Term Loan compared to the interest
rate associated with the previous senior secured loan and a decrease of $1.0 million due to the
continual pay off of the Working Capital Revolver Loan during 2008, partially offset by the
increase in realized and unrealized losses of $2.5 million relating to our interest rate contracts
and the increase of $1.7 million relating to the 2007 Debentures.

Gain on Extinguishment of Debt

Provision For Income Taxes

The provision for income taxes for 2008 was $18.8 million compared to $2.5 million for 2007.
As discussed under “Overview - 2008 Results,” during 2008, we incurred current and deferred
federal and state income taxes due, in part, to increased taxable income and higher effective tax
rates partially offset by a net deferred income tax benefit of $1.6 million as the result of a
detailed analysis performed on all our deferred tax assets and liabilities and the realizability of
those deferred tax assets. During 2007, we incurred federal and state income taxes resulting from
increased taxable income and additional prior year state income taxes recorded under FIN 48.
However, these provisions were partially offset by the benefit of deferred taxes from the reversal
of valuation allowances.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Climate Control Business

The following table contains certain information about our net sales, gross profit and operating
income in our Climate Control segment for 2007 and 2006:

2007

2006
(Dollars In Thousands)

Change

Percentage
Change

Net sales:

Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products

Total Climate Control

$ 165,115
85,815
35,435
$ 286,365

$ 134,210 $ 30,905
26,318
7,981
$ 221,161 $ 65,204

59,497
27,454

23.0 %
44.2 %
29.1 %
29.5 %

Gross profit – Climate Control

83,638

$ 65,496 $ 18,142

27.7 %

Gross profit percentage – Climate Control (1)

29.2 %

29.6 %

(0.4 ) %

Operating income – Climate Control

34,194

$ 25,428 $

8,766

34.5 %

(1) As a percentage of net sales

Net Sales – Climate Control

• Net sales of our geothermal and water source heat pump products increased primarily as a
result of increases in OEM, export and commercial shipments. In total, the number of
geothermal and water source heat pump products shipments increased by approximately 10%
in 2007 as compared to 2006. In addition, an increase of approximately 13% relates to the
change in product mix and price increases. The price increases were instituted in response to
rising raw material and component purchase prices. Due to the significant backlog of
customer orders at the time the price increases were put into effect, the impact of customer
price increases trail cost increases in raw material and component purchase prices. In 2007,
the impact of price increases is estimated to be approximately 4%. We continue to maintain a
market share leadership position based on data supplied by the Air-Conditioning and
Refrigeration Institute;

• Net sales of our hydronic fan coils increased primarily due to a 16% increase in the number
of units sold due to an increase in large customer orders as well as a 25% increase in average
unit sales prices as the result of the change in product mix, lower discounting, and higher
selling prices driven by raw material cost increases;

• Net sales of our other HVAC products increased primarily as the result of engineering and

construction services due to work completed on construction contracts.

Gross Profit – Climate Control

The increase in gross profit in our Climate Control Business was a direct result of the increase in
sales volume, change in product mix, and price increases as discussed above. Our gross profit
percentage as a percentage of sales decreased by 0.4% primarily due to raw material costs
increases being incurred ahead of customer price increases becoming effective as well as
changes in product mix.

Operating Income – Climate Control

The net increase in operating income of our Climate Control Business resulted primarily from
the net increase of gross profit of $18.1 million as discussed above. This increase in operating
income was partially offset primarily by increased personnel cost of $1.8 million as the result of
increased number of personnel and group healthcare costs, increased commissions and warranty
expenses of $1.6 million and $1.1 million, respectively, due to increased sales volume and
distribution/product mix increased shipping and handling costs of $0.7 million due to increased
sales volume and rising fuel costs and increased consulting fees of $0.5 million primarily due to
efforts to promote governmental support in the geothermal market. In addition, our Climate
Control Business recognized income of $1.2 million in 2006 relating to an arbitration award
received relating to an arbitration case involving a subsidiary within the Climate Control
Business.

Chemical Business

The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2007 and 2006:

2007

2006
(Dollars In Thousands)

Change

Percentage
Change

Net sales:

Agricultural products
Industrial acids and other chemical products
Mining products
Total Chemical

$ 117,158
95,754
75,928
$ 288,840

$ 89,735 $ 27,423
546
220
$ 260,651 $ 28,189

95,208
75,708

30.6 %
0.6 %
0.3 %
10.8 %

Gross profit - Chemical

44,946

$ 22,023 $ 22,923

104.1 %

Gross profit percentage – Chemical (1)

15.6 %

8.4 %

7.2 %

Operating income - Chemical

35,011

9,785 $ 25,226

257.8 %

(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 nitric acid products. The volume of tons sold and
the sales prices for the Chemical Business increased 3% and 7%, respectively, compared with
2006.

• Overall, volume at the El Dorado Facility remained essentially the same while sales prices
increased 10%. However, our product mix shifted in 2007 from industrial acids products to
agricultural products driven by increased agricultural demand. The increase in sales prices
includes a 17% increase relating to our nitrogen fertilizer products.

• Overall volume at the Cherokee Facility increased 7% and sales prices increased 11%. The
Cherokee Facility also experienced the same market-driven demand for nitrogen fertilizer
products in 2007, which resulted in a 54% increase in volume and a 32% increase in sales
prices relating to these products. Additionally, there were low demand and production
curtailments experienced throughout the first quarter of 2006 as the result of reduction in
orders from several key customers due to the high cost of natural gas caused by the effects of
Hurricane Katrina.

• Volume increased 5% while sales prices remained essentially the same at the Baytown

Facility.

Gross Profit - Chemical

The increase in gross profit of our Chemical Business relates primarily to improved margins on
agricultural products sold by the El Dorado and Cherokee Facilities. Comparing 2007 with 2006,

there was little change in the cost of the El Dorado and Cherokee Facilities’ primary feedstocks,
ammonia and natural gas. As a result, the higher selling prices and volumes as discussed above
are the primary reasons for the increase in the gross profit percentage.

During 2007 and 2006, we recorded the realization of losses on certain nitrogen-based
inventories of approximately $0.4 million and $1.0 million, respectively. In addition, during
2007, we realized insurance recoveries of approximately $3.8 million relating to a business
interruption claim associated with the Cherokee Facility. In 2006, we realized insurance
recoveries of approximately $0.9 million relating to a business interruption claim associated with
the El Dorado Facility. The above transactions contributed to an increase in gross profit for each
respective period.

As discussed above under “Overview-Chemical Business,” our Chemical Business uses precious
metals as a catalyst in the manufacturing process. During 2007, we had accumulated precious
metals in excess of our production requirements. Therefore we sold a portion of the excess
metals. As a result, we recognized a gain of $2.0 million which increased gross profit compared
to 2006. However, this increase in gross profit of $2.0 million was partially offset by a decrease
of $1.8 million due primarily to the increase in precious metals expense of approximately $1.5
million compared to 2006 as the result of cost increases for these metals.

Operating Income - Chemical

The net increase of our Chemical Business’ operating income primarily relates to the net increase
in gross profit of $22.9 million as discussed above. Also as discussed above under “Overview -
Chemical Business”, our Chemical Business recognized income of approximately $3.3 million
relating to a litigation settlement during 2007.

Other

The business operation classified as “Other” 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 2007 and 2006:

Net sales - Other

Gross profit - Other

2007

2006
(Dollars In Thousands)
$ 10,140 $

11,202

Change

Percentage
Change

1,062

10.5 %

4,009

3,343 $

666

19.9 %

Gross profit percentage – Other (1)

35.8 %

33.0 %

2.8 %

General corporate expense and other business

operations, net

$ (10,194)

(8,074)

)
(2,120

26.3

(1) As a percentage of net sales

Net Sales - Other

The increase in net sales classified as “Other” relates primarily to increased customer demand for
our machine tool products.

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

The net increase of $2.1 million in our general corporate expense and other business operations,
net relates primarily to an increase of professional fees of $1.3 million primarily as the result of
costs incurred associated with the evaluation and audit of our internal controls and procedures
and related documentation for Sarbanes-Oxley requirements and an increase of $1.0 million in
personnel costs due, in part, to increased group health care costs which was partially offset by the
increase of $0.7 million in gross profit classified as “Other” as discussed above.

Interest Expense - Interest expense was $12.1 million for 2007 compared to $11.9 million for
2006, an increase of $0.2 million. This net increase includes $2.0 million relating to the 2007
Debentures, $0.6 million relating to the Secured Term Loan and the $0.6 million change in the
fair value of our interest rate caps. This increase was partially offset by a decrease of $1.3
million as the result of the conversions of the 2006 Debentures during 2006 and 2007, a decrease
of $1.1 million primarily due the pay down of the Working Capital Revolver Loan during 2007,
and a decrease of $0.6 million as the result of the acquisition of the 10.75% Senior Unsecured
Notes during 2006.

Provision For Income Taxes - The provision for income taxes for 2007 was $2.5 million
compared to $0.9 million for 2006. The increase of $1.6 million was primarily the result of an
increase in the federal and state income taxes resulting from increased taxable income and
additional prior year state income taxes recorded under FIN 48. This increase was partially offset
by the benefit of deferred taxes from the reversal of valuation allowances.

Net Loss (Income) From Discontinued Operations - Net income from discontinued operations
was $0.3 million for 2007 compared to a net loss from discontinued operations of $0.3 million
for 2006. The loss incurred in 2006 relates primarily to provisions for our estimated costs to
investigate and delineate a site in Hallowell, Kansas as a result of meetings with the Kansas
Department of Health and Environment (“KDHE”) during 2006. However, on September 12,
2007, the KDHE approved our proposal to perform surface and groundwater monitoring and to
implement a mitigation work plan to acquire additional field data. As a result of receiving
approval from the KDHE for our proposal, net income from discontinued operations for 2007
relates primarily to the reduction of our liability for the estimated costs associated with this
remediation.

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 discussion concerning cash flows from our Climate Control and
Chemical Businesses in "Liquidity and Capital Resources."

For 2008, net cash provided by continuing operating activities was $32.0 million, including net
income plus depreciation and amortization, deferred income taxes, gain on extinguishment of
debt, gain on litigation judgment associated with PP&E, changes in fair value of commodities
and interest rate contracts, provision for losses on inventory and other adjustments offset by cash
used by the following changes in assets and liabilities:

Accounts receivable increased a net $8.8 million including:

• an increase of $5.7 million relating to the Climate Control Business primarily as the
result of higher 2008 fourth quarter sales of our water source heat pump products, and
• a net increase of $3.9 million relating to the Chemical Business due primarily to the
timing of two barge shipments of UAN in December 2008 partially offset by a decrease
of $0.9 million relating to proceeds from a business interruption claim. These increases
were partially offset by

• a decrease of $1.0 million relating to the reimbursement of group health insurance claims

paid in excess of our self-insured limits.

Inventories increased a net $7.8 million including:

• a net increase of $6.8 million relating to the Chemical Business primarily relating to
higher volumes on hand at our distribution centers and increased raw material costs
partially offset by the two barge shipments of UAN in December 2008.

• an increase of $0.8 million relating to our industrial machinery to meet customer demand,

and

• a net increase of $0.2 million relating to the Climate Control Business but included an
increase of $1.1 million relating to water source heat pumps associated with inventory
required to support the higher backlog of customers orders partially offset by a decrease
of $0.8 million relating to large custom air handlers as the result of lower shipment levels
expected for the first quarter of 2009 compared to the same period in 2008.

Other supplies and prepaid items increased $4.1 million primarily due to an increase of $3.8
million relating to higher volume on hand and costs of precious metals used in the manufacturing
process of our Chemical Business.

Accounts payable increased $2.2 million primarily due to our Chemical Business primarily as the
result of improved credit terms with our supplier of natural gas.

Customer deposits decreased $6.3 million relating primarily to our Chemical Business as the
result of the shipment of product associated with these deposits.

The decrease in deferred rent expense of $2.9 million is due to the scheduled lease payments in
2008 exceeding the rent expense recognized on a straight-line basis.

The increase in other current and noncurrent liabilities of $3.9 million includes:

• an increase of $1.8 million of billings in excess of costs and estimated earnings on
uncompleted contracts due to invoices issued to customers pursuant to the terms of the
construction contracts,

• an increase of $1.1 million of accrued payroll and benefits primarily as the result of an
increase in number of employees and in the number of days accrued due to the timing of
our payroll-related payments,

• an increase of $0.9 million of accrued interest primarily as a result of the timing of the

semi-annual interest payment associated with the remaining 2007 Debentures,

• an increase of $0.9 million of accrued warranty costs primarily due to the increase in

sales volume,

• a net increase of $2.0 million due to other individually immaterial items, partially offset

• a decrease of $2.8 million of accrued income taxes due primarily to payments made to the

taxing authorities partially offset by the recognition of income taxes for 2008.

Cash Flow from Continuing Investing Activities

Net cash used by continuing investing activities was $29.5 million for 2008, which included
$32.6 million for capital expenditures of which $8.7 million and $23.6 million are for the benefit
of our Climate Control and Chemical Businesses, respectively. As discussed above under
“Overview – Chemical Business,” we received proceeds from a litigation judgment, of which
$4.1 million (net of attorneys’ fees of $1.9 million) was associated with property, plant and
equipment.

Cash Flow from Continuing Financing Activities

Net cash used by continuing financing activities was $14.4 million, which primarily consisted of:

• $13.2 million used for the acquisition of $19.5 million aggregate principal amount of the

2007 Debentures,

• $4.8 million used for the acquisition of 400,000 shares of our common stock, partially

offset by,

• $2.4 million provided from the excess income tax benefit on stock options exercised and
• $1.3 million provided from short-term financing, net of payments.

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 Holding, 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 December 31, 2008, our investment was $3.6 million. For
2008, distributions received from this Partnership were $0.7 million and our equity in earnings
was $0.9 million. As of December 31, 2008, the Partnership and general partner to the
Partnership is indebted to a term lender (“Lender”) of the Project for approximately $3.6 million
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.
No liability has been established for this pledge since it was entered into prior to adoption of FIN
45. 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.

,
1
3

r
e
b
m
e
c
e
D
g
n
i
d
n
E
r
a
e
Y
e
h
t

n
i

e
u
D
s
t
n
e
m
y
a
P

r
e
t
f
a
e
r
e
h
T

3
1
0
2

2
1
0
2

1
1
0
2

0
1
0
2

9
0
0
2

l
a
t
o
T

s
n
o
i
t
a
g
i
l
b
O

l
a
u
t
c
a
r
t
n
o
C

.
e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
t

n
i

d
e
z
i
r
a
m
m
u
s

e
r
a

8
0
0
2

,
1
3

r
e
b
m
e
c
e
D

f
o

s
a

s
n
o
i
t
a
g
i
l
b
o

l
a
u
t
c
a
r
t
n
o
c

e
t
a
g
e
r
g
g
a

r
u
O

s
n
o
i
t
a
g
i
l
b
O

l
a
u
t
c
a
r
t
n
o
C
e
t
a
g
e
r
g
g
A

0
9
2
,
6

0
5
1
,
1

5
2
7
,
1

2
9
4

0
0
5
,
0
4

0
0
0
,
0
5

3
6

5
2
6
,
1

8
8
1
,
2
9

3
8
1

0
6
3
,
4

5
6
1

3
3
5
,
1

8
9
6
,
1

9
3
0
,
6

8
5
5

3
5
2

6
4
4
,
1

9
9
6
,
1

3
5
1
,
6

1
0
9

)
s
d
n
a
s
u
o
h
T
n
I
(

3
2
2
,
1

5
1
6

2
0
5
,
1

0
3
8
,
1

8
7
3
,
2

6
7
2
,
3

9
3
9
,
1
1

4
0
1

6
3
9
,
2

2
6
1

0
0
1

6
9
6

8
9

5
3
2

5
2
3
,
1

0
6
5
,
1

6
6
2
,
6

5
9
7

0
0
4
,
0
1

1
8
8
,
4

5
4
3
,
3

9
5
2
,
7
1

0
3
2
,
2

4
4
0
,
1

6
1
7

0
0
5
,
0
4

0
0
0
,
0
5

4
4
9
,
3
1

0
6
1
,
5
0
1

0
6
4
,
4
2

7
3
4
,
2

0
0
4
,
0
1

1
8
8
,
4

3
9
8
,
0
1

9
5
2
,
7
1

0
3
2
,
2

0
4
7
,
1

0
4
7
,
3

s
e
t
o
N
d
e
t
a
n
i
d
r
o
b
u
S
r
o
i
n
e
S
e
l
b
i
t
r
e
v
n
o
C
%
5
.
5

2
1
0
2
e
u
d
n
a
o
L
m
r
e
T
d
e
r
u
c
e
S

:
t
b
e
d
m
r
e
t
-
g
n
o
L

)
1
(

t
b
e
d
m
r
e
t
-
g
n
o
l
n
o
s
t
n
e
m
y
a
p

t
s
e
r
e
t
n
I

t
b
e
d
m
r
e
t
-
g
n
o
l

l
a
t
o
T

s
e
s
a
e
l

l
a
t
i
p
a
C

r
e
h
t
O

s
n
o
i
t
a
g
i
l
b
o

g
n
i
r
u
t
c
a
f
u
n
a
m

l
a
u
t
c
a
r
t
n
o
c

d
e
u
r
c
c
A

s
e
i
t
i
l
i
b
a
i
l

r
e
h
t
o
d
n
a

d
e
u
r
c
c
a

t
n
e
r
r
u
c
n
o
n

n
i

d
e
d
u
l
c
n
i

s
n
o
i
t
a
g
i
l
b
o

l
a
u
t
c
a
r
t
n
o
c

r
e
h
t
O

s
n
o
i
t
a
g
i
l
b
o
e
s
a
h
c
r
u
P

)
2
(

s
t
c
a
r
t
n
o
c

e
t
a
r

t
s
e
r
e
t
n
I

)
3
(

s
e
r
u
t
i
d
n
e
p
x
e

l
a
t
i
p
a
C

e
s
a
e
l

y
t
i
l
i
c
a
F
n
w
o
t
y
a
B

:
s
e
s
a
e
l

g
n
i
t
a
r
e
p
O

s
e
s
a
e
l

g
n
i
t
a
r
e
p
o
r
e
h
t
O

s
t
c
a
r
t
n
o
c

d
r
a
w
r
o
f
/
s
e
r
u
t
u
F

5
9
3
,
8
9

5
2
2
,
0
1

5
2
9
,
1
1

0
8
7
,
7
4

0
0
2
,
3
8
1

.
8
0
0
2
,
1
3

r
e
b
m
e
c
e
D

t
a

s
e
t
a
r

t
s
e
r
e
t
n
i

e
v
i
t
c
e
f
f
e

e
h
t

n
o
d
e
s
a
b
e
r
a

t
b
e
d
e
t
a
r

t
s
e
r
e
t
n
i

e
l
b
a
i
r
a
v
o
t

g
n
i
t
a
l
e
r

s
t
n
e
m
y
a
p

t
s
e
r
e
t
n
i

d
e
t
a
m

i
t
s
e

.
8
0
0
2
,
1
3

r
e
b
m
e
c
e
D

t
a

s
t
c
a
r
t
n
o
c

e
s
e
h
t

f
o
e
u
l
a
v
r
i
a
f

d
e
t
a
m

i
t
s
e

e
h
t

n
o
d
e
s
a
b
e
r
a

s
w
o
l
f

h
s
a
c

e
r
u
t
u
f

d
e
t
a
m

i
t
s
e

e
h
T

.
t
e
g
d
u
b
e
r
u
t
i
d
n
e
p
x
e

l
a
t
i
p
a
c

9
0
0
2

r
u
o

n
i

s
t
n
u
o
m
a

y
r
a
n
o
i
t
e
r
c
s
i
d
-
n
o
n
y
l
n
o
e
d
u
l
c
n
i

s
e
r
u
t
i
d
n
e
p
x
e

l
a
t
i
p
a
C

)
1
(

)
2
(

)
3
(

l
a
t
o
T

1
7

Availability of Company's Income Tax Loss Carry-Overs

For a discussion on our income tax net operating loss carry-overs, see Note 13 of Notes to
Consolidated Financial Statements.

ITEM 7A. 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 sales
commitments of products for deliveries in future periods. As a result, we could be exposed to
embedded losses should our product costs exceed the firm sales prices. At December 31, 2008,
we had no embedded losses associated with sales commitments with firm sales prices.

Commodity Price Risk

Our Climate Control Business buys substantial quantities of copper and steel for use in
manufacturing processes and our Chemical Business buys substantial quantities of anhydrous
ammonia and natural gas as feedstocks generally at market prices. As part of our raw material
price risk management, periodically, 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
in accordance with SFAS 133. At December 31, 2008, our purchase commitments under copper
contracts were for 2 million pounds of copper through March 2009 at a weighted-average cost of
$1.72 per pound ($3.4 million) and a weighted-average market value of $1.41 per pound ($2.8
million). In addition, our Chemical Business had purchase commitments under anhydrous
ammonia contracts for 9,000 metric tons of anhydrous ammonia through March 2009 at a
weighted-average cost of $320 per metric ton ($2.9 million) and a weighted-average market
value of $166 per metric ton ($1.5 million). Also our Chemical Business had purchase
commitments under natural gas contracts for approximately 970,000 MMBtu of natural gas
through December 2009 at a weighted-average cost of $10.08 per MMBtu ($9.8 million) and a
weighted-average market value of $6.05 per MMBtu ($5.9 million).

Foreign Currency Risk

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
entered into several foreign currency contracts, which set the U.S. Dollar/Euro exchange rates
through March 2009. At December 31, 2008, our commitments under these contracts were for
the receipt of approximately 861,000 Euros at a weighted-average contract exchange rate of 1.35
($1.16 million) and a weighted-average market exchange rate of 1.39 ($1.20 million).

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 December 31, 2008, we have two interest rate cap contracts, which set
a maximum three-month LIBOR rate of 4.59% on a total of $30 million and mature in March
2009. In addition, 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 in
accordance with SFAS 133. At December 31, 2008, the fair value of these contracts (unrealized
loss) was $2.4 million.

t
b
e
d

e
v
i
t
i
s
n
e
s

e
t
a
r

t
s
e
r
e
t
n
i

r
u
o

r
o
f

e
t
a
d

y
t
i
r
u
t
a
m
y
b

s
e
t
a
r

t
s
e
r
e
t
n
i

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e
w

d
e
t
a
l
e
r

d
n
a

s
t
n
u
o
m
a

l
a
p
i
c
n
i
r
p

s
t
n
e
s
e
r
p

e
l
b
a
t

g
n
i
w
o
l
l
o
f

e
h
T

e
t
a
r

t
s
e
r
e
t
n
i

e
v
i
t
i
s
n
e
s

e
t
a
r

t
s
e
r
e
t
n
i

r
u
o

r
o
f

e
t
a
r

e
v
i
e
c
e
r

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e
w

d
e
t
a
m

i
t
s
e

d
e
t
a
l
e
r

d
n
a

s
w
o
l
f

h
s
a
c

e
r
u
t
u
f

d
e
t
a
m

i
t
s
e

e
h
t

d
n
a

s
t
n
e
m
e
e
r
g
a

.
8
0
0
2

,
1
3

r
e
b
m
e
c
e
D

f
o

s
a

s
p
a
w
s

l
a
t
o
T

r
e
t
f
a
e
r
e
h
T

3
1
0
2

2
1
0
2

1
1
0
2

0
1
0
2

9
0
0
2

,
1
3

r
e
b
m
e
c
e
D
g
n
i
d
n
e

s
r
a
e
Y

)
s
d
n
a
s
u
o
h
T
n
I

s
r
a
l
l
o
D

(

%
9
1
.
6

8
0
0
,
0
5

0
0
0
,
0
5

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

e
t
a
r

t
s
e
r
e
t
n
i

f
o

s
e
i
t
i
r
u
t
a
m
d
e
t
c
e
p
x
E

:
)
1
(

t
b
e
d
m
r
e
t
-
g
n
o
l

t
b
e
d

e
t
a
r

e
l
b
a
i
r
a
V

2
5
1
,
5
5

0
9
2
,
6

5
2
7
,
1

8
8
1
,
2
4

8
9
6
,
1

9
9
6
,
1

2
5
5
,
1

t
b
e
d

e
t
a
r

d
e
x
i
F

%
8
9
.
5

%
2
7
.
6

%
0
7
.
6

%
6
8
.
5

%
4
7
.
5

%
7
7
.
5

%
1
8
.
5

%
2
4
.
3

%
2
2
.
2

%
2
4
.
3

%
9
5
.
2

%
7
2
.
2

%
0
6
.
1

%
3
4
.
2

7
3
4
,
2

3
8
1

8
5
5

1
0
9

5
9
7

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

e
t
a
r

t
s
e
r
e
t
n
i

f
o

s
w
o
l
f
h
s
a
c

e
r
u
t
u
f
d
e
t
a
m

i
t
s
E

:
)
2
(

s
p
a
w
s

e
t
a
r

t
s
e
r
e
t
n

d
e
x
i
F
o
t

e
l
b
a
i
r
a
V

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

e
t
a
r

y
a
p

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

e
t
a
r

e
v
i
e
c
e
r

,
1
3

r
e
b
m
e
c
e
D

f
o

s
a

g
n
i
d
n
a
t
s
t
u
o

t
b
e
d

f
o

t
n
u
o
m
a

e
t
a
g
e
r
g
g
a

e
h
t

n
o

d
e
s
a
b

e
r
a

e
t
a
r

t
s
e
r
e
t
n
i

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e
w
d
n
a

s
e
c
n
a
l
a
b

t
b
e
d

e
t
a
r

d
e
x
i
f

d
n
a

e
l
b
a
i
r
a
v

e
h
T

)
1
(

f
o

s
a

s
t
c
a
r
t
n
o
c

e
s
e
h
t

f
o

e
u
l
a
v

r
i
a
f

d
e
t
a
m

i
t
s
e

e
h
t

n
o

d
e
s
a
b

e
r
a

e
t
a
r

e
v
i
e
c
e
r

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e
w
d
e
t
a
l
e
r

d
n
a

s
w
o
l
f

h
s
a
c

e
r
u
t
u
f

d
e
t
a
m

i
t
s
e

e
h
T

)
2
(

.
8
0
0
2

,
1
3

r
e
b
m
e
c
e
D

.
8
0
0
2

4
7

l
a
t
o
T

r
e
t
f
a
e
r
e
h
T

3
1
0
2

2
1
0
2

1
1
0
2

0
1
0
2

9
0
0
2

,
1
3

r
e
b
m
e
c
e
D
g
n
i
d
n
e

s
r
a
e
Y

)
u
t
B
M
M
d
n
A
n
o
T
c
i
r
t
e

,
d
n
u
o
P
r
e
P
r
o
F
t
p
e
c
x
E

,
s
d
n
a
s
u
o
h
T
n
I

s
r
a
l
l
o
D

(

e
t
a
r

e
g
n
a
h
c
x
e
/
s
t
s
o
c

t
c
a
r
t
n
o
c

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e
w
d
e
t
a
l
e
r

d
n
a

s
t
c
a
r
t
n
o
c

d
r
a
w
r
o
f
/
s
e
r
u
t
u
f

r
e
d
n
u

s
t
n
e
m

t
i

m
m
o
c

e
s
a
h
c
r
u
p

r
u
o

s
t
n
e
s
e
r
p

e
l
b
a
t

g
n
i
w
o
l
l
o
f

e
h
T

.
8
0
0
2

,
1
3

r
e
b
m
e
c
e
D

f
o

s
a

m
r
e
t

t
c
a
r
t
n
o
c

y
b

5
3
4
,
3

2
7
.
1

0
8
8
,
2

0
2
3

0
8
7
,
9

8
0
.
0
1

4
6
1
,
1

4
7
.
0

5
7

.
s
o
r
u
E
0
0
0
,
1
6
8

y
l
e
t
a
m
i
x
o
r
p
p
a

e
v
i
e
c
e
r

d
n
a

s
r
a
l
l
o
D
S
U
n
i

y
a
p

o
t

e
r
a

s
t
c
a
r
t
n
o
c

e
s
e
h
t

r
e
d
n
u

s
t
n
e
m

t
i

m
m
o
c

r
u
O

)
1
(

5
3
4
,
3

2
7
.
1

0
8
8
,
2

0
2
3

0
8
7
,
9

8
0
.
0
1

4
6
1
,
1

4
7
.
0

r
e
p

t
s
o
c

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

s
t
c
a
r
t
n
o
c

f
o

t
s
o
c

l
a
t
o
T

:
r
e
p
p
o
C

:
s
t
c
a
r
t
n
o
c
d
r
a
w
r
o
F
/
s
e
r
u
t
u
F

r
e
p

t
s
o
c

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

n
o
t

c
i
r
t
e
m

s
t
c
a
r
t
n
o
c

f
o

t
s
o
c

l
a
t
o
T

r
e
p

t
s
o
c

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

u
t
B
M
M

s
t
c
a
r
t
n
o
c

f
o

t
s
o
c

l
a
t
o
T

:
s
a
g

l
a
r
u
t
a
N

s
t
c
a
r
t
n
o
c

f
o

t
s
o
c

l
a
t
o
T

:
)
1
(

y
c
n
e
r
r
u
C
n
g
i
e
r
o
F

t
c
a
r
t
n
o
c

e
g
a
r
e
v
a
-
d
e
t
h
g
i
e

e
t
a
r

e
g
n
a
h
c
x
e

d
n
u
o
p

:
a
i
n
o
m
m
A

Due to their short-term nature, the carrying values of financial instruments classified as cash,
restricted cash, accounts receivable, accounts payable, short-term financing and drafts payable,
and accrued and other liabilities approximated their estimated fair values. Carrying values for our
interest rate contracts, commodities futures/forward contracts, and foreign currency contracts
approximate their fair value since they are accounted for on a mark-to-market basis. At
December 31, 2008, the estimated fair value of the Secured Term Loan is based on defined
LIBOR rates plus 10% utilizing information obtained from the lender. At December 31, 2007,
carrying values for variable debt, including the Secured Term Loan, was believed to approximate
their fair value. Fair values for fixed rate borrowings, other than the 5.5% Senior Convertible
Senior Subordinated Notes (“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 December 31, 2008, the estimated fair value of the 2007 Debentures is based on
quoted prices obtained from a broker for these debentures. At December 31, 2007, the estimated
fair value of the 2007 Debentures was based on the conversion rate and market price of our
common. The following table shows the estimated fair value and carrying value of our
borrowings at:

December 31, 2008

December 31, 2007

Estimated
Fair Value

Carrying

Value

Estimated
Fair Value

Carrying

Value

Variable Rate:

Secured Term Loan
Working Capital Revolver Loan
Other debt

(In Thousands)

20,939 $

50,000 $ 50,000 $

-
8

-
155

50,000
-
155

Fixed Rate:

5.5% Convertible Senior Subordinated Notes
Other bank debt and equipment financing

27,338
60,000
11,952
14,949
63,234 $ 105,160 $ 124,085 $ 122,107

40,500
14,652

61,632
12,298

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We have included the financial statements and supplementary financial information required by
this item immediately following Part IV of this report and hereby incorporate by reference the
relevant portions of those statements and information into this Item 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As previously reported, we had noted one significant deficiency in our disclosure controls and
procedures, which related to controls over electronic spreadsheets. At December 31, 2008, we
have remediated this deficiency.

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, we have
concluded, with the participation of our Principal Executive Officer and our Principal Financial
Officer, that our disclosure controls and procedures were effective. There were no changes to our
internal control over financial reporting during the quarter ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance to
our management and board of directors regarding the preparation and fair presentation of
published financial statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated
Framework. Based on our assessment, we believe that, as of December 31, 2008, our internal
control over financial reporting is effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on our internal
control over financial reporting. This report appears on the following page.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of LSB Industries, Inc.

We have audited LSB Industries, Inc.’s internal control over financial reporting as of December
31, 2008 based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LSB
Industries, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.

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

In our opinion, LSB Industries, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of LSB Industries, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2008 of LSB
Industries, Inc. and our report dated March 12, 2009 expressed an unqualified opinion thereon.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
March 12, 2009

ITEM 9B. OTHER INFORMATION

None.

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", "will", and similar expressions identify Forward-Looking Statements.
Forward-Looking Statements contained herein relate to, among other things,

• our Climate Control Business has developed leadership positions in certain niche markets by

offering extensive product lines, customized products and improved technologies,

• we have developed the most extensive line of geothermal and water source heat pumps and

hydronic fan coils in the United States,

• we were a pioneer in the use of geothermal technology in the climate control industry,
• we have used geothermal technology in the climate control industry to create the most energy

efficient climate control systems commercially available today,

• the tax credits and incentives and certain planned direct spending by the federal government
contained in the recently enacted American Reinvestment and Recovery Act of 2009 could
stimulate sales of our geothermal heat pump products, as well as other products that could be
used to modernize federally owned and operated buildings, military installations, public
housing and hospitals,

• we are a leading provider of geothermal and water source heat pumps to the commercial

construction and renovation markets in the United States,

• the market share for commercial water source heat pumps relative to other types of heating
and air-conditioning systems will continue to grow due to the relative efficiency and
longevity of such systems, as well as due to the emergence of the replacement market for
those systems,

• the energy efficiency, longer life, and relatively short payback periods of geothermal
systems, as compared with air-to-air systems, will continue to increase demand for our
geothermal products,

• the recently enacted American Reinvestment and Recovery Act of 2009 contains significant

incentives for the installation of our geothermal products,

• our Climate Control Business is a leading provider of hydronic fan coils,
• the amount of capital expenditures relating to the Climate Control Business for 2009,
• obtaining raw materials for our Climate Control Business,

the ability to pass to our customers the majority of any raw material cost increases in the
form of higher prices and that the timing of these price increases could lag the increases in
the cost of materials,

• our Climate Control Business having sufficient sources for materials; however, a shortage of

raw materials could impact production of our Climate Control products,

• our Climate Control Business manufactures a broader line of geothermal and water source

heat pump and fan coil products than any other manufacturer in the United States,

• lower demand for most of our Climate Control products for the short term,
• a decline in both commercial and residential construction due to the current recession,
• lower volumes in Climate Control sales during 2009, as compared to 2008 for most of our

products,

• continued volatility in material costs, especially for copper, steel, aluminum and components

that include those metals,

• our longer term outlook after 2009 for the Climate Control Business, to a significant extent,

will depend on the recovery of the credit and capital markets and the general economy,

• our investment in the Climate Control Business will continue if order intake levels continue
to warrant and the investment will increase our capacity to produce and distribute our
Climate Control products,

• we are competitive as to price, service, warranty and product performance in our Climate

Control Business,

• our Climate Control Business will continue to launch new products and product upgrades in
an effort to maintain our current market position and to establish a presence in new markets,
• shipping substantially all of our backlog at December 31, 2008 within the next twelve

months and have the production capacity in place to do so,

• monitoring and managing to the current economic environment, increasing the sales and
operating margins of all products, developing and introducing new and energy efficient
products, improving production and product delivery performance and expanding the
markets we serve, both domestic and foreign, in the Climate Control Business,

• not paying dividends on our common stock in the foreseeable future,
• the concentration relating to receivable accounts of six customers at December 31, 2008 does

not represent a significant credit risk due to the financial stability of these customers,

• important components of our strategy for competing in the commercial and institutional
renovation and replacement markets include the breadth of our product line coupled with
customization capability provided by a flexible manufacturing process,

• the annual United States market for water source heat pumps and hydronic fan coils to be
approximately $700 million in 2008 based on December 2008 data supplied by the AHRI
that could be impacted by the current economic conditions,

• the new products of our Climate Control Business have good long-term prospects,
• our Chemical Business has established leading regional market positions, which is a key

element in the success of this business,

• our Chemical Business sales volumes expressed in tons will be lower than in 2008 and our
sales dollars per unit will be less due to significantly lower raw material costs and selling
prices,

• competition within the markets served by our Chemical Business is primarily based upon
service, price, location of production and distribution sites, and product quality and
performance,

• the lack of sufficient non-seasonal sales volume to operate our manufacturing facilities at
optimum levels can preclude the Chemical Business from reaching full performance
potential,

• the El Dorado Facility’s ability to comply with the more restrictive permit limits, and the
rules that support the more restrictive dissolved minerals rules have been revised to authorize
a permit modification to adopt achievable dissolved minerals permit limits,

• Russia is the world’s largest producer of fertilizer grade AN and we has substantial excess

AN production capacity,

• the El Dorado Facility produces a high performance AN fertilizer that, because of its uniform

size, is easier to apply than many competing nitrogen-based fertilizer products,

• the customers that have entered into sales commitments with us will fulfill their obligations

to purchase the products at contracted prices,

• our Chemical Business pursuing a strategy of developing customers that purchase substantial
quantities of products pursuant to sales agreements and/or pricing arrangements that provide
for the pass through of raw material costs in order to minimize the impact of the uncertainty
of the sales prices of our products in relation to the cost of anhydrous ammonia, natural gas
and sulfur,

• certain of our industrial and mining customers will be affected by the current economic

recession and could substantially reduce their purchases,

• many of our mining and industrial customers will take significantly less product in 2009 than

in 2008 due to the downturn in housing, automotive and other sectors,

• our agricultural operating margins in dollars will be less based upon the current spread
between natural gas cost and UAN market prices and the current spread between anhydrous
ammonia cost and AN market prices,

• starting production at the Pryor Facility during the third quarter of 2009,
• periodically, the El Dorado and Cherokee Facilities will hedge certain of their anhydrous

ammonia and natural gas requirements with futures/forward contracts,

• our primary efforts to improve the results of our Chemical Business include emphasizing our
marketing efforts to customers that will accept the commodity risk inherent with natural gas
and anhydrous ammonia, while maintaining a strong presence in the agricultural sector,

• net sales will decrease as a result of the reduction in the Baytown Facility’s lease expense

beginning in June 2009,

• the actual results for agricultural products will depend upon the global and domestic supply
of and the demand for nitrogen fertilizer and agricultural products, including but not limited
to, corn and wheat,

• industry sources predicting that due to plant curtailments, fewer imports, the deferral of the
2008 fall nitrogen application, and low global grain inventories, a decreased supply will be
available to meet demand after the initial spring application depletes the fertilizer in storage,

• making changes to our controllable cost structure, as conditions dictate,
• the products and amount of products to be produced from the Pryor Facility,
• the costs to be incurred for Turnarounds in 2009,
• continue to focus our sales efforts on sales agreements and/or pricing formulas that provide
for the pass through of raw material and other variable costs and certain fixed costs in the
Chemical Business,

• our Chemical Business’ long-term strategy includes optimizing production efficiency of our

facilities, thereby lowering the fixed cost of each ton produced,

• other capital expenditures for 2009 are discretionary and dependent upon an adequate amount

of liquidity and/or obtaining acceptable funding,

• the agricultural products are the only significant seasonal products,

• we are the largest domestic merchant marketer of concentrated and blended nitric acids,
• the estimated costs to activate the Pryor Facility,
• our ability to reach an agreement to sell or distribute the UAN production at the Pryor

Facility in the near term,

• obtaining our requirements for raw materials in 2009,
• the amount of committed and discretionary capital expenditures for 2009 and how it will be

funded,

• under the terms of an agreement with a supplier, the El Dorado Facility purchasing a majority

of its anhydrous ammonia requirements through at least December 2010,

• ability to obtain anhydrous ammonia from other sources in the event of an interruption of

service under our existing purchase agreement,

• outcomes of various contingencies adversely impacting our liquidity and capital resources,
• our capital structure and liquidity reflect a reasonably sound financial position,
• our performance is dependent upon the efforts of our principal executive officers and our
future success depends in large part on our continued ability to attract and retain highly
skilled and qualified personnel,

• our cash and borrowing availability under our Working Capital Revolver Loan is adequate to

fund operations in 2009, subject to the financial viability of the lender,

• our primary cash needs will be for working capital and capital expenditures in 2009,
• recognizing and paying federal income taxes at regular corporate tax rates in 2009,
• the total stock-based compensation expense not yet recognized to be amortized through 2016

(adjusted for forfeitures),

• the assumptions used for our 2009 business plan, including that the economy will continue to
contract due to additional loss of jobs, declining consumer demand and limited credit
availability during most of 2009,

• our 2009 business plan will be adjusted frequently as we measure customer demand during

the first and second quarters,

• meeting all required covenant tests for all quarters and the year ending in 2009, and
• 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.

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,

• decline 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, pending,

• 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,
• modifications to or termination of the suspension agreement between the United States and

Russia,

• activating operations at the Pryor Facility is subject to obtaining a customer to purchase and

distribute a majority of its production,

• inability to obtain necessary raw materials,
• other factors described in "Management's Discussion and Analysis of Financial Condition

and Results of Operation" contained in this report, and

• other factors described in “Risk Factors”.

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.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PART III

General

The Certificate of Incorporation and By-laws of the Company provide for the division of the
Board of Directors into three classes, each class consisting as nearly as possible of one-third of
the whole. The term of office of one class of directors expires each year; with each class of
directors elected for a term of three years and until the shareholders elect their qualified
successors.

The Company’s By-laws provide that the Board of Directors, by resolution from time to time,
may fix the number of directors that shall constitute the whole Board of Directors. The By-laws
presently provide that the number of directors may consist of not less than 3 nor more than 13.
The Board of Directors currently has set the number of directors at 13.

Directors

Raymond B. Ackerman, age 86. Mr. Ackerman first became a director in 1993. His term will
expire in 2011. From 1952 until his retirement in 1992, Mr. Ackerman served as Chairman of the
Board and President of Ackerman McQueen, Inc., the largest advertising and public relations
firm headquartered in Oklahoma. He currently serves as Chairman Emeritus of the firm. He
retired as a Rear Admiral in the United States Naval Reserve. He is a graduate of Oklahoma City
University, and in 1996, was awarded an honorary doctorate from the school. He was elected to
the Oklahoma Hall of Fame in 1993 and the Oklahoma Commerce and Industry Hall of Honor in
1998. He served as the President of the Oklahoma City Chamber of Commerce, the United Way,
Allied Arts and six other Oklahoma City non-profit organizations.

Robert C. Brown, M.D., age 77. Dr. Brown first became a director in 1969. His term will expire
in 2009. Dr. Brown has practiced medicine for many years and is Vice President and Treasurer
of Plaza Medical Group, P.C. and President and Chief Executive Officer of ClaimLogic L.L.C.
Dr. Brown received both his undergraduate and medical degrees from Tufts University after
which he spent two years in the United States Navy as a doctor and over three years at the Mayo
Clinic. Dr. Brown is also a Clinical Professor at University of Oklahoma Medical School.

Charles A. Burtch, age 73. Mr. Burtch first became a director in 1999. His term will expire in
2010. Mr. Burtch was formerly Executive Vice-President and West Division Manager of
BankAmerica, where he managed BankAmerica’s asset-based lending division for the western
third of the United States. He retired in 1998 and has since been engaged as a private investor.
Mr. Burtch is a graduate of Arizona State University.

Robert A. Butkin, age 56. Mr. Butkin first became a director in August 2007. His term will
expire in 2010. Mr. Butkin is currently a Professor of Law at the University of Tulsa College of
Law. He was Dean of the Tulsa College of Law from 2005 to 2007. Mr. Butkin also serves as
President of BRJN Capital Corporation a private investment company. Mr. Butkin served as
Assistant Attorney General for the State of Oklahoma from 1987 to 1993, and served from 1995

to 2005 as the State Treasurer of Oklahoma. He has served in various organizations, including
holding the presidency of the Southern State Treasurers Association. He chaired the Banking,
Collateral and Cash Management Committee for the National Association of State Treasurers. In
addition, from 1981 to 1995, he served on the Board of Citizens Bank of Velma, Oklahoma, and
he served as Chairman of the Board of that bank from 1991 to 1994. He attended and received a
Bachelor of Arts degree from Yale College. He received his Juris Doctorate from the University
of Pennsylvania Law School in 1978.

Barry H. Golsen, J.D., age 58. Mr. Golsen first became a director in 1981. His term will expire
in 2009. Mr. Golsen was elected President of the Company in 2004. Mr. Golsen has served as
our Vice Chairman of the Board of Directors since August 1994, and has been the President of
our Climate Control Business for more than five years. Mr. Golsen served as a director of the
Oklahoma branch of the Federal Reserve Bank. Mr. Golsen has both his undergraduate and law
degrees from the University of Oklahoma.

Jack E. Golsen, age 80. Mr. Golsen first became a director in 1969. His term will expire in
2010. Mr. Golsen, founder of the Company, is our Chairman of the Board of Directors and Chief
Executive Officer and has served in that capacity since our inception in 1969. Mr. Golsen served
as our President from 1969 until 2004. During 1996, he was inducted into the Oklahoma
Commerce and Industry Hall of Honor as one of Oklahoma’s leading industrialists. Mr. Golsen
has a Bachelor of Science degree from the University of New Mexico. Mr. Golsen is a Trustee of
Oklahoma City University. During his career, he acquired or started the companies which
formed the Company. He has served on the boards of insurance companies, several banks and
was Board Chairman of Equity Bank for Savings N.A. which was formerly owned by the
Company.

David R. Goss, age 68. Mr. Goss first became a director in 1971. His term will expire in 2009.
Mr. Goss, a certified public accountant, is our Executive Vice President of Operations and has
served in substantially the same capacity for more than five years. Mr. Goss is a graduate of
Rutgers University.

Bernard G. Ille, age 82. Mr. Ille first became a director in 1971. His term will expire in 2011.
Mr. Ille served as President and Chief Executive Officer of United Founders Life from 1966 to
1988. He served as President and Chief Executive Officer of First Life Assurance Company from
1988, until it was acquired by another company in 1994. During his tenure as President of these
two companies, he served as Chairman of the Oklahoma Guaranty Association for ten years and
was President of the Oklahoma Association of Life Insurance Companies for two terms. He is a
director of Landmark Land Company, Inc., which was the parent company of First Life. He is
also a director for Quail Creek Bank, N.A. Mr. Ille is currently President of BML Consultants
and a private investor. He is a graduate of the University of Oklahoma.

Donald W. Munson, age 76. Mr. Munson first became a director in 1997. His term will expire
in 2011. From 1988, until his retirement in 1992, Mr. Munson served as President and Chief
Operating Officer of Lennox Industries. Prior to 1998, he served as Executive Vice President of
Lennox Industries’ Division Operations, President of Lennox Canada and Managing Director of
Lennox Industries’ European Operations. Prior to joining Lennox Industries, Mr. Munson served
in various capacities with the Howden Group, a company located in Scotland, and The Trane

Company, including serving as the managing director of various companies within the Howden
Group and Vice President Europe for The Trane Company. He is currently a consultant. Mr.
Munson is a resident of England. He has degrees in mechanical engineering and business
administration from the University of Minnesota.

Ronald V. Perry, age 59. Mr. Perry first became a director in August 2007. His term will expire
in 2011. Mr. Perry currently serves as President of Prime Time Travel, which he founded in
1979. He also serves on the Alumni Board of Directors for Leadership Oklahoma City. Mr.
Perry has served in various charitable and civic organizations. Mr. Perry is also a past President
of the Oklahoma City Food Bank and has served as President of the OKC Food Bank Board of
Directors. In 2007, the mayor of Oklahoma City appointed Mr. Perry to serve as a commissioner
on the Oklahoma City Convention and Visitors Bureau. Mr. Perry graduated from Oklahoma
State University, with a Bachelor’s degree in Business Administration.

Horace G. Rhodes, age 81. Mr. Rhodes first became a director in 1996. His term will expire in
2010. Mr. Rhodes is the Chairman of the law firm of Kerr, Irvine, Rhodes & Ables and has
served in such capacity and has practiced law for many years. From 1972 until 2001, he served
as Executive Vice President and General Counsel for the Association of Oklahoma Life
Insurance Companies and since 1982 served as Executive Vice President and General Counsel
for the Oklahoma Life and Health Insurance Guaranty Association. Mr. Rhodes received his
undergraduate and law degrees from the University of Oklahoma.

Tony M. Shelby, age 67. Mr. Shelby first became a director in 1971. His term will expire in
2011. Mr. Shelby, a certified public accountant, is our Executive Vice President of Finance and
Chief Financial Officer, a position he has held for more than five years. Prior to becoming our
Executive Vice President of Finance and Chief Financial Officer, he served as Chief Financial
Officer of a subsidiary of the Company and was with the accounting firm of Arthur Young &
Co., a predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of Oklahoma City
University.

John A. Shelley, age 58. Mr. Shelley first became a director in 2005. His term will expire in
2009. Mr. Shelley is the President and Chief Executive Officer of The Bank of Union (“Bank of
Union”) located in Oklahoma. He has held this position since 1997. Prior to 1997, Mr. Shelley
held various senior level positions in financial institutions in Oklahoma including the position of
President of Equity Bank for Savings, N.A., a savings and loan that was owned by the Company
prior to 1994. Mr. Shelley is a graduate of the University of Oklahoma.

Family Relationships

Jack E. Golsen is the father of Barry H. Golsen and the brother-in-law of Robert C. Brown.
Robert C. Brown is the uncle of Barry H. Golsen. David M. Shear is the nephew by marriage to
Jack E. Golsen and son-in-law of Robert C. Brown. Although not executive officers or directors
of the Company, Steve J. Golsen, the son of Jack E. Golsen, brother of Barry H. Golsen, and the
nephew of Robert C. Brown, is the Chief Operating Officer of our Climate Control Business, and
Heidi Brown Shear, Vice President and Managing Counsel of the Company, is the daughter of
Robert C. Brown and spouse of David M. Shear.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act of 1934, as amended (the “Exchange Act”), requires the
Company’s directors, officers, and beneficial owners of more than 10% of the Company’s
common stock to file with the Securities and Exchange Commission reports of holdings and
changes in beneficial ownership of the Company’s stock. Based solely on a review of copies of
the Forms 3, 4 and 5 and amendments thereto furnished to the Company with respect to 2008, or
written representations that no Form 5 was required to be filed, the Company believes that during
2008 all directors and officers of the Company and beneficial owners of more than 10% of the
Company’s common stock filed timely their required Forms 3, 4, or 5, except

• Jack Golsen, Barry Golsen, Steve Golsen, Sylvia Golsen, Linda Rappaport, SBL, LLC,
and Golsen Family, LLC each inadvertently filed one late Form 4 to report three
transactions;

• James Murray inadvertently filed one late Form 4 to report one transaction;
• Raymond Ackerman inadvertently filed two late Forms 5 to report four gifts;
• Paul Rydlund and Linda Rappaport each filed a late Form 3 to report their holdings of the

Company’s securities;

• Robert Butkin inadvertently filed one late Form 4 and one late Form 5 to report one

transaction each; and

• Bernard Ille, John Shelley, Raymond Ackerman, Charles Burtch, Donald Munson, Robert
Brown, Ron Perry and Horace Rhodes each inadvertently filed one late Form 4 to report
one transaction.

Code of Ethics

The Chief Executive Officer, the Chief Financial Officer, the principal accounting officer, and
the controller of the Company and each of the our subsidiaries, or persons performing similar
functions, are subject to our Code of Ethics.

We and each of our subsidiary companies have adopted a Statement of Policy Concerning
Business Conduct applicable to our employees. Our Code of Ethics and Statement of Policy
Concerning Business Conduct are available on our website at www.lsb-okc.com or by mail if
requested. We will post any amendments to these documents, as well as any waivers that are
required to be disclosed pursuant to the rules of either the Securities and Exchange Commission
or the NYSE Euronext (“NYSE”), on our website.

Audit Committee

We have a separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Messrs.
Bernard Ille (Chairman), Charles Burtch, Horace Rhodes, Ray Ackerman and John Shelley
(added in November 2008). The Board has determined that each member of the Audit
Committee is independent, as defined in the listing standards of the NYSE as of the Company’s
fiscal year end. During 2008, the Audit Committee had six meetings.

Audit Committee Financial Expert

While the Board of Directors endorses the effectiveness of our Audit Committee, its membership
does not presently include a director that qualifies for designation as an “audit committee
financial expert.” However, each of the current members of the Audit Committee is financially
literate and able to read and understand fundamental financial statements and at least one of its
members is “financially sophisticated” and has financial management expertise. The Board of
Directors believes that the background and experience of each member of the Audit Committee
is sufficient to fulfill the duties of the Audit Committee. For these reasons, although members of
our Audit Committee are not professionally engaged in the practice of accounting or auditing,
our Board of Directors has concluded that the ability of our Audit Committee to perform its
duties is not impaired by the absence of an “audit committee financial expert.”

Nominating and Corporate Governance Committee

We have a separately-designated standing Nominating and Corporate Governance Committee
(the “Nominating Committee”). The members of the Nominating Committee are Mssers. Ray
Ackerman, Horace Rhodes, and John Shelley (Chairman). The Board has determined that each
member of the Nominating Committee is independent, in accordance with Section 10A-3 of the
Exchange Act and the listing standards of the NYSE. During 2008, the Nominating Committee
had one meeting.

Compensation and Stock Option Committee

The Compensation and Stock Option Committee (the “Compensation Committee”) has three
members and met six times during 2008. The Committee is comprised of Messrs. Horace
Rhodes (Chairman), Charles Burtch and Bernard Ille, non-employee, independent directors in
accordance with the rules of the NYSE. The Board has adopted a Compensation and Stock
Option Committee Charter which governs the responsibilities of the Compensation Committee.
This charter is available on the Company’s website at www.lsb-okc.com, and is also available
from the Company upon request.

The Compensation Committee’s responsibilities include, among other duties, the responsibility
to:

• establish the base salary, incentive compensation and any other compensation for the

Company’s executive officers;

• administer the Company’s management incentive and stock-based compensation plans,
non-qualified death benefits, salary continuation and welfare plans, and discharge the
duties imposed on the Compensation Committee by the terms of those plans; and

• perform other functions or duties deemed appropriate by the Board.

Decisions regarding non-equity compensation of non-executive officers of the Company and the
executive officers of the Company named in the Summary Compensation Table (the “named
executive officers”) other than the Chief Executive Officer and the President, are made by the
Company’s Chief Executive Officer and presented for approval or modification by the
Committee.

The agenda for meetings of the Compensation Committee is determined by its Chairman with the
assistance of the Company’s Chief Executive Officer. Committee meetings are regularly
attended by the Chief Executive Officer. At each Compensation Committee meeting, the
Compensation Committee also meets in executive session without the Chief Executive Officer.
The Committee’s Chairman
the Compensation Committee’s
recommendations on compensation for the Chief Executive Officer and the President. The Chief
Executive Officer may be delegated authority to fulfill certain administrative duties regarding the
compensation programs.

the Board

reports

The Compensation Committee has authority under its charter to retain, approve fees for, and
terminate advisors, consultants and agents as it deems necessary to assist in the fulfillment of its
responsibilities. If an outside consultant is engaged, the Compensation Committee reviews the
total fees paid to such outside consultant by the Company to ensure that the consultant maintains
its objectivity and independence when rendering advice to the Compensation Committee. For
2008, no outside consultants were engaged by the Compensation Committee.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview of Compensation Program

Our long-term success depends on our ability to efficiently operate our facilities, to continue to
develop our product lines and technologies, and to focus on developing our product markets. To
achieve these goals, it is important that we be able to attract, motivate, and retain highly talented
individuals who are committed to our values and goals.

The Compensation Committee has responsibility for the establishment in consultation with
management, of our compensation philosophy for its senior executive officers and the
implementation and oversight of a compensation program consistent with the philosophy. This
group of senior executive officers includes the named executive officers, as well as our other
executives.

A primary objective of the Compensation Committee is to ensure that the compensation paid to
the senior executive officers is fair, reasonable, and competitive and provides incentives for
superior performance. The Compensation Committee is responsible for approval of all decisions

for the direct compensation, including the base salary and bonuses, stock options and other
benefit programs for the Company’s senior executive officers, including the named executive
officers.

In general, the day to day administration of savings, health and welfare plans and policies are
handled by a team of the legal and finance department employees. The Compensation Committee
(or Board) remains responsible for key policy changes outside of the day to day requirements
necessary to maintain these plans and policies.

Compensation Philosophy and Objectives

The Compensation Committee believes that the most effective executive compensation program
rewards the executive’s achievements and contribution towards the Company achieving its long-
term strategic goals. However, the Compensation Committee does not believe that executive
compensation should be tied to specific numeric or formulaic financial goals or stock price
achievement by the Company. The Compensation Committee recognizes that, given the
volatility of the market in which we do business, our economic performance in any given time
frame may not be an accurate measurement of our senior executive officer’s performance.

The Compensation Committee values both personal contribution and teamwork as factors to be
rewarded. The Compensation Committee believes that it is important to align executives’
interests with those of stockholders through the use of stock option incentive programs. The
Compensation Committee evaluates both performance and compensation to ensure that we
maintain our ability to attract and retain highly talented employees in key positions, and that
compensation provided to key employees will remain competitive relative to our other senior
executive officers. The Compensation Committee believes that executive compensation packages
should include both cash and stock-based compensation, as well as other benefit programs to
encourage senior executive officers to remain with the Company and have interests aligned with
those of the Company. Based on the foregoing, the Committee bases it executive compensation
program on the following criteria:

• Compensation should be based on the level of job responsibility, executive performance,

and Company performance.

• Compensation should enable us to attract and retain key talent.
• Compensation should be competitive with compensation offered by other companies that

compete with us for talented individuals in our geographic area.

• Compensation should reward performance.
• Compensation should motivate executives to achieve our strategic and operational goals.

Setting Executive Compensation

The Committee sets annual cash and non-cash executive compensation to reward the named
executive officers for achievement and to motivate the named executive officers to achieve long-
term business objectives. The Compensation Committee is unable to use peer group comparisons
in determining the compensation package because of the diverse nature of our lines of business.
Although the Compensation Committee has not engaged outside consultants to assist in

conducting its annual review of the total compensation program, it may do so in the future. The
Compensation Committee consulted some generally available compensation information for
companies of our size. The Compensation Committee did not engage consultants to prepare
specialized reports for their use. The Compensation Committee considered base salary and
current bonus awards in determining overall compensation. The Compensation Committee does
not have a policy allocating long term and currently paid compensation. The Compensation
Committee also considered the allocation between cash and non-cash compensation amounts, but
does not have a specific formula or required allocation between such compensation amounts. The
Compensation Committee compares the Chief Executive Officer’s total compensation to the total
compensation of our other named executive officers over time. However, the Compensation
Committee has not established a target ratio between total compensation of the Chief Executive
Officer and the median total compensation level for the next lower tier of management. The
Compensation Committee also considers internal pay equity among the named executive officers
and in relation to next lower tier of management in order to maintain compensation levels that
are consistent with the individual contributions and responsibilities of those executive officers.
The Compensation Committee does not consider amounts payable under severance agreements
when setting the compensation of the named executive officers.

Role of Executive Officers in Compensation Decisions

Our Chief Executive Officer annually reviews the performance of each of our named executive
officers (other than the Chief Executive Officer and the President) and presents to the
Compensation Committee recommendations with respect to salary, bonuses and other benefit
items. The Committee considers and reviews such recommendations in light of the
Compensation Committee’s philosophy and objections and exercises its discretion in accepting
or modifying the recommended compensation. In determining compensation for the Chief
Executive Officer and the President, the Compensation Committee reviews the responsibilities
and performance of each of them. Such review includes interviewing both the Chief Executive
Officer and the President and consideration of the Compensation Committee’s observations of
the Chief Executive Officer and the President during the applicable year.

2008 Executive Compensation Components

For the fiscal year ended December 31, 2008, the principal components of compensation for the
named executive officers were:

• base salary;
• cash bonus;
• death benefit and salary continuation programs; and
• perquisites and other personal benefits.

The Compensation Committee did not award equity based compensation, such as stock options,
to the named executive officers in 2008. As discussed below, the Compensation Committee
awarded salary increases and bonuses to the named executive officers for 2008. Those awards
were considered sufficient to provide competitively based incentives to our executives to
advance company performance, without granting equity based compensation as well.

Base Salary

We provide the named executive officers and other senior executive officers with base salary to
compensate them for services rendered during the year. We do not have a defined benefit or
qualified retirement plan for our executives. This factor is considered when setting the base
compensation for senior executive officers.

Base salaries are determined for the named executive officers in the discretion of the
Compensation Committee based upon the recommendations of the Chief Executive Officer’s
assessment of the executive’s compensation, both individually and relative to the other senior
executive officers and based upon an assessment of the individual performance of the executive
during the proceeding year. In determining the base salary for the Chief Executive Officer and
the President, the Compensation Committee exercises its judgment based on its observations of
such senior executive officers and the Compensation Committee’s assessment of such officers’
contribution to the Company’s performance and other leadership achievements. Although the
Compensation Committee does not use specific profit targets to set base salaries or bonuses, the
Compensation Committee awarded salary increases in 2008 based on the above criteria and with
consideration of the profitable year.

Bonuses

The Compensation Committee may award cash bonuses to the named executive officers to
reward outstanding performance. The Compensation Committee awarded bonuses to the named
executive officers in 2008 based upon the Committee’s review of the performance and the
recommendation of the Chief Executive Officer. No bonus is guaranteed, and there is no defined
range of bonus amounts that the Compensation Committee may award. Bonus awards are made
at the Compensation Committee’s discretion based upon an assessment of an individual’s overall
contribution to the Company.

Death Benefit and Salary Continuation Plans

The Company sponsors non-qualified arrangements to provide a death benefit to the designated
beneficiary of certain key employees (including certain of the named executive officers) in the
event of such executive’s death (the “Death Benefit Plans”). We also have a non-qualified
arrangement with certain key employees (including certain of the named executive officers) of
the Company and its subsidiaries to provide compensation to such individuals in the event that
they are employed by the Company at age 65 (the “Salary Continuation Plans”).

Attributed costs of the personal benefits described above for the named executive officers for the
fiscal year ended December 31, 2008, are discussed in footnote (1) and included in column (i) of
the “Summary Compensation Table.”

The Committee believes that the Death Benefit and Salary Continuation Plans are significant
factors in:

• enabling the Company to retain its named executive officers;

• encouraging our named executive officers to render outstanding service; and
• maintaining competitive levels of total compensation.

Perquisites and Other Personal Benefits

The Company and the Compensation Committee believe that perquisites are necessary and
appropriate parts of total compensation that contribute to our ability to attract and retain superior
executives. Accordingly, the Company and the Compensation Committee provided a limited
number of perquisites that are reasonable and consistent with our overall compensation program.
The Compensation Committee periodically reviews the levels of perquisites provided to the
named executive officers.

We currently provide the named executive officers with the use of our automobiles, provide cell
phones that are used primarily for business purposes, and pay the country club dues for certain of
the executive officers. The executive officers are expected to use the country club in large part
for business purposes.

Severance Agreements

We have entered into change of control severance agreements with certain key employees,
including the named executive officers. The severance agreements are designed to promote
stability and continuity of senior management. Information regarding applicable payments under
such agreements for the named executive officers is provided under the heading “Potential
Payments Upon Termination or Change-In-Control.”

Employment Agreement

We have no employment agreements with our named executive officers, except with Jack E.
Golsen, our Chief Executive Officer. The terms of Mr. Golsen’s employment agreement are
described below under “Employment Agreement.” We believe that Mr. Golsen’s employment
agreement promotes stability in our senior management and encourages Mr. Golsen to provide
superior service to us. The current term of the Employment Agreement expires March 21, 2011.

Amendments to Salary Continuation Plans, Severance Agreements and Employment
Agreement

Effective December 17, 2008, our Board of Directors, based on the recommendation and
approval of the Compensation Committee, approved the amendment of the following benefit
plans in order to address, before December 31, 2008, the documentation requirements of Section
409A of the Internal Revenue Code (“Section 409A”):

• Non-Qualified Benefit Plan Agreements, each dated January 1, 1992, between the
Company and each of Barry H. Golsen, David M. Shear, and Steven J. Golsen, Chief
Executive Officer of one of the Company’s subsidiaries and Chief Operating Officer of
the Company’s Climate Control Business;

• Severance Agreements, each dated January 17, 1989, between the Company and certain
of our officers, including each of Jack E. Golsen; Barry H. Golsen; Tony M. Shelby;
David R. Goss; and David M. Shear, (whose Severance Agreement is dated September
25, 1991); and Steven J. Golsen, Chief Executive Officer of one of the Company’s
subsidiaries and Chief Operating Officer of the Company’s Climate Control Business;
and

• Employment Agreement, dated March 21, 1996, as amended April 29, 2003 and May 12,

2005, between the Company and Jack E. Golsen.

The amendments primarily clarify and modify the dates on which certain types of benefits are
provided, in order to comply with Section 409A. Where applicable, the amendments require that
payments due to a “specified employee” (as such term is defined under Section 409A) upon
separation from service must be delayed until the earlier of death or the expiration of a period of
six months, among other revisions made to comply with Section 409A. Except as amended to
address Section 409A, the agreements listed above are materially consistent with the respective
pre-amendment agreements.

Ownership Guidelines

At this time, we have not established any guidelines which require our executive officers to
acquire and hold our common stock. However, our named executive officers have historically
acquired and maintained a significant ownership position in our common stock.

Tax and Accounting Implications

Deductibility of Executive Compensation - Section 162(m) of the Internal Revenue Code,
provides that the Company may not deduct compensation of more than $1,000,000 of employee
remuneration for named executive officers. However, the statute exempts qualifying
performance-based compensation from the deduction limit when specified requirements are met.
In the past, the Company has granted non-qualifying stock options to the named executive
officers that do not meet the performance-based compensation criteria and are subject to the
Section 162(m) limitation.

As a result of the exercise of non-qualifying stock options, the Company’s reported
compensation, for tax purposes, to Jack E. Golsen, Barry H. Golsen, and David M. Shear
exceeded the Section 162(m) deductibility limits during 2008 and 2007 by $350,000 and
$3,418,000, respectively. For 2008, Barry H. Golsen’s compensation exceeded the deductibility
limit by $350,000, which represents a cost to the company of $137,000 as a result of the lost tax
deduction. For 2007 Jack E. Golsen’s compensation exceeded the deductibility limit by
$3,349,000, which represents a cost to the company of $1,306,000 as a result of the lost tax
deduction and David M. Shear’s compensation exceeded the deductibility limit by $69,000
which represents a cost to the company of $27,000 as a result of the lost tax deductions.

Accounting for Stock-Based Compensation – The Company accounts for stock-based payments,
including its incentive and nonqualified stock options, in accordance with the requirements of
SFAS 123(R).

Compensation and Stock Option Committee Report

The Compensation and Stock Option Committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis with management and, based on such review and
discussions, the Compensation and Stock Option Committee recommended to the Board that the
Compensation Discussion and Analysis be included herein.

Submitted by the Compensation and Stock Option Committee of the Company’s Board of
Directors.

Horace G. Rhodes, Chairman
Charles A. Burtch
Bernard G. Ille

The following table summarizes the total compensation paid or earned by each of the named
executive officers for each of the three fiscal years in the period ended December 31, 2008.

Summary Compensation Table

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Name and Principal Position

Year

Salary
($)

Bonus
($)

Stock
Awards
($)

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($)

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)

All Other
Compensation
($) (1)

Total
($)

Jack E. Golsen,

Chairman of the Board
of Directors and
Chief Executive Officer

Tony M. Shelby,

Executive Vice President
of Finance and Chief
Financial Officer

Barry H. Golsen,

Vice Chairman of the Board of
Directors, President, and
President of the Climate Control
Business

David R. Goss,

Executive Vice President of
Operations

David M. Shear,

Senior Vice President and
General Counsel

2008
2007
2006

575,554
523,400
497,400

200,000
50,000
-

2008
2007
2006

268,654
255,000
245,000

125,000
90,000
40,000

2008
2007
2006

479,446
433,100
413,600

175,000
100,000
40,000

259,923
240,500
233,000

85,000
55,000
35,000

264,423
240,000
225,000

100,000
75,000
35,000

-
-
-

-
-

-
-
-

-
-

-
-
-

-
-

-
-
-

-
-

682,646
645,010
615,168

1,458,200
1,218,410
1,112,568

15,574
22,773
22,428

409,228
367,773
307,428

27,546
22,191
9,515

14,440
12,361
14,146

17,149
9,961
4,628

681,992
555,291
463,115

359,363
307,861
282,146

381,572
324,961
264,628

(1) As discussed below under “1981 Agreements” and “2005 Agreement,” the Company entered
into individual death benefit agreements in 1981 (amended in 2008 to comply with Section
409A) and a death benefit agreement in 2005. Reported compensation for the death benefit
under these agreements is the greater of:

•
•

the expense incurred associated with our accrued death benefit liability; or
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit.

Amounts accrued under these agreements are not paid until the death of the named executive
officer.

As discussed below under “1992 Agreements”, the Company entered into benefit agreements in
1992 (and amended in 2008 to comply with Section 409A), which include a death benefit until
the employee reaches age 65 or benefits for life commencing when the employee reaches age 65.
Compensation reported for these benefits is the greater of:

•
•

the expense incurred associated with our accrued benefit liability or
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit.

The amounts set forth under “All Other Compensation” are comprised of compensation relating
to these agreements and perquisites for 2008, as follows:

1981
Agreements

1992
Agreements

2005
Agreement

Other (A)

Total

Jack E. Golsen

Tony M. Shelby

Barry H. Golsen

David R. Goss

David M. Shear

204,856 $

- $

466,533 $ 11,257 $

682,646

7,250 $

- $

8,324 $

15,574

2,593 $

18,960 $

- $

5,993 $

27,546

4,854 $

3,352 $

- $

6,234 $

14,440

10,782 $

- $

6,367 $

17,149

(A) Amount relates to the personal use of automobiles, cell phones and country club dues.

The Company did not grant equity-based awards to the named executive officers during 2008,
2007 or 2006.

Employment Agreement

We have an employment agreement with Jack E. Golsen, which requires the Company to employ
Mr. Golsen as an executive officer of the Company. The employment agreement was amended in
2008 to comply with Section 409A. The employment agreement may be terminated by either
party by written notice at least one year prior to the expiration of the then current term. The
current term of the employment agreement expires March 21, 2011, but will be automatically
renewed for up to three additional three-year periods. Under the terms of such employment
agreement, Mr. Golsen shall:

• be paid an annual base salary at his 1995 base rate, as adjusted from time to time by the
Compensation and Stock Option Committee, but such shall never be adjusted to an
amount less than Mr. Golsen’s 1995 base salary,

• be paid an annual bonus in an amount as determined by the Compensation and Stock

•

Option Committee, and
receive from the Company certain other fringe benefits (vacation; health and disability
insurance).

The employment agreement provides that Mr. Golsen’s employment may not be terminated,
except:

• upon conviction of a felony involving moral turpitude after all appeals have been

exhausted (“Conviction”),

• Mr. Golsen’s serious, willful, gross misconduct or willful, gross negligence of duties
resulting in material damage to the Company and its subsidiaries, taken as a whole,
unless Mr. Golsen believed, in good faith, that such action or failure to act was in the
Company’s or its subsidiaries’ best interest (“Misconduct”), and

• Mr. Golsen’s death.

However, no termination for a Conviction or Misconduct may occur unless and until the
Company has delivered to Mr. Golsen a resolution duly adopted by an affirmative vote of three-
fourths of the entire membership of the Board of Directors at a meeting called for such purpose
after reasonable notice given to Mr. Golsen finding, in good faith, that Mr. Golsen violated such
item.

If Mr. Golsen’s employment is terminated for reasons other than due to a Conviction or
Misconduct, then he shall, pursuant to the employment agreement, in addition to his other rights
and remedies, receive and the Company shall pay to Mr. Golsen:

• a cash payment, on the date of termination, a sum equal to the amount of Mr. Golsen’s
annual base salary at the time of such termination and the amount of the last bonus paid
to Mr. Golsen prior to such termination times the number of years remaining under the
then current term of the employment agreement, and

• provide to Mr. Golsen all of the fringe benefits that the Company was obligated to
provide during his employment under the employment agreement for the remainder of the
term of the employment agreement.

If there is a change in control (as defined in the severance agreement between Mr. Golsen and
the Company as discussed below under “Severance Agreements”) and within 24 months after
such change in control Mr. Golsen is terminated, other than for Cause (as defined in the
severance agreement), then in such event, the severance agreement between Mr. Golsen and the
Company shall be controlling.

In the event Mr. Golsen becomes disabled and is not able to perform his duties under the
employment agreement as a result thereof for a period of 12 consecutive months within any two-
year period, the Company shall pay Mr. Golsen his full salary for the remainder of the term of
the employment agreement and thereafter 60% of such salary until Mr. Golsen’s death.

1981 Agreements

During 1981, the Company entered into individual death benefit agreements (the “1981
Agreements”) with certain key employees (including certain of the named executive officers). As
relating to the named executive officers, under the 1981 Agreements, the designated beneficiary
of the officer will receive a monthly benefit for a period of 10 years if the officer dies while in
the employment of the Company or a wholly-owned subsidiary of the Company. The 1981
Agreements provide that the Company may terminate the agreement as to any officer at anytime
prior to the officer’s death. The Company has purchased life insurance on the life of each officer
covered under the 1981 Agreements to provide a source of funds for the Company’s obligations
under the 1981 Agreements. The Company is the owner and sole beneficiary of each of the
insurance policies and the proceeds are payable to the Company upon the death of the officer.

The following table sets forth the amounts of annual benefits payable to the designated
beneficiary or beneficiaries of the named executive officer’s under the 1981 Agreements.

Name of Individual

Amount of Annual
Payment

Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear

$ 175,000
$ 35,000
$ 30,000
$ 35,000
N/A

1992 Agreements

During 1992, the Company entered into individual benefit agreements with certain key
employees of the Company and its subsidiaries (including certain of the named executive
officers) to provide compensation to such individuals in the event that they are employed by the
Company or a subsidiary of the Company at age 65 (the “1992 Agreements”). The 1992
Agreements were amended in 2008 to comply with Section 409A. As relating to the named
executive officers, under the 1992 Agreements, the officer is eligible to receive a designated
benefit (“Benefit”) as set forth in the 1992 Agreements. The officer will receive the Benefit
beginning at the age 65 for the remainder of the officer’s life. If prior to attaining the age 65, the
officer dies while in the employment of the Company or a subsidiary of the Company, the
designated beneficiary of the officer will receive a monthly benefit (“Death Benefit”) for a
period of ten years. The 1992 Agreements provide that the Company may terminate the
agreement as to any officer at any time and for any reason prior to the death of the officer. The
Company has purchased insurance on the life of each officer covered under the 1992
Agreements. The Company is the owner and sole beneficiary of each insurance policy, and the
proceeds are payable to the Company to provide a source of funds for the Company’s obligations
under the 1992 Agreements. Under the terms of the 1992 Agreements, if the officer becomes
incapacitated prior to retirement or prior to reaching age 65, the officer may request the
Company to cash-in any life insurance on the life of such officer purchased to fund the
Company’s obligations under the 1992 Agreements. Jack E. Golsen does not participate in the
1992 Agreements.

The following table sets forth the amounts of annual benefits payable to the named executive
officers under the 1992 Agreements and the net cash surrender value of the associated life
insurance policies at December 31, 2008.

Amount
of Annual
Benefit

Amount
of Annual
Death Benefit

N/A
$ 15,605
$ 17,480
$ 17,403
$ 17,822

N/A
N/A
$ 11,596
N/A
7,957
$

Amount of
Net Cash
Surrender
Value

N/A

$
-
$ 33,490
$ 59,662
-
$

Name of Individual

Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear

2005 Agreement

During 2005, the Company entered into a death benefit agreement (“2005 Agreement”) with
Jack E. Golsen. This agreement replaced existing benefits that were payable to Mr. Golsen. The
2005 Agreement provides that, upon Mr. Golsen’s death, the Company will pay to Mr. Golsen’s
family or designated beneficiary $2.5 million to be funded from the net proceeds received by the
Company under certain life insurance policies on Mr. Golsen’s life that were purchased and are
owned by the Company. The 2005 Agreement requires that the Company is obligated to keep in
existence no less than $2.5 million of the stated death benefit. The life insurance policies in
force provide an aggregate stated death benefit to the Company, as beneficiary, of $7 million.

401(k) Plan

We maintain The LSB Industries, Inc. Savings Incentive Plan (the “401(k) Plan”) for the
employees (including the named executive officers) of the Company and its subsidiaries,
excluding employees covered under union agreements and certain other employees. As relating
to the named executive officers, the 401(k) Plan is funded by the officer’s contributions. The
Company and its subsidiaries make no contributions to the 401(k) Plan for any of the named
executive officers. The amount that an officer may contribute to the 401(k) Plan equals a certain
percentage of the employee’s compensation, with the percentage based on the officer’s income
and certain other criteria as required under Section 401(k) of the Internal Revenue Code. The
Company or subsidiary deducts the amounts contributed to the 401(k) Plan from the officer’s
compensation each pay period, in accordance with the officer’s instructions, and pays the amount
into the 401(k) Plan pursuant to the officer’s election. The salary and bonus set forth in the
Summary Compensation Table above include any amounts contributed by the named executive
officers during the 2008, 2007 and 2006 fiscal years pursuant to the 401(k) Plan.

Outstanding Equity Awards At December 31, 2008

(a)

(b)

(c)

(d)

(e)

(f)

Options Awards (1)

Number of
Securities
Underlying
Unexercised
Options
(#) (2)
Exercisable(2)

-
100,000
15,000
11,250
65,000
15,000
-

Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
-
-
-
-
-
-
-

Name

Jack E. Golsen
Tony M. Shelby

Barry H. Golsen
David R. Goss

David M. Shear

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
-
-
-
-
-
-
-

Option
Exercise
Price
($)
-
1.25
2.73
2.73
1.25
2.73
-

Option
Expiration
Date(2)
-

7/8/2009
11/29/2011
11/29/2011
7/8/2009
11/29/2011
-

(1) There were no unvested stock awards at December 31, 2008.
(2) Options expiring on July 8, 2009 were granted on July 8, 1999, and were fully vested on July 7,
2003. Options expiring on November 29, 2011, were granted on November 29, 2001 and were fully
vested on November 28, 2005.

Options Exercised in 2008 (1)

(a)

Option Awards

(b)

(c)

Number of
Shares
Acquired on
Exercise
(#)

Value
Realized
on Exercise(2)
($)

-
-
55,000
35,000
65,544

-
-
742,500
338,800
1,472,937

Name

Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear

(1) There were no stock awards that vested in 2008.
(2) Value realized was determined using the difference between the exercise price of the options and
the closing price of our common stock on the date of exercise.

100

Severance Agreements

We have entered into severance agreements with each of the named executive officers and
certain other officers, which were amended in 2008 to comply with Section 409A. Each
severance agreement provides (among other things) that if, within 24 months after the occurrence
of a change in control (as defined) of the Company, the Company terminates the officer’s
employment other than for cause (as defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an amount equal to 2.9 times the officer’s
base amount (as defined). The phrase “base amount” means the average annual gross
compensation paid by the Company to the officer and includable in the officer’s gross income
during the most recent five year period immediately preceding the change in control. If the
officer has been employed by the Company for less than five years, the base amount is calculated
with respect to the most recent number of taxable years ending before the change in control that
the officer worked for the Company.

The severance agreements provide that a “change in control” means a change in control of the
Company of a nature that would require the filing of a Form 8-K with the SEC and, in any event,
would mean when:

• any individual, firm, corporation, entity, or group (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of the Company’s outstanding
voting securities having the right to vote for the election of directors, except acquisitions
by:
• any person, firm, corporation, entity, or group which, as of the date of the severance

agreement, has that ownership, or

• Jack E. Golsen, his wife; his children and the spouses of his children; his estate;
executor or administrator of any estate, guardian or custodian for Jack E. Golsen, his
wife, his children, or the spouses of his children, any corporation, trust, partnership,
or other entity of which Jack E. Golsen, his wife, children, or the spouses of his
children own at least 80% of the outstanding beneficial voting or equity interests,
directly or indirectly, either by any one or more of the above-described persons,
entities, or estates; and certain affiliates and associates of any of the above-described
persons, entities, or estates;

individuals who, as of the date of the severance agreement, constitute the Board of
Directors of the Company (the “Incumbent Board”) and who cease for any reason to
constitute a majority of the Board of Directors except that any person becoming a director
subsequent to the date of the severance agreement, whose election or nomination for
election is approved by a majority of the Incumbent Board (with certain limited
exceptions), will constitute a member of the Incumbent Board; or
the sale by the Company of all or substantially all of its assets.

•

Except for the severance agreement with Jack E. Golsen, the termination of an officer’s
employment with the Company “for cause” means termination because of:

•

the mental or physical disability from performing the officer’s duties for a period of 120
consecutive days or one hundred eighty days (even though not consecutive) within a 360
day period;

101

•
•

•

the conviction of a felony;
the embezzlement by the officer of Company assets resulting in substantial personal
enrichment of the officer at the expense of the Company; or
the willful failure (when not mentally or physically disabled) to follow a direct written
order from the Company’s Board of Directors within the reasonable scope of the officer’s
duties performed during the 60 day period prior to the change in control.

The definition of “Cause” contained in the severance agreement with Jack E. Golsen means
termination because of:

•

the conviction of Mr. Golsen of a felony involving moral turpitude after all appeals have
been completed; or
if due to Mr. Golsen’s serious, willful, gross misconduct or willful, gross neglect of his
duties has resulted in material damages to the Company and its subsidiaries, taken as a
whole, provided that:
• no action or failure to act by Mr. Golsen will constitute a reason for termination if he
believed, in good faith, that such action or failure to act was in the Company’s or its
subsidiaries’ best interest, and
failure of Mr. Golsen to perform his duties hereunder due to disability shall not be
considered willful, gross misconduct or willful, gross negligence of his duties for any
purpose.

•

The termination of an officer’s employment with the Company for “good reason” means
termination because of:

•

the assignment to the officer of duties inconsistent with the officer’s position, authority,
duties, or responsibilities during the 60 day period immediately preceding the change in
control of the Company or any other action which results in the diminishment of those
duties, position, authority, or responsibilities;
the relocation of the officer;

•
• any purported termination by the Company of the officer’s employment with the

•

Company otherwise than as permitted by the severance agreement; or
in the event of a change in control of the Company, the failure of the successor or parent
company to agree, in form and substance satisfactory to the officer, to assume (as to a
successor) or guarantee (as to a parent) the severance agreement as if no change in
control had occurred.

Except for the severance agreement with Jack E. Golsen, each severance agreement runs until the
earlier of: (a) three years after the date of the severance agreement, or (b) the date of retirement
from the Company; however, beginning on the first anniversary of the severance agreement and
on each annual anniversary thereafter, the term of the severance agreement automatically extends
for an additional one-year period, unless the Company gives notice otherwise at least 60 days
prior to the anniversary date. The severance agreement with Jack E. Golsen is effective for a
period of three years from the date of the severance agreement; except that, commencing on the
date one year after the date of such severance agreement and on each anniversary thereafter, the
term of such severance agreement shall be automatically extended so as to terminate three years
from such renewal date, unless the Company gives notices otherwise at least one year prior to the
renewal date.

102

Potential Payments Upon Termination or Change-In-Control(1)

The following table reflects the amount that would have been payable to each of the named
executive officers under the applicable agreement if the respective trigger event had occurred on
December 31, 2008.

Severance Pay Trigger Event

Name and
Executive Benefit
and Payments
Upon Separation

Involuntary
Other Than
For Cause
Termination
($)

Involuntary
For Cause
Termination
($)

Voluntary
Termination
($)

Jack E. Golsen:
Salary
Bonus
Death Benefits
Other

Tony M. Shelby:
Salary
Death Benefits
Other

Barry H. Golsen:

Salary
Death Benefits

David R. Goss:
Salary
Death Benefits
Other

David M. Shear:

Salary
Death Benefits

-
-
-
-

1,294,996
450,000
-
59,182

-
-
240,794

-
-

-
-
256,752

-
-

-
-
-

-
-

-
-
-

-
-

-
-
-
-

-
-
-

-
-

-
-
-

-
-

Involuntary
Other Than
For Cause
Termination
- Change of
Control
($)

Voluntary
For Good
Reason
Termination
- Change of
Control
($)

Disability/
Incapacitation
($)

Death
($)

1,684,973
-
-
-

3,246,125
-
-
-

-
-
4,250,000
59,182

925,222
-
-

1,467,593
-

864,770
-
-

834,392
-

-
-
-

-
-

-
-
-

-
-

-
350,000
-

-
415,962

-
350,000
-

-
79,567

(1) This amount does not include the amount realizable under outstanding stock options granted
to the named executive officers, all of which are fully vested. See “Outstanding Equity Awards
at December 31, 2008.”

103

Compensation of Directors

In 2008, we compensated our non-employee directors for their services as directors on our
Board. Directors who are employees of the Company receive no compensation for their services
as directors.

The following table summarizes the compensation paid by us to our non-employee directors
during the year ended December 31, 2008.

Director Compensation Table
(a)

(b)

(d)

Fees
Earned
or Paid
in Cash
($) (1)

Option
Awards
($)(2)

Name

Raymond B. Ackerman

40,000

Robert C. Brown, M.D.

40,000

Charles A. Burtch

Robert A. Butkin

Bernard G. Ille

Donald W. Munson

Ronald V. Perry

Horace G. Rhodes

John A. Shelley

40,000

39,500

40,000

344

(h)

Total
($)

40,344

39,844

40,344

(1) This amount includes as to each director, an annual fee of $13,000 for services as a director
and $500 for each Board meeting attended during 2008. This amount also includes the following
fees earned during 2008:

• Mr. Ackerman received $25,000 for his services on the Audit Committee, Nominating
and Corporate Governance Committee and Public Relations and Marketing Committee.
• Dr. Brown received $25,000 for his services on the Benefits and Programs Committee.
This amount does not include amounts paid by the Company to Dr. Brown for consulting
services rendered by him or his affiliated medical group, which amounts are described
under “Item 13 - Certain Relationships and Related Party Transactions, and Director
Independence - Related Party Transactions.”

• Mr. Burtch received $25,000 for his services on the Audit Committee and Compensation

and Stock Option Committee.

• Mr. Butkin received $25,000 for his services on the Business Development Committee.
• Mr. Ille received $25,000 for his services on the Audit Committee, Compensation and
Stock Option Committee, Nominating and Corporate Governance Committee and Public
Relations and Marketing Committee.

• Mr. Munson received $25,000 for his services on the Business Development Committee.
• Mr. Perry received $25,000 for his services on the Public Relations and Marketing

Committee.

104

• Mr. Rhodes received $25,000 for his services on the Audit Committee, Compensation
and Stock Option Committee and Nominating and Corporate Governance Committee.
• Mr. Shelley received $25,000 for his services on the Audit Committee, Public Relations
and Marketing Committee and Nominating and Corporate Governance Committee.

(2) During the fourth quarter of 2008, our board of directors (with each recipient abstaining as to
himself) approved the grants of 45,000 shares of non-qualified stock options to our non-
employee directors under the 2008 Plan (the “2008 Non-Qualified Options”). The exercise price
of the 2008 Non-Qualified Options was equal to the market value of our common stock at the
date of grant. The 2008 Non-Qualified Options have a 10 year term and vest at the end of each
one-year period at the rate of 16.5% per year for the first five years, with the remaining unvested
options will vest at the end of the sixth year. Pursuant to the terms of the 2008 Non-Qualified
Options, if a termination event occurs, as defined, the non-vested 2008 Non-Qualified Options
will become fully vested and exercisable for a period of one year from the date of the termination
event. The amount of director compensation relating to option awards is the expense recognized
in 2008 relating to the 2008 Non-Qualified Options in accordance with SFAS 123(R).

Compensation Committee Interlocks and Insider Participation

The Compensation and Stock Option Committee has the authority to set the compensation of all
of our officers. This Committee considers the recommendations of the Chief Executive Officer
when setting the compensation of our officers. The Chief Executive Officer does not make a
recommendation regarding his own salary, and does not make any recommendation as to the
President’s salary. The members of the Compensation and Stock Option Committee are the
following non-employee directors: Horace G. Rhodes (Chairman), Charles A. Burtch, and
Bernard G. Ille. Neither Mr. Burtch, Mr. Ille nor Mr. Rhodes is, or ever has been, an officer or
employee of the Company or any of its subsidiaries.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the information as of December 31, 2008, with respect to our
equity compensation plans.

Equity Compensation Plan Information

Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

Plan Category

Equity compensation plans approved by
stockholders (1)
Equity compensation plans not approved by
stockholders (2)

Total

6.81

1.48

$ 6.22

863,000

863,300

1,145,100

142,500

1,287,600

105

(1) Stock Incentive Plan Receiving Stockholders' Approval in 2008 On May 5, 2008, our Board
of Directors adopted our 2008 Incentive Stock Plan (the “2008 Plan”), which plan was approved
by our shareholders at our annual meeting of shareholders held on June 5, 2008. The number of
shares of our common stock available for issuance under the 2008 Plan is 1,000,000 shares,
subject to adjustment. Under the 2008 Plan, awards may be made to any employee, officer or
director of the Company and its affiliated companies. An award may also be granted to any
consultant, agent, advisor or independent contractor for bona fide services rendered to the
Company or any affiliate (as defined in the 2008 Plan), subject to certain conditions. The 2008
Plan will be administered by the Compensation and Stock Option Committee.

During the fourth quarter of 2008, the Compensation and Stock Option Committee under the
2008 Plan approved the grants of 372,000 shares of qualified stock options to certain employees,
and the Board of Directors (with each recipient abstaining as to himself) approved the grants of
45,000 shares of non-qualified stock options to our non-employee directors (the “2008
Options”). The exercise price of the 2008 Options ranged from $7.86 to $9.97 per share, which is
based on the market value of our common stock on the date the 2008 Options were granted. The
2008 Options vest at the end of each one-year period at the rate of 16.5% per year for the first
five years and the remaining unvested options will vest at the end of the sixth year. Pursuant to
the terms of the non-qualified stock options, if a termination event occurs, as defined, the non-
vested stock options will become fully vested and exercisable for a period of one year from the
date of the termination event. Excluding the non-qualified stock options relating to a termination
event, the 2008 Options expire during the fourth quarter of 2018.

Under SFAS 123(R), the fair value for the 2008 Options was estimated, using an option pricing
model. The total fair value for the 2008 Options was estimated to be approximately $1,503,000,
or an average of $3.60 per share, using a Black-Scholes-Merton option pricing model. During
the fourth quarter of 2008, we began amortizing the total estimated fair value of the 2008
Options, primarily to SG&A, which will continue through the fourth quarter of 2014 (adjusted
for forfeitures). For 2008, we incurred stock-based compensation expense of $811,000, of which
$42,000 relates to the 2008 Options.

(2) Non-Stockholder Approved Plans From time to time, the Compensation Committee and/or
the Board of Directors has approved the grants of certain nonqualified stock options as the Board
has determined to be in our best interest to compensate directors, officers, or employees for
service to the Company. The exercise price of each such option is equal to the market value of
our common stock at the date of grant and each option expires ten years from the grant date. All
outstanding options under these plans were exercisable at December 31, 2008.

The equity compensation plans, which have not been approved by the stockholders, are the
following:

• On November 29, 2001, we granted to employees of the Company nonqualified stock
options to acquire 102,500 shares of common stock in consideration of services to the
Company. As of December 31, 2008, 22,500 shares remain exercisable at an exercise
price of $2.73 per share.

• On July 8, 1999, in consideration of services to the Company, we granted nonqualified
stock options to acquire 371,500 shares of common stock at an exercise price of $1.25

106

per share to Jack E. Golsen (176,500 shares), Barry H. Golsen (55,000 shares) and Steven
J. Golsen (35,000 shares), David R. Goss (35,000 shares), Tony M. Shelby (35,000
shares), and David M. Shear (35,000 shares) and also granted to certain other employees
nonqualified stock options to acquire a total of 165,000 shares of common stock at an
exercise price of $1.25 per share in consideration of services to the Company. As of
December 31, 2008, 120,000 shares remain exercisable.

Security Ownership of Certain Beneficial Owners

The following table sets forth certain information as of February 28, 2009, regarding the
ownership of our voting common stock and voting preferred stock by each person (including any
“group” as used in Section 13(d)(3) of the Securities Act of 1934, as amended) that we know to
be beneficial owner of more than 5% of our voting common stock and voting preferred stock. A
person is deemed to be the beneficial owner of shares of the Company which he or she could
acquire within 60 days of February 28, 2009.

Name and Address
of
Beneficial Owner

Title
of
Class

Amounts
of Shares
Beneficially
owned (1)

Jack E. Golsen and certain

members of his family (2)

Common
Voting Preferred

4,750,009
1,020,000

(3) (4)
(5)

Winslow Management Company LLC

Common

1,307,453

Percent
of
Class+

21.4%
99.9%

6.2%

+ Because of the requirements of the SEC as to the method of determining the amount of shares
an individual or entity may own beneficially, the amount shown for an individual may include
shares also considered beneficially owned by others. Any shares of stock which a person does
not own, but which he or she has the right to acquire within 60 days of February 28, 2009 are
deemed to be outstanding for the purpose of computing the percentage of outstanding stock of
the class owned by such person but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.

(1) We based the information with respect to beneficial ownership on information furnished by
the above-named individuals or entities or contained in filings made with the Securities and
Exchange Commission or the Company’s records.

(2) Includes Jack E. Golsen (“J. Golsen”) and the following members of his family: wife, Sylvia
H. Golsen; son, Barry H. Golsen (“B. Golsen”) (a director, Vice Chairman of the Board of
Directors, and President of the Company and its climate control business); son, Steven J. Golsen
(“S. Golsen”) (executive officer of several subsidiaries of the Company), Golsen Family LLC
(“LLC”) which is wholly-owned by J. Golsen (45.92% owner), Sylvia H. Golsen (45.92%
owner), B. Golsen (2.72% owner), S. Golsen (2.72% owner), and Linda F. Rappaport (2.72%
owner and daughter of J. Golsen (“L. Rappaport”)), and SBL LLC (“SBL”) which is wholly-
owned by the LLC (49% owner), B. Golsen (17% owner), S. Golsen (17% owner), and L.
Rappaport (17% owner). J Golsen and Sylvia H. Golsen are the managers of the LLC and share
voting and dispositive power over the shares beneficially owned by the LLC. J. Golsen and B.
Golsen, as the only directors and officers of SBL, share the voting and dispositive power of the
shares beneficially owned by SBL and its wholly owned subsidiary, Golsen Petroleum Corp

107

(“GPC”). See “Description of Capital Stock.” The address of Jack E. Golsen, Sylvia H. Golsen,
and Barry H. Golsen is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107; and
Steven J. Golsen’s address is 7300 SW 44th Street, Oklahoma City, Oklahoma 73179. SBL’s
address is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107.

(3) Includes (a) the following shares over which J. Golsen has the sole voting and dispositive
power: (i) 4,000 shares that he has the right to acquire upon conversion of a promissory note;
(ii) 263,320 shares of common stock owned of record by certain trusts for the benefit of B.
Golsen, S. Golsen and L. Rappaport over which J. Golsen is the trustee of each of these trusts;
and (iii) 200,406 shares held in certain trusts for the benefit of grandchildren and great
grandchildren of J. Golsen and Sylvia H. Golsen over which J. Golsen is the trustee; (b) 653,976
shares owned of record by the LLC and 133,333 shares that the LLC has the right to acquire
upon the conversion of 4,000 shares of the Series B Preferred owned of record by the LLC;
(c) 296,639 shares over which B. Golsen has the sole voting and dispositive power, 533 shares
owned of record by B. Golsen’s wife, over which he shares the voting and dispositive power, and
11,250 shares that he has the right to acquire within the next 60 days under the Company’s stock
option plans; (d) 263,915 shares over which S. Golsen has the sole voting and dispositive power
and 11,250 shares that he has the right to acquire within the next 60 days under the Company’s
stock option plans; (e) 30,000 shares over which L. Rappaport has the sole voting and dispositive
power and 36,400 shares that she has the right to acquire upon conversion of $1 million principal
amount of the 2007 Debentures; (f) 1,632,099 shares owned of record by SBL, 400,000 shares
that SBL has the right to acquire upon conversion of 12,000 shares of Series B Preferred owned
of record by SBL, 250,000 shares that SBL has to right to acquire upon conversion of 1,000,000
shares of the Series D Preferred owned of record by SBL and 145,600 shares issuable shares
upon the conversion of $4 million principal amount of the Company’s 5.5% Convertible Senior
Subordinated Debentures Due 2012 owned of record by SBL, and (g) 283,955 shares owned of
record by GPC, which is a wholly-owned subsidiary of SBL, and 133,333 shares that GPC has
the right to acquire upon conversion of 4,000 shares of Series B Preferred owned of record by
GPC, and (h) 36,400 shares issuable upon the conversion of $1 million principal amount of the
Company’s 5.5% Convertible Senior Subordinated Debentures Due 2012 owned by L.
Rappaport. See “Certain Relationships and Related Transactions”.

(4) J. Golsen and Sylvia H. Golsen disclaim beneficial ownership of the shares over which B.
Golsen, S. Golsen and L. Rappaport each have sole voting and investment power. Sylvia H.
Golsen, B. Golsen, S. Golsen and L. Rappaport disclaim beneficial ownership of the shares that
J. Golsen has sole voting and investment power over as noted in footnote (3)(a) above. B.
Golsen, S. Golsen and L. Rappaport disclaim beneficial ownership of the shares owned of record
by the LLC, except to the extent of their respective pecuniary interest therein. S. Golsen and L.
Rappaport disclaims beneficial ownership of the shares owned of record by SBL and GPC and
all shares beneficially owned by SBL through the LLC, except to the extent of his pecuniary
interest therein. L. Rappaport disclaims beneficial ownership of the shares over which her spouse
has sole voting and investment power over.

(5) Includes: (a) 4,000 shares of Series B Preferred owned of record by the LLC; (b) 12,000
shares of Series B Preferred owned of record by SBL; (c) 4,000 shares Series B Preferred owned
of record by SBL’s wholly-owned subsidiary, GPC, over which SBL, J. Golsen, and B. Golsen
share the voting and dispositive power and (d) 1,000,000 shares of Series D Preferred owned of
record by SBL.

108

Security Ownership of Management

The following table sets forth certain information obtained from our directors and executive
officers as a group as to their beneficial ownership of our voting common stock and voting
preferred stock as of February 28, 2009.

Name of
Beneficial Owner

Title of Class

Amount of Shares
Beneficially Owned (1)

Percent of
Class+

Raymond B. Ackerman

Robert C. Brown, M.D.

Charles A. Burtch

Robert A. Butkin

Barry H. Golsen

Jack E. Golsen

David R. Goss

Bernard G. Ille

Jim D. Jones

Donald W. Munson

Ronald V. Perry

Horace G. Rhodes

David M. Shear

Tony M. Shelby

John A. Shelley

Michael G. Adams

Harold L. Rieker, Jr.

17.8
99.9

%
%

18.5
99.9

%
%

1.2 %

Common

16,450 (2)

59,516 (3)

1,000 (4)

1,000 (5)

Common
Voting Preferred

3,940,718
1,020,000

(6)
(6)

Common
Voting Preferred

4,100,022
1,020,000

(7)
(7)

Common

251,594 (8)

30,000 (9)

135,252 (10)

6,740 (11)

16,500 (12)

95,581 (13)

220,810 (14)

1.0 %

2,830 (15)

21,304 (16)

3,500 (17)

Directors and Executive
Officers as a group number
(17 persons)

Common
Voting Preferred

5,270,521
1,020,000

(19)

23.4
99.9

%
%

* Less than 1%.
+ See footnote “+” to the table under “Security Ownership of Certain Beneficial Owners.”

109

(1) We based the information, with respect to beneficial ownership, on information furnished
by each director or officer, contained in filings made with the SEC, or contained in our records.

trust over which
includes 1,450 shares held by Mr. Ackerman’s
(2) This amount
Mr. Ackerman possesses sole voting and dispositive power and 15,000 shares are held in a trust
owned by Mrs. Ackerman, of which Mrs. Ackerman is trustee.

(3) These shares are held in a joint account owned by a trust, of which Dr. Brown’s wife is the
trustee, and by a trust, of which Dr. Brown is the trustee. As trustees, Dr. Brown and his wife
share voting and dispositive power over these shares. The amount shown does not include shares
owned directly, or through trusts, by the children of Dr. Brown and the son-in-law of Dr. Brown,
David M. Shear, all of which Dr. Brown disclaims beneficial ownership.

(4) Mr. Burtch has the sole voting and dispositive power over these shares.

(5) These shares are held in certain trusts over which Mr. Butkin has voting and dispositive
power.

(6) See footnotes (3), (4), and (5) of the table under “Security Ownership of Certain Beneficial
Owners” for a description of the amount and nature of the shares beneficially owned by B.
Golsen.

(7) See footnotes (3), (4), and (5) of the table under “Security Ownership of Certain Beneficial
Owners” for a description of the amount and nature of the shares beneficially owned by J.
Golsen.

(8) Mr. Goss has the sole voting and dispositive power over these shares, which include 600
shares held in a trust of which Mr. Goss is trustee and 80,000 shares that Mr. Goss may acquire
pursuant to currently exercisable stock options.

(9) The amount includes (a) 25,000 shares of common stock, including 15,000 shares that
Mr. Ille may purchase pursuant to currently exercisable non-qualified stock options, over which
Mr. Ille has the sole voting and dispositive power, and (b) 5,000 shares owned of record by
Mr. Ille’s wife, voting and dispositive power of which are shared by Mr. Ille and his wife.

(10) Mr. Jones and his wife share voting and dispositive power over these shares, which include
115,000 shares that Mr. Jones may acquire pursuant to currently exercisable stock options.

(11) Mr. Munson has the sole voting and dispositive power over these shares.

(12) The amount includes (a) 16,000 shares of common stock over which Mr. Rhodes has the
sole voting and dispositive power including 15,000 shares held by a trust, and (b) 500 shares held
by a revocable trust over which Mr. Rhodes’ wife has voting and dispositive power.

(13) These shares are held in a joint account owned by Mr. Shear’s revocable trust of which Mr.
Shear is the trustee and by Mr. Shear’s spouse’s revocable trust of which his spouse is the
trustee. As trustees, Mr. Shear and his wife share voting and dispositive power over these shares.

110

This amount does not include, and Mr. Shear disclaims beneficial ownership of the shares
beneficially owned by Mr. Shear’s wife, which consist of 8,988 shares, the beneficial ownership
of which is disclaimed by her, that are held by trusts of which she is the trustee.

(14) Mr. Shelby has the sole voting and dispositive power over these shares, which include
115,000 shares that Mr. Shelby may acquire pursuant to currently exercisable stock options
plans.

(15) Mr. Shelley has the sole voting and dispositive power over these shares.

(16) This amount includes 11,304 shares held by Mr. Adams’ trust over which Mr. Adams
possesses sole voting and dispositive power, and 10,000 shares that Mr. Adams may acquire
pursuant to currently exercisable stock options.

(17) Mr. Rieker has the sole voting and dispositive power over these shares, which include
3,100 shares that Mr. Rieker may acquire pursuant to currently exercisable stock options.

(18) The shares of common stock include 349,350 shares of common stock that executive
officers and directors have the right to acquire within 60 days under our stock option plans and
1,066,266 shares of common stock that executive officers, directors, or entities controlled by our
executive officers and directors, have the right to acquire within 60 days under other convertible
securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE

Policy as to Related Party Transaction

Pursuant to the Audit Committee Charter, adopted in 2003, our Audit Committee is to review
any related party transactions involving any of our directors and executive officers. The
following related party transactions were reviewed by the Audit Committee or the Board of
Directors as a whole.

Related Party Transactions

Golsen Group

During 2008, the Company remodeled their offices and incurred costs of $18,000 for the
replacement of carpet involving a company (“Designer Rugs”) owned by Linda Golsen
Rappaport, the daughter of Jack E. Golsen, our Chairman and Chief Executive Officer, and sister
of Barry H. Golsen, our President.

111

During 2008, the Golsen Group paid us approximately $9,400 for the use of office space in our
corporate offices, which is currently approximately 1,200 square feet.

Steven J. Golsen, Chief Operating Officer of our Climate Control Business, 2008 compensation
was approximately $445,000, which included $160,000 bonus and $6,000 automobile allowance.
In addition, Steven J. Golsen realized approximately $473,000 value in 2008 from the exercise of
non-qualified stock options. Heidi Brown Shear, Vice President and Managing Counsel to the
Company, 2008 compensation was approximately $155,000, which included $35,000 bonus and
$3,900 automobile allowance. In addition, Heidi Brown Shear realized approximately $295,000
value in 2008 from the exercise of qualified stock options.

Cash Dividends

In March 2008, we paid the dividends totaling approximately $240,000 and $60,000 on our
Series B Preferred and our Series D Preferred, respectively, all of the outstanding shares of
which are owned by the Golsen Group.

Northwest

Northwest Internal Medicine Associates (“Northwest”), a division of Plaza Medical Group, P.C.,
has an agreement with the Company to perform medical examinations of the management and
supervisory personnel of the Company and its subsidiaries. Each year, we pay Northwest $2,000
a month to perform such examinations, under the agreement. Dr. Robert C. Brown (a director of
the Company) is Vice President and Treasurer of Plaza Medical Group, P.C. In addition, Dr.
Brown receives a fee of $2,000 per month to perform medical director consulting services for the
Company in connection with the Company’s self-insured health plan and workmen’s
compensation benefits.

Board Independence

The Board of Directors has determined that each of Messrs. Ackerman, Burtch, Butkin, Ille,
Munson, Rhodes, Perry and Shelley is an “independent director” in accordance with the current
listing standards of the NYSE.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed by Ernst & Young LLP for professional services rendered for the audit
of the Company’s annual financial statements for the fiscal years ended December 31, 2008 and
2007, for the reviews of the financial statements included in the Company’s Quarterly Reports
on Form 10-Q for those fiscal years, and for review of documents filed with the SEC for those
fiscal years were approximately $1,455,001 and $1,635,057, respectively.

112

Audit-Related Fees

Ernst & Young LLP billed the Company $25,000 and $95,000 during 2008 and 2007,
respectively, for audit-related services, which included benefit plan audit and accounting
consultations that included assistance with our internal control documentation, the issuance of
the 2007 Debentures, and the exchange tender offer during 2007.

Tax Fees

Ernst & Young LLP billed $538,095 and $249,887 during 2008 and 2007, respectively, for tax
services to the Company, and included tax return review and preparation and tax consultations
and planning.

All Other Fees

The Company did not engage its accountants to provide any other services for the fiscal years
ended December 31, 2008 and 2007.

Engagement of the Independent Registered Public Accounting Firm

The Audit Committee is responsible for approving all engagements with Ernst & Young LLP to
perform audit or non-audit services for us prior to us engaging Ernst & Young LLP to provide
those services. All of the services under the headings Audit Related, Tax Services, and All Other
Fees were approved by the Audit Committee in accordance with paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X of the Exchange Act. The Audit Committee of the Company’s Board of
Directors has considered whether Ernst & Young LLP’s provision of the services described
above for the fiscal years ended December 31, 2008 and 2007 is compatible with maintaining its
independence.

113

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements

The following consolidated financial statements of the Company appear immediately following
this Part IV:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2008 and 2007

Consolidated Statements of Income for each of the three years in the period ended
December 31, 2008

Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 2008

Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2008

Notes to Consolidated Financial Statements

Quarterly Financial Data (Unaudited)

(a) (2) Financial Statement Schedules

Page

F-2

F-3

F-5

F-6

F-9

F-11

F- 69

The Company has included the following schedules in this report:

I - Condensed Financial Information of Registrant

II - Valuation and Qualifying Accounts

F- 72

F- 77

We have omitted all other schedules because the conditions requiring their filing do not exist or
because the required information appears in our Consolidated Financial Statements, including the
notes to those statements.

114

(a)(3) Exhibits

3(i).1 Restated Certificate of Incorporation, as amended.

3(i).2 Restated Bylaws, dated December 19, 2007, which the Company hereby incorporates by
reference from Exhibit 3.2 to the Company’s Form 8-K, filed December 20, 2007.

4.1 Specimen Certificate for the Company's Noncumulative Preferred Stock, having a par
value of $100 per share, which the Company incorporates by reference from Exhibit 4.1
to the Company’s Form 10-K for the fiscal year ended December 31, 2005.

4.2 Specimen Certificate for the Company's Series B Preferred Stock, having a par value of
$100 per share, which the Company hereby incorporates by reference from Exhibit 4.27
to the Company's Registration Statement No. 33-9848.

4.3 Specimen of Certificate of Series D 6% Cumulative, Convertible Class C Preferred
Stock, 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, 2001.

4.4 Specimen Certificate for the Company's Common Stock, which the Company
incorporates by reference from Exhibit 4.4 to the Company's Registration Statement No.
33-61640.

4.5 Renewed Rights Agreement, dated January 6, 1999 between the Company and Bank One,
N.A., which the Company hereby incorporates by reference from Exhibit No. 1 to the
Company's Form 8-A Registration Statement, dated January 27, 1999.

4.6 Renewed Rights Agreement, dated as of December 2, 2008, between the Company and
UMB Bank, n.a., which the Company hereby incorporates by reference from Exhibit 4.1
to the Company’s Form 8-K, dated December 5, 2008.

4.7 First Amendment to Renewed Rights Agreement, dated December 3, 2008, between LSB
Industries, Inc. and UMB Bank, n.a., which the Company hereby incorporates by
reference from Exhibit 4.3 to the Company’s Form 8-K, dated December 5, 2008.

4.8 Redemption Notice, dated July 12, 2007, for the LSB Industries, Inc.’s $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which the Company hereby incorporates
by reference from Exhibit 99.1 to the Company’s Form 8-K, dated July 11, 2007.

4.9 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.

115

4.10 Loan Agreement, dated September 15, 2004 between ThermaClime, Inc. and certain
subsidiaries of ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital
Markets, L.L.C. and LSB Industries, Inc. (“Loan Agreement”), which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company’s Form 8-K, dated
September 16, 2004. The Loan Agreement lists numerous Exhibits and Schedules that are
attached thereto, which will be provided to the Commission upon the commission’s
request.

4.11 First Amendment, dated February 18, 2005 to Loan Agreement, dated as of September
15, 2004, among ThermaClime, Inc., and certain subsidiaries of ThermaClime, Cherokee
Nitrogen Holdings, Inc., and Orix Capital Markets, L.L.C., which the Company hereby
incorporates by reference from Exhibit 4.21 to the Company’s Form 10-K for the year
ended December 31, 2004.

4.12 Waiver and Consent, dated as of January 1, 2006 to the Loan Agreement dated as of
September 15, 2004 among ThermaClime, Inc., and certain subsidiaries of ThermaClime,
Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital Markets, L.L.C. and LSB Industries,
Inc., which the Company hereby incorporates by reference from Exhibit 4.23 to the
Company’s Form 10-K for the year ended December 31, 2005.

4.13 Consent of Orix Capital Markets, LLC and the Lenders of the Senior Credit Agreement,
dated May 12, 2006, to the interest rate of a loan between LSB and ThermaClime and the
utilization of the loan proceeds by ThermaClime and the waiver of related covenants,
which the Company hereby incorporates by reference from Exhibit 4.2 to the Company’s
Form 10-Q for the fiscal quarter ended June 30, 2006.

4.14 Indenture, dated March 3, 2006, by and among the Company and UMB Bank, which the
Company hereby incorporates by reference from Exhibit 99.2 to the Company’s Form 8-
K, dated March 14, 2006.

4.15 Registration Rights Agreement, dated March 3, 2006, by and among the Company and
the Purchasers set fourth in the signature pages, which the Company hereby incorporates
by reference from Exhibit 99.3 to the Company’s Form 8-K, dated March 14, 2006.

4.16 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.

4.17 Certificate of 5.5% Senior Subordinated Convertible Debentures due 2012, which the
Company hereby incorporates by reference from Exhibit 4.1 to the Company’s Form 8-K,
dated June 28, 2007.

4.18 Indenture, dated June 28, 2007, by and among the Company and UMB Bank, n.a., which
the Company hereby incorporates by reference from Exhibit 4.2 to the Company’s Form
8-K, dated June 28, 2007

116

4.19 Registration Rights Agreement, dated June 28, 2007, by and among the Company and the
Purchasers set forth in the signature pages thereto, which the Company hereby
incorporates by reference from Exhibit 4.3 to the Company’s Form 8-K, dated June 28,
2007.

4.20 Registration Rights Agreement, dated March 25, 2003 among LSB Industries, Inc., Kent
C. McCarthy, Jayhawk Capital management, L.L.C., Jayhawk Investments, L.P. and
Jayhawk Institutional Partners, L.P., which the Company hereby incorporates by
reference from Exhibit 10.49 to the Company's Form 10-K for the fiscal year ended
December 31, 2002.

10.1 Limited Partnership Agreement dated as of May 4, 1995 between the general partner, and
LSB Holdings, Inc., an Oklahoma Corporation, as limited partner, which the Company
hereby incorporates by reference from Exhibit 10.11 to the Company's Form 10-K for the
fiscal year ended December 31, 1995. See SEC file number 001-07677.

10.2 Form of Death Benefit Plan Agreement between the Company and the employees
covered under the plan, which the Company incorporates by reference from Exhibit 10.2
to the company’s Form 10-K for the fiscal year ended December 31, 2005.

10.3 Amendment to Non-Qualified Benefit Plan Agreement, dated December 17, 2008,
between Barry H. Golsen and the Company, which the Company hereby incorporates by
reference from Exhibit 99.3 to the Company’s Form 8-K, dated December 23, 2008.
Each Amendment to Non-Qualified Benefit Plan Agreement with David R. Goss and
Steven J. Golsen is substantially the same as this exhibit and will be provided to the
Commission upon request.

10.4 The Company's 1993 Stock Option and Incentive Plan, which the Company incorporates
by reference from Exhibit 10.3 to the company’s Form 10-K for the fiscal year ended
December 31, 2005.

10.5 First Amendment to Non-Qualified Stock Option Agreement, dated March 2, 1994 and
Second Amendment to Stock Option Agreement, dated April 3, 1995 each between the
Company and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1995.
See SEC file number 001-07677.

10.6 Non-Qualified Stock Option Agreement, dated April 22, 1998 between the Company and
Robert C. Brown, M.D., which the Company hereby incorporates by reference from
Exhibit 10.43 to the Company’s Form 10-K for the fiscal year ended December 31, 1998.
The Company entered into substantially identical agreements with Bernard G. Ille,
Raymond B. Ackerman, Horace G. Rhodes, and Donald W. Munson. The Company will
provide copies of these agreements to the Commission upon request. See SEC file
number 001-07677.

117

10.7 The Company's 1998 Stock Option and Incentive Plan, which the Company hereby
incorporates by reference from Exhibit 10.44 to the Company's Form 10-K for the year
ended December 31, 1998. See SEC file number 001-07677.

10.8 LSB Industries, Inc. Outside Directors Stock Option Plan, which the Company hereby
incorporates by reference from Exhibit "C" to the Company’s Proxy Statement, dated
May 24, 1999 for its 1999 Annual Meeting of Stockholders. See SEC file number 001-
07677.

10.9 Nonqualified Stock Option Agreement, dated November 7, 2002 between the Company
and John J. Bailey Jr, which the Company hereby incorporates by reference from Exhibit
55 to the Company's Form 10-K/A Amendment No.1 for the fiscal year ended December
31, 2002.

10.10 Nonqualified Stock Option Agreement, dated November 29, 2001 between the Company
and Dan Ellis, which the Company hereby incorporates by reference from Exhibit 10.56
to the Company's Form 10-K/A Amendment No.1 for the fiscal year ended December 31,
2002.

10.11 Nonqualified Stock Option Agreement, dated July 20, 2000 between the Company and
Claude Rappaport for the purchase of 80,000 shares of common stock, which the
Company hereby incorporates by reference from Exhibit 10.57 to the Company's Form
10-K/A Amendment No.1 for the fiscal year ended December 31, 2002. Substantially
similar nonqualified stock option agreements were entered into with Mr. Rappaport
(40,000 shares at an exercise price of $1.25 per share, expiring on July 20, 2009), (5,000
shares at an exercise price of $5.362 per share, expiring on July 20, 2007), and (60,000
shares at an exercise price of $1.375 per share, expiring on July 20, 2009), copies of
which will be provided to the Commission upon request.

10.12 Nonqualified Stock Option Agreement, dated July 8, 1999 between the Company and
Jack E. Golsen, which the Company hereby incorporates by reference from Exhibit 10.58
to the Company's Form 10-K/A Amendment No.1 for the fiscal year ended December 31,
2002. Substantially similar nonqualified stock options were granted to Barry H. Golsen
(55,000 shares), Steven J. Golsen (35,000 shares), David R. Goss (35,000 shares), Tony
M. Shelby (35,000 shares), David M. Shear (35,000 shares), Jim D. Jones (35,000
shares), and four other employees (130,000 shares), copies of which will be provided to
the Commission upon request.

10.13 Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries,
Inc. and Dan Ellis, which the Company hereby incorporates by reference from Exhibit
99.1 to the Company’s Form S-8, dated September 10, 2007.

10.14 Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries,
Inc. and John Bailey, which the Company hereby incorporates by reference from Exhibit
99.2 to the Company’s Form S-8, dated September 10, 2007.

118

10.15 LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5, 2008, which the
Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-
K, dated June 6, 2008.

10.16 Severance Agreement, dated January 17, 1989 between the Company and Jack E. Golsen,
which the Company hereby incorporates by reference from Exhibit 10.13 to the
Company’s Form 10-K for the year ended December 31, 2005. The Company also
entered into identical agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen,
David M. Shear, and Jim D. Jones and the Company will provide copies thereof to the
Commission upon request.

10.17 Amendment to Severance Agreement, dated December 17, 2008, between Barry H.
Golsen and the Company, which the Company hereby incorporates by reference from
Exhibit 99.2 to the Company’s Form 8-K, dated December 23, 2008. Each Amendment
to Severance Agreement with Jack E. Golsen, Tony M. Shelby, David R. Goss and David
M. Shear is substantially the same as this exhibit and will be provided to the Commission
upon request.

10.18 Employment Agreement and Amendment to Severance Agreement dated January 12,
1989 between the Company and Jack E. Golsen, dated March 21, 1996, which the
Company hereby incorporates by reference from Exhibit 10.15 to the Company's Form
10-K for fiscal year ended December 31, 1995. See SEC file number 001-07677.

10.19 First Amendment to Employment Agreement, dated April 29, 2003 between the
Company and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 10.52 to the Company's Form 10-K/A Amendment No.1 for the fiscal year ended
December 31, 2002.

10.20 Third Amendment to Employment Agreement, dated December 17, 2008, between the
Company and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 99.1 to the Company’s Form 8-K, dated December 23, 2008.

10.21 Baytown Nitric Acid Project and Supply Agreement dated June 27, 1997 by and among
El Dorado Nitrogen Company, El Dorado Chemical Company and Bayer Corporation,
which the Company hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. See SEC file number 001-07677.

10.22 First Amendment to Baytown Nitric Acid Project and Supply Agreement, dated February
1, 1999 between El Dorado Nitrogen Company and Bayer Corporation, which the
Company hereby incorporates by reference from Exhibit 10.30 to the Company's Form
10-K for the year ended December 31, 1998. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER

119

CF #7927, DATED JUNE 9, 1999 GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. See SEC file number 001-
07677.

10.23 Nitric Acid Supply Operating and Maintenance Agreement, dated October 23, 2008,
between El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience, LLC, which the Company hereby incorporates by reference from
Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended September 30,
2008. 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

10.24 Service Agreement, dated June 27, 1997 between Bayer Corporation and El Dorado
Nitrogen Company, which the Company hereby incorporates by reference from Exhibit
10.3 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. See SEC file number 001-07677.

10.25 Ground Lease dated June 27, 1997 between Bayer Corporation and El Dorado Nitrogen
Company, which the Company hereby incorporates by reference from Exhibit 10.4 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. See SEC file number 001-07677.

10.26 Participation Agreement, dated as of June 27, 1997 among El Dorado Nitrogen
Company, Boatmen's Trust Company of Texas as Owner Trustee, Security Pacific
Leasing Corporation, as Owner Participant and a Construction Lender, Wilmington Trust
Company, Bayerische Landes Bank, New York Branch, as a Construction Lender and the
Note Purchaser, and Bank of America National Trust and Savings Association, as
Construction Loan Agent, which the Company hereby incorporates by reference from
Exhibit 10.5 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. See SEC file number 001-07677.

120

10.27 Lease Agreement, dated as of June 27, 1997 between Boatmen's Trust Company of Texas
as Owner Trustee and El Dorado Nitrogen Company, which the Company hereby
incorporates by reference from Exhibit 10.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997. See SEC file number 001-07677.

10.28 Security Agreement and Collateral Assignment of Construction Documents, dated as of
June 27, 1997 made by El Dorado Nitrogen Company, which the Company hereby
incorporates by reference from Exhibit 10.7 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997. See SEC file number 001-07677.

10.29 Security Agreement and Collateral Assignment of Facility Documents, dated as of June
27, 1997 made by El Dorado Nitrogen Company and consented to by Bayer Corporation,
which the Company hereby incorporates by reference from Exhibit 10.8 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997. See SEC file number
001-07677.

10.30 Loan Agreement dated December 23, 1999 between Climate Craft, Inc. and the City of
Oklahoma City, which the Company hereby incorporates by reference from Exhibit 10.49
to the Company's Amendment No. 2 to its 1999 Form 10-K. See SEC file number 001-
07677.

10.31 Assignment, dated May 8, 2001 between Climate Master, Inc. and Prime Financial
Corporation, which the Company hereby incorporates by reference from Exhibit 10.2 to
the Company's Form 10-Q for the fiscal quarter ended March 31, 2001.

10.32 Agreement for Purchase and Sale, dated April 10, 2001 by and between Prime Financial
Corporation and Raptor Master, L.L.C., which the Company hereby incorporates by
reference from Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter ended
March 31, 2001.

10.33 Amended and Restated Lease Agreement, dated May 8, 2001 between Raptor Master,
L.L.C. and Climate Master, Inc., which the Company hereby incorporates by reference
from Exhibit 10.4 to the Company's Form 10-Q for the fiscal quarter ended March 31,
2001.

10.34 Option Agreement, dated May 8, 2001 between Raptor Master, L.L.C. and Climate
Master, Inc., which the Company hereby incorporates by reference from Exhibit 10.5 to
the Company's Form 10-Q for the fiscal quarter ended March 31, 2001.

10.35 First Amendment to Amended and Restated Lease Agreement, dated April 1, 2007,
between Raptor Master, L.L.C. and Climate Master, Inc., which the Company hereby
incorporates by reference from Exhibit 10.30 to the Company’s Form 10-K for the fiscal
year ended December 31, 2007.

10.36 Stock Purchase Agreement, dated September 30, 2001 by and between Summit
Machinery Company and SBL Corporation, which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company' Form 10-Q for the fiscal quarter ended
September 30, 2001.

121

10.37 Asset Purchase Agreement, dated October 22, 2001 between Orica USA, Inc. and El
Dorado Chemical Company and Northwest Financial Corporation, which the Company
hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K dated
December 28, 2001. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF 12179, DATED
MAY 24, 2006, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.

10.38 AN Supply Agreement, dated November 1, 2001 between Orica USA, Inc. and El
Dorado Company, which the Company hereby incorporates by reference from Exhibit
99.2 to the Company's Form 8-K dated December 28, 2001. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF 12179, DATED MAY 24, 2006, AND CF 19661 DATED
MARCH 23, 2007, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT
UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.

10.39 Second Amendment to AN Supply Agreement, executed August 24, 2006, to be effective
as of January 1, 2006, between Orica USA, Inc. and El Dorado Company, which the
Company hereby incorporates by reference from Exhibit 10.1 to the Company’s Form
10-Q for the fiscal quarter ended September 30, 2006. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A
COMMISSION ORDER CF 19661, DATED MARCH 23, 2007, GRANTING REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

10.40 Third Amendment to AN Supply Agreement, dated effective December 9, 2008, between
El Dorado Chemical Company and Orica USA Inc., which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company's Form 8-K, filed January
21, 2009.

10.41 Agreement, dated August 1, 2007, between El Dorado Chemical Company and United
Steelworkers of America International Union AFL-CIO and its Local 13-434, which the
Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-
K, dated July 29, 2008.

10.42 Agreement, dated October 17, 2007, between El Dorado Chemical Company and
International Association of Machinists and Aerospace Workers, AFL-CIO Local No.
224, which the Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated May 14, 2008.

10.43 Agreement, dated November 12, 2007, between United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International
Union, AFL-CIO, CLC, on behalf of Local No. 00417 and Cherokee Nitrogen Company,
which the Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated March 27, 2008.

122

10.44 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. The asset purchase agreement contains a brief list identifying all schedules and
exhibits to the asset purchase agreement. Such schedules and exhibits are not filed, and
the Registrant agrees to furnish supplementally a copy of the omitted schedules and
exhibits to the commission upon request.

10.45 Anhydrous Ammonia Sales Agreement, dated effective January 3, 2005 between Koch
Nitrogen Company and El Dorado Chemical Company, which the Company hereby
incorporates by reference from Exhibit 10.41 to the Company’s Form 10-K for the year
ended December 31, 2004. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF# 26082,
DATED NOVEMBER 16, 2007, GRANTING CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.

10.46 First Amendment to Anhydrous Ammonia Sales Agreement, dated effective August 29,
2005, between Koch Nitrogen Company and El Dorado Chemical Company, which the
Company hereby incorporates by reference from Exhibit 10.42 to the Company's Form
10-K for the fiscal year ended December 31, 2005, filed March 31, 2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF# 18274, DATED MARCH 23, 2007, AND CF#
20082 DATED NOVEMBER 16, 2007 GRANTING A REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION
ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

10.47 Purchase Confirmation, dated July 1, 2006, between Koch Nitrogen Company and
Cherokee Nitrogen Company, which the Company hereby incorporates by reference from
Exhibit 10.40 to the Company’s Form 10-K for the fiscal year ended December 31, 2006.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF# 20082, DATED NOVEMBER 16, 2007,
GRANTING CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT, AS AMENDED.

10.48 Second Amendment to Anhydrous Ammonia Sales Agreement, dated November 3, 2006,
between Koch Nitrogen Company and El Dorado Chemical Company, which the
Company hereby incorporates by reference from Exhibit 10.41 to the Company’s Form
10-K for the fiscal year ended December 31, 2006. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION
ORDER CF# 20082, DATED NOVEMBER 16, 2007, GRANTING CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT, AS
AMENDED.

123

10.49 Anhydrous Ammonia Sales Agreement, dated effective January 1, 2009 between Koch
Nitrogen
International Sarl and El Dorado Chemical Company. 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

10.50 Warrant Agreement, dated March 25, 2003 between LSB Industries, Inc. and Jayhawk
Institutional Partners, L.P., which the Company hereby incorporates by reference from
Exhibit 10.51 to the Company's Form 10-K for the fiscal year ended December 31, 2002.

10.51 Subscription Agreement, dated March 25, 2003 by and between LSB Industries, Inc. and
Jayhawk Institutional Partners, L.P., which the Company hereby incorporates by
reference from Exhibit 10.50 to the Company's Form 10-K for the fiscal year ended
December 31, 2002.

10.52 Second Amendment and Extension of Stock Purchase Option, effective July 1, 2004,
between LSB Holdings, Inc., an Oklahoma corporation and Dr. Hauri AG, a Swiss
corporation, which the Company hereby incorporates by reference from Exhibit 10.1 to
the Company’s Form 10-Q for the fiscal quarter ended September 30, 2004.

10.53 Purchase Agreement, dated March 3, 2006, by and among the Company and the investors
identified on the Schedule of Purchasers, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company’s Form 8-K, dated March 14, 2006.

10.54 Exchange Agreement, dated October 6, 2006, between LSB Industries, Inc., Paul Denby,
Trustee of the Paul Denby Revocable Trust, U.A.D. 10/12/93, The Paul J. Denby IRA,
Denby Enterprises, Inc., Tracy Denby, and Paul Denby, which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company’s Form 10-Q for the fiscal
quarter ended September 30, 2006. Substantially similar Exchange Agreements (each
having the same exchange rate) were entered with the following individuals or entities on
the dates indicated for the exchange of the number of shares of LSB’s Series 2 Preferred
noted: October 6, 2006 - James W. Sight (35,428 shares of Series 2 Preferred), Paul
Denby, Trustee of the Paul Denby Revocable Trust, U.A.D. 10/12/93 (25,000 shares of
Series 2 Preferred), The Paul J. Denby IRA (11,000 shares of Series 2 Preferred), Denby
Enterprises, Inc. (4,000 shares of Series 2 Preferred), Tracy Denby (1,000 shares of
Series 2 Preferred); October 12, 2006 - Harold Seidel (10,000 shares of Series 2
Preferred); October 11, 2006 -Brent Cohen (4,000 shares of Series 2 Preferred), Brian J.
Denby and Mary Denby (1,200 shares of Series 2 Preferred), Brian J. Denby, Trustee,
Money Purchase Pension Plan (5,200 shares of Series 2 Preferred), Brian Denby, Inc.
Profit Sharing Plan (600 shares of Series 2 Preferred); October 25, 2006 - William M.
and Laurie Stern ( 400 shares of Series 2 Preferred), William M. Stern Revocable Living
Trust, UTD July 9, 1992 (1,570 shares of Series 2 Preferred), the William M. Stern IRA
(2,000 shares of Series 2 Preferred), and William M. Stern, Custodian for David Stern
(1,300 shares of Series 2 Preferred), John Cregan (500 shares of Series 2 Preferred), and
Frances Berger (1,350 shares of Series 2 Preferred). Copies of the foregoing Exchange
Agreements will be provided to the Commission upon request.

124

10.55 Purchase Agreement, dated June 28, 2007, by and among the Company and the investors
identified on the Schedule of Purchasers attached thereto, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company’s Form 8-K, dated June 28,
2007.

10.56 Agreement, dated November 10, 2006 by and among LSB Industries, Inc., Kent C.
McCarthy, Jayhawk Capital Management, L.L.C., Jayhawk Institutional Partners, L.P.
and Jayhawk Investments, L.P., which the Company hereby incorporates by reference
from Exhibit 99d1 to the Company’s Schedule TO-I, filed February 9, 2007.

14.1 Code of Ethics for CEO and Senior Financial Officers of Subsidiaries of LSB Industries,
Inc., which the Company hereby incorporates by reference from Exhibit 14.1 to the
Company’s Form 10-K for the fiscal year ended December 31, 2003.

21.1 Subsidiaries of the Company.

23.1 Consent of Independent Registered Public Accounting Firm.

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.

32.1 Certification of Jack E. Golsen, Chief Executive Officer, furnished pursuant to Sarbanes-

Oxley Act of 2002, Section 906.

32.2 Certification of Tony M. Shelby, Chief Financial Officer, furnished pursuant to Sarbanes-

Oxley Act of 2002, Section 906.

125

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated:
March 12, 2009

LSB INDUSTRIES, INC.

By: /s/ Jack E. Golsen
Jack E. Golsen
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)

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

126

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.

Dated:

March 12, 2009

Dated:
March 12, 2009

By: /s/ Jack E. Golsen

Jack E. Golsen, Director

By: /s/ Tony M. Shelby

Tony M. Shelby, Director

By: /s/ Barry H. Golsen

Barry H. Golsen, Director

By: /s/ David R. Goss

David R. Goss, Director

By: /s/ Raymond B. Ackerman

Raymond B. Ackerman, Director

By: /s/ Robert C. Brown MD

Robert C. Brown MD, Director

By: /s/ Charles A. Burtch

Charles A. Burtch, Director

By: /s/ Robert A. Butkin

Robert A. Butkin, Director

By: /s/ Bernard G. Ille

Bernard G. Ille, Director

By: /s/ Donald W. Munson

Donald W. Munson, Director

By: /s/ Ronald V. Perry

Ronald V. Perry, Director

By: /s/ Horace G. Rhodes

Horace G. Rhodes, Director

By: /s/ John A. Shelley

John A. Shelley, Director

127

LSB Industries, Inc.

Consolidated Financial Statements
And Schedules for Inclusion in Form 10-K
For the Fiscal Year ended December 31, 2008

TABLE OF CONTENTS

Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Quarterly Financial Data (Unaudited)

Financial Statement Schedules

Schedule I – Condensed Financial Information of Registrant

Schedule II – Valuation and Qualifying Accounts

Page

F - 2

F - 3

F - 5

F - 6

F - 9

F - 11

F - 69

F - 72

F - 77

F-1

Report of Independent Registered
Public Accounting Firm

The Board of Directors and Stockholders of LSB Industries, Inc.

We have audited the accompanying consolidated balance sheets of LSB Industries, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2008. Our
audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These
financial statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedules based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of LSB Industries, Inc. at December 31, 2008 and 2007, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LSB Industries, Inc.’s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 12, 2009 expressed an unqualified opinion thereon.

As discussed in Note 13 to the consolidated financial statements, in 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.”

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
March 12, 2009

F-2

LSB Industries, Inc.

Consolidated Balance Sheets

Assets
Current assets:

Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Supplies, prepaid items and other:

Prepaid insurance
Precious metals
Supplies
Other

Total supplies, prepaid items and other

Deferred income taxes

Total current assets

December 31,

2008

2007

(In Thousands)

46,204
893
78,846
60,810

3,373
14,691
4,301
1,378
23,743
11,417
221,913

$ 58,224
203
70,577
56,876

3,350
10,935
3,849
1,464
19,598
10,030
215,508

Property, plant and equipment, net

104,292

79,692

Other assets:

Debt issuance costs, net
Investment in affiliate
Goodwill
Other, net

Total other assets

2,607
3,628
1,724
1,603
9,562
$ 335,767

4,213
3,426
1,724
2,991
12,354
$ 307,554

(Continued on following page)

F-3

LSB Industries, Inc.

Consolidated Balance Sheets (continued)

Liabilities and Stockholders’ Equity
Current liabilities:

Accounts payable
Short-term financing
Accrued and other liabilities
Current portion of long-term debt

Total current liabilities

Long-term debt

Noncurrent accrued and other liabilities

Deferred income taxes

Commitments and contingencies (Note 14)

Stockholders’ equity:

December 31,

2008

2007

(In Thousands)

43,014
2,228
39,236
1,560
86,038

$ 39,060
919
38,942
1,043
79,964

103,600

121,064

9,631

6,454

6,913

5,330

2,000

1,000

2,000

1,000

2,496
127,337

(120 )

19,804
152,517

2,447
123,336
(411)
(16,437)
111,935

22,473
130,044
$ 335,767

17,652
94,283
$ 307,554

Series B 12% cumulative, convertible preferred stock, $100 par value;
20,000 shares issued and outstanding
Series D 6% cumulative, convertible Class C preferred stock, no par
value; 1,000,000 shares issued and outstanding
Common stock, $.10 par value; 75,000,000 shares authorized,
24,958,330 shares issued (24,466,506 at December 31, 2007)
Capital in excess of par value
Accumulated other comprehensive loss
Accumulated retained earnings (deficit)

Less treasury stock, at cost:
Common stock, 3,848,518 shares (3,448,518 at December 31, 2007)

Total stockholders’ equity

See accompanying notes.

F-4

LSB Industries, Inc.

Consolidated Statements of Income

Net sales
Cost of sales
Gross profit

2008

Year ended December 31,
2006
2007
(In Thousands, Except Per Share Amounts)

$ 748,967
610,087
138,880

$ 586,407
453,814
132,593

$ 491,952
401,090
90,862

Selling, general and administrative expense
Provisions for losses on accounts receivable
Other expense
Other income
Operating income

Interest expense
Gain on extinguishment of debt
Non-operating other income, net
Income from continuing operations before provisions
for income taxes and equity in earnings of affiliate

Provisions for income taxes
Equity in earnings of affiliate
Income from continuing operations

Net loss (income) from discontinued operations
Net income

Dividends, dividend requirements and stock dividends

on preferred stock

Net income applicable to common stock

Income (loss) per common share:

Basic:

Income from continuing operations
Net income (loss) from discontinued operations
Net income

Diluted:

Income from continuing operations
Net income (loss) from discontinued operations
Net income

86,646
371
1,184
(8,476)
59,155

11,381
(5,529)
(1,096)

54,399
18,776
(937)
36,560

13
36,547

306
36,241

1.71
-
1.71

1.58
-
1.58

75,033
858
1,186
(3,495 )
59,011

12,078
-

(1,264 )

48,197
2,540
(877 )

46,534

(348 )

46,882

5,608
41,274

2.09
.02
2.11

1.82
.02
1.84

64,134
426
722
(1,559)
27,139

11,915
-
(624)

15,848
901
(821)
15,768

253
15,515

2,630
12,885

.92
(.02)
.90

.77
(.01)
.76

See accompanying notes.

F-5

4
3
6
,
3
4

)
6
3
6
,
7
1
(
$

)
7
9
7
(
$

)
2
6
9
,
7
4
(
$

)
1
0
7
(

8
3
8

9
7

2
2
0

0
7
8

8
2

5
1
2
,
0
2

)
e
g
a
p

g
n
i
w
o
l
l
o
f

n
o
d
e
u
n
i
t
n
o
C

(

6
-
F

7
1

l
a
t
o
T

9
8
2

4
0
8
,
5
1

)
2
6
2
(

8
9
2

0
1
0
,
3
1

1
6
8
,
4
1

5
1
5
,
5
1

)
5
9
(

8
1

)
s
d
n
a
s
u
o
h
T
n
I
(

y
r
u
s
a
e
r
T

-
k
c
o
t
S

n
o
m
m
o
C

y
r
u
s
a
e
r
T

-
k
c
o
t
S

d
e
r
r
e
f
e
r
P

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
E

)
t
i
c
i
f
e
D

(

r
e
h
t
O

e
v
i
s
n
e
h
e
r
p
m
o
C

s
s
o
L

n
i

l
a
t
i
p
a
C

f
o
s
s
e
c
x
E

e
u
l
a
V
r
a
P

k
c
o
t
S

e
u
l
a
V
r
a
P

d
e
r
r
e
f
e
r
P

k
c
o
t
S

s
e
r
a
h
S

n
o
m
m
o
C

e
l
b
a
m
e
e
d
e
R

n
o
m
m
o
C

d
e
t
a
l
u
m
u
c
c
A

-
n
o
N

.
c
n
I

,
s
e
i
r
t
s
u
d
n
I

B
S
L

y
t
i
u
q
E
’
s
r
e
d
l
o
h
k
c
o
t
S
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C

)
1
5
4
,
6
1
(
$

)
7
9
7
(
$

)
3
3
3
,
0
6
(
$

)
0
9
9
(

7
4
5

7
5

8
0
7

7
7
1

4
3

2
8
0
,
7
1

5
0
0
2

,
1
3

r
e
b
m
e
c
e
D

t
a

e
c
n
a
l
a
B

)
5
8
1
,
1
(

5
1
5
,
5
1

)
2
6
2
(

)
2
8
8
,
2
(

9
8
2

5
4
4

2
1
8

2
1

8
3

8
9
1

)
5
1
(

2
3
0

7
7

)
7
2
2

)
0
8
(

5
(

4
7
7

4
7
3

7
7
9
,
1

k
c
o
t
s

n
o
m
m
o
c

o
t

s
e
r
u
t
n
e
b
e
d

f
o

n
o
i
s
r
e
v
n
o
C

k
c
o
t
s

d
e
r
r
e
f
e
r
p
n
o

d
i
a
p

s
d
n
e
d
i
v
i
D

e
m
o
c
n
i

e
v
i
s
n
e
h
e
r
p
m
o
c

l
a
t
o
T

e
g
d
e
h
w
o
l
f

h
s
a
c

f
o

n
o
i
t
a
z
i
t
r
o
m
A

e
m
o
c
n
i

t
e
N

f
o

s
e
r
a
h
s

5
5
6
,
3
7
7

r
o
f

k
c
o
t
s

d
e
r
r
e
f
e
r
p

-
n
o
n

f
o

s
e
r
a
h
s

0
0
6
,
1

f
o

n
o
i
t
i
s
i
u
q
c
A

k
c
o
t
s

n
o
m
m
o
c

-
n
o
n

f
o

s
e
r
a
h
s

8
4
5
,
4
0
1
f
o

e
g
n
a
h
c
x
E

s
n
o
i
t
p
o

k
c
o
t
s

f
o

e
s
i
c
r
e
x
E

e
l
b
a
m
e
e
d
e
r

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
r

f
o

s
e
r
a
h
s

8
8
1

f
o

n
o
i
s
r
e
v
n
o
C

6
0
0
2

,
1
3

r
e
b
m
e
c
e
D

t
a

e
c
n
a
l
a
B

k
c
o
t
s

n
o
m
m
o
c

o
t

k
c
o
t
s

d
e
r
r
e
f
e
r
p

0
9
2

)
4
3
9
,
2
(

2
7
1
,
7
4

)
0
2
1
(

1
2
4

8
3
7
,
3

2
2
5
,
1

3
9
3

0
4
7
,
1

)
1
(

)
1
9
2
,
1
(

l
a
t
o
T

2
8
8
,
6
4

y
r
u
s
a
e
r
T

-
k
c
o
t
S

n
o
m
m
o
C

y
r
u
s
a
e
r
T

-
k
c
o
t
S

d
e
r
r
e
f
e
r
P

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
E

)
t
i
c
i
f
e
D

(

)
s
d
n
a
s
u
o
h
T
n
I
(

s
s
o
L

r
e
h
t
O

e
v
i
s
n
e
h
e
r
p
m
o
C

n
i

l
a
t
i
p
a
C

f
o
s
s
e
c
x
E

e
u
l
a
V
r
a
P

k
c
o
t
S

e
u
l
a
V
r
a
P

d
e
r
r
e
f
e
r
P

k
c
o
t
S

s
e
r
a
h
S

n
o
m
m
o
C

e
l
b
a
m
e
e
d
e
R

n
o
m
m
o
C

d
e
t
a
l
u
m
u
c
c
A

-
n
o
N

.
c
n
I

,
s
e
i
r
t
s
u
d
n
I

B
S
L

)
d
e
u
n
i
t
n
o
c
(
y
t
i
u
q
E
’
s
r
e
d
l
o
h
k
c
o
t
S
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C

)
6
1
(

7
9
7

)
0
2
1
(

)
4
3
9
,
2
(

)
3
0
3
,
2
1
(

2
8
8
,
6
4

0
9
2

1
2
4

1
8
6

0
8
4

1
8
3

0
4
7

7
5

8
5

2
1

5
6
5

2
8
5

3
1
1

e
c
n
a
d
r
o
c
c
a

n
i

t
n
e
m
t
s
u
j
d
a

t
c
e
f
f
e

e
v
i
t
a
l
u
m
u
C

k
c
o
t
s

n
o
m
m
o
c

o
t

s
e
r
u
t
n
e
b
e
d

f
o

n
o
i
s
r
e
v
n
o
C

n
o
i
t
a
s
n
e
p
m
o
c

d
e
s
a
b
-
k
c
o
t

8
4
N
I
F
h
t
i

k
c
o
t
s

f
o

e
s
i
c
r
e
x
e
m
o
r
f

t
i
f
e
n
e
b

x
a
t

e
m
o
c
n
I

s
n
o
i
t
p
o

5
6
9
,
2
6
2
,
2

r
o
f

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
r

-
n
o
n

f
o

s
e
r
a
h
s

7
0
8
,
5
0
3
f
o

e
g
n
a
h
c
x
E

s
n
o
i
t
p
o

k
c
o
t
s

t
n
a
r
r
a
w

f
o

e
s
i
c
r
e
x
E

k
c
o
t
s

d
e
r
r
e
f
e
r
p
n
o

d
i
a
p

s
d
n
e
d
i
v
i
D

e
m
o
c
n
i

e
v
i
s
n
e
h
e
r
p
m
o
c

l
a
t
o
T

e
g
d
e
h
w
o
l
f

h
s
a
c

f
o

n
o
i
t
a
z
i
t
r
o
m
A

e
m
o
c
n
i

t
e
N

7
6
3

7
2

6
2
2

)
0
9
2

5
1
(

3
6
2
,
2

k
c
o
t
s

n
o
m
m
o
c

f
o

s
e
r
a
h
s

8
1
1

)
1
9
2

1
(

)
5
1
9
(

1
0
3

2
7

)
4
7
3

8
(

5
2
7

3
9
9
,
4
2
7

r
o
f

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
r

-
n
o
n

f
o

s
e
r
a
h
s

5
7
4
,
7
6
1

f
o

n
o
i
s
r
e
v
n
o
C

-
n
o
n

f
o

s
e
r
a
h
s

0
2
8
,
5
2

f
o

n
o
i
t
p
m
e
d
e
R

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
r

-
n
o
n

f
o

s
e
r
a
h
s

0
0
3
,
8
1

f
o

n
o
i
t
a
l
l
e
c
n
a
C

)
1
(

k
c
o
t
s

d
e
r
r
e
f
e
r
p

e
l
b
a
m
e
e
d
e
r

f
o

s
e
r
a
h
s

8
9

f
o

n
o
i
s
r
e
v
n
o
C

k
c
o
t
s

n
o
m
m
o
c

o
t

k
c
o
t
s

d
e
r
r
e
f
e
r
p

k
c
o
t
s

n
o
m
m
o
c

f
o

s
e
r
a
h
s

3
8
2
,
4
9

)
2
5
6
,
7
1
(

)
7
3
4
,
6
1
(

)
1
1
4
(

6
3
3
3
2
1

7
4
4

0
0
0

7
6
4
,
4
2

7
0
0
2

,
1
3

r
e
b
m
e
c
e
D

t
a

e
c
n
a
l
a
B

d
e
r
r
e
f
e
r
P
2

s
e
i
r
e
S
f
o

s
e
r
a
h
s

o
n

,
n
o
i
t
a
l
l
e
c
n
a
c

e
h
t

f
o

t
l
u
s
e
r

e
h
t

s
A

k
c
o
t
s

y
r
u
s
a
e
r
t

s
a

d
l
e
h

y
l
s
u
o
i
v
e
r
p

d
e
r
r
e
f
e
r
P
2

s
e
i
r
e
S
f
o

s
e
r
a
h
s

e
h
t

t
n
e
s
e
r
p
e
r

s
e
r
a
h
s

e
s
e
h
T
)
1
(

)
e
g
a
p

g
n
i
w
o
l
l
o
f

n
o
d
e
u
n
i
t
n
o
C

(

7
0
0
2

,
1
3

r
e
b
m
e
c
e
D

t
a

g
n
i
d
n
a
t
s
t
u
o

d
n
a

d
e
u
s
s
i

e
r
e
w

7
-
F

.
c
n
I

,
s
e
i
r
t
s
u
d
n
I

B
S
L

)
d
e
u
n
i
t
n
o
c
(
y
t
i
u
q
E
’
s
r
e
d
l
o
h
k
c
o
t
S
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C

l
a
t
o
T

n
o
m
m
o
C

d
e
r
r
e
f
e
r
P

y
r
u
s
a
e
r
T

-
k
c
o
t
S

y
r
u
s
a
e
r
T

-
k
c
o
t
S

d
e
t
a
l
u
m
u
c
c
A

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
E

)
t
i
c
i
f
e
D

(

)
s
d
n
a
s
u
o
h
T
n
I
(

s
s
o
L

r
e
h
t
O

e
v
i
s
n
e
h
e
r
p
m
o
C

l
a
t
i

p
a
C

f
o
s
s
e
c
x
E

e
u
l
a
V
r
a
P

k
c
o
t
S

e
u
l
a
V
r
a
P

d
e
r
r
e
f
e
r
P

k
c
o
t
S

s
e
r
a
h
S

n
o
m
m
o
C

e
l

b
a
m
e
e
d
e
R

n
o
m
m
o
C

-
n
o
N

1
9
2

)
6
0
3
(

8
3
8
,
6
3

1
1
8

6
4
8

0
9
3
,
2

)
1
2
8
,
4
(

7
4
5
,
6
3

)
1
2
8
,
4
(

)
6
0
3
(

7
4
5
,
6
3

1
9
2

1
1
8

7
9
7

0
9
3
,
2

9
4

0
9
4

k
c
o
t
s

d
e
r
r
e
f
e
r
p
n
o

d
i
a
p

s
d
n
e
d
i
v
i
D

e
m
o
c
n
i

e
v
i
s
n
e
h
e
r
p
m
o
c

l
a
t
o
T

e
g
d
e
h
w
o
l
f

h
s
a
c

f
o

n
o
i
t
a
z
i
t
r
o
m
A

n
o
i
t
a
s
n
e
p
m
o
c

d
e
s
a
b
-
k
c
o
t
S

s
n
o
i
t
p
o

k
c
o
t
s

f
o

e
s
i
c
r
e
x
E

e
m
o
c
n
i

t
e
N

e
l
b
a
m
e
e
d
e
r

f
o

s
e
r
a
h
s

8
3

f
o

n
o
i
s
r
e
v
n
o
C

k
c
o
t
s

n
o
m
m
o
c

o
t

k
c
o
t
s

d
e
r
r
e
f
e
r
p

k
c
o
t
s

f
o

e
s
i
c
r
e
x
e
m
o
r
f

t
i
f
e
n
e
b

x
a
t

e
m
o
c
n
I

s
n
o
i
t
p
o

n
o
m
m
o
c

f
o

s
e
r
a
h
s

0
0
0
,
0
0
4

f
o

n
o
i
t
i
s
i
u
q
c
A

k
c
o
t
s

4
4
0
,
0
3
1

)
3
7
4
,
2
2
(

4
0
8
,
9
1

)
0
2
1
(

7
3
3
,
7
2
1

6
9
4
,
2

0
0
0
,
3

8
5
9
,
4
2

8
0
0
2

1
3

r
e
b
m
e
c
e
D

t
a

e
c
n
a
l
a
B

.
s
e
t
o
n

g
n
i
y
n
a
p
m
o
c
c
a

e
e
S

8
-
F

LSB Industries, Inc.

Consolidated Statements of Cash Flows

2008

Year ended December 31,
2007
(In Thousands)

2006

Cash flows from continuing operating activities
Net income
Adjustments to reconcile net income to net cash provided by

continuing operating activities:
Net loss (income) from discontinued operations
Deferred income taxes
Gain on extinguishment of debt
Losses (gain) on sales and disposals of property and equipment
Gain on litigation judgment associated with property, plant and
equipment
Depreciation of property, plant and equipment
Amortization
Stock-based compensation
Provisions for losses on accounts receivable
Provision for (realization of) losses on inventory
Provisions for impairment on long-lived assets
Provision for (realization of) losses on firm sales commitments
Equity in earnings of affiliate
Distributions received from affiliate
Changes in fair value of commodities contracts
Changes in fair value of interest rate contracts
Cash provided (used) by changes in assets and liabilities

(net of effects of discontinued operations):
Accounts receivable
Inventories
Other supplies and prepaid items
Accounts payable
Customer deposits
Deferred rent expense
Other current and noncurrent liabilities

Net cash provided by continuing operating activities

$ 36,547

$ 46,882

15,515

13
(263)
(5,529)
158

(3,943)
13,830
1,186
811
371
3,824
192

-
(937)
735
5,910
2,863

(8,776)
(7,758)
(4,145)
2,214
(6,283)
(2,876)
3,871
32,015

(348 )
(4,700 )
-
378

12,271
2,082
421
858
(384 )
250
(328 )
(877 )
765
172
580

(4,392 )
(11,044 )
(4,857 )
(5,110 )
6,587
(931 )
8,524
46,799

253
-
-
(12)

-
11,381
1,168
-
426
(711)
286
328
(821)
875
408
44

(18,066)
(7,287)
(1,871)
11,183
1,011
122
3,460
17,692

Cash flows from continuing investing activities

Capital expenditures
Proceeds from litigation judgment associated with property, plant
and equipment
Payment of legal costs relating to litigation judgment associated

with property, plant and equipment

Proceeds from sales of property and equipment
Proceeds from (deposits of) current and noncurrent restricted cash
Purchase of interest rate cap contracts
Other assets

Net cash used by continuing investing activities

(32,556)

(14,808 )

(14,701)

5,948

(1,884)
74
(690)
-
(379)
(29,487)

-
271
3,478
(621 )
(168 )
(11,848 )

-
147
(3,504)
-
(363)
(18,421)

(Continued on following page)

F-9

LSB Industries, Inc.

Consolidated Statements of Cash Flows (continued)

2008

Year ended December 31,
2007
(In Thousands)

2006

Cash flows from continuing financing activities

Proceeds from revolving debt facilities
Payments on revolving debt facilities
Proceeds from 5.5% convertible debentures, net of fees
Proceeds from Secured Term Loan
Proceeds from 7% convertible debentures, net of fees
Proceeds from other long-term debt, net of fees
Payments on Senior Secured Loan
Acquisition of 5.5% convertible debentures
Acquisition of 10.75% Senior Unsecured Notes
Payments on other long-term debt
Payments of debt issuance costs
Proceeds from short-term financing and drafts payable
Payments on short-term financing and drafts payable
Proceeds from exercise of stock options
Proceeds from exercise of warrant
Purchase of treasury stock
Excess income tax benefit on stock options exercised
Dividends paid on preferred stock
Acquisition of non-redeemable preferred stock

Net cash provided (used) by continuing financing activities
Cash flows of discontinued operations:

Operating cash flows

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

Supplemental cash flow information:
Cash payments for:

Interest on long-term debt and other
Income taxes, net of refunds

Noncash investing and financing activities:

Receivable from sale of property and equipment
Debt issuance costs
Other assets, accounts payable and other liabilities and long-
term debt associated with additions of property, plant and
equipment

Debt issuance costs associated with the acquisition of the 5.5%

convertible debentures

Debt issuance costs associated with 7% convertible debentures

converted to common stock

7% convertible debentures converted to common stock
Series 2 preferred stock converted to common stock of which
$12,303,000 and $2,882,000 was charged to accumulated
deficit in 2007 and 2006, respectively

$ 662,402

$ 529,766

(662,402)

-
-
-
-
-

(13,207)

-
(599)
-
3,178
(1,869)
846
-

(4,821)
2,390
(306)
-

(14,388)

(160)
(12,020)

58,224
46,204

6,562
19,469

-
-

6,675

764

-
-

$
$

(556,173 )
56,985
50,000
-
2,424
(50,000 )

-
-

(7,781 )
(1,403 )
1,456
(3,523 )
1,522
393
-
1,740
(2,934 )
(1,292 )
21,180

(162 )

55,969

2,255
58,224

9,162
1,646

-
3,026

1,937

$
$

460,335
(466,445)
-
-
16,876
8,218
-
-
(13,300)
(6,853)
(356)
3,984
(3,788)
298
-
-
-
(262)
(95)
(1,388)

(281)
(2,398)

4,653
2,255

11,084
445

182
1,190

149

266
4,000

$
$

998
14,000

27,593

8,109

$
$

See accompanying notes.

F-10

LSB Industries, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying consolidated financial statements include the accounts of LSB Industries, Inc.
(the “Company”, “We”, “Us”, or “Our”) and its subsidiaries. We are a manufacturing, marketing
and engineering company which is primarily engaged, through our wholly-owned subsidiary
ThermaClime, Inc. (“ThermaClime”) and its subsidiaries, 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 and ThermaClime are holding companies with no significant assets or operations other
than cash and 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.

Certain reclassifications have been made in our consolidated financial statements for 2007 and
2006 to conform to our consolidated financial statement presentation for 2008.

2. Summary of Significant Accounting Policies

Use of Estimates - The preparation of consolidated financial statements in conformity with
generally accepted accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents - Short-term investments, which consist of highly liquid
investments with original maturities of three months or less, are considered cash equivalents.

Restricted Cash - Restricted cash consists of cash balances that are legally restricted or
designated by the Company for specific purposes. At December 31, 2008 and 2007, we had
restricted cash of $893,000 and $203,000, respectively, primarily to fund certain unrealized
losses on futures contracts.

Accounts Receivable and Credit Risk - Sales to contractors and independent sales
representatives are generally subject to a mechanic’s lien in the Climate Control Business. Other
sales are generally unsecured. Credit is extended to customers based on an evaluation of the
customer’s financial condition and other factors. Credit losses are provided for in the
consolidated financial statements based on historical experience and periodic assessment of
outstanding accounts receivable, particularly those accounts which are past due (determined
based upon how recently payments have been received). Our periodic assessment of accounts
and credit loss provisions are based on our best estimate of amounts that are not recoverable.

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 December 31, 2008 and 2007, we
had inventory reserves for certain slow-moving inventory items (primarily Climate Control

F-11

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

products) and inventory reserves for certain nitrogen-based inventories provided by our
Chemical Business because cost exceeded the net realizable value.

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 or
capital projects, we may be able to perform procedures to recover precious metals (previously
expensed) which have accumulated over time within the manufacturing equipment. Recoveries
of precious metals are recognized at historical FIFO costs.

Property, Plant and Equipment - Property, plant and equipment are carried at cost. For
financial reporting purposes, depreciation is primarily computed using the straight-line method
over the estimated useful lives of the assets. Leases meeting capital lease criteria have been
capitalized and included in property, plant and equipment. Amortization of assets under capital
leases is included in depreciation expense. No provision for depreciation is made on construction
in progress or capital spare parts until such time as the relevant assets are put into service.
Maintenance, repairs and minor renewals are charged to operations while major renewals and
improvements are capitalized in property, plant and equipment.

Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts may not be recoverable. If
assets to be held and used are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amounts of the assets exceed the fair values of the assets as
measured by the present value of future net cash flows expected to be generated by the assets or
their appraised value. Assets to be disposed of are reported at the lower of the carrying amounts
of the assets or fair values less costs to sell. At December 31, 2008, we had no long-lived assets
that met the criteria presented in Statement of Financial Accounting Standards (“SFAS”) 144 -
Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) to be classified
as assets held for sale.

We have obtained estimates from external sources and made internal estimates based on inquiry
and other techniques of the fair values of certain capital spare parts and idle assets in our
Chemical Business and certain non-core equipment included in our Corporate assets in order to
determine recoverability of the carrying amounts of such assets.

Debt Issuance Costs - Debt issuance costs are amortized over the term of the associated debt
instrument.

Goodwill - Goodwill is reviewed for impairment at least annually in accordance with SFAS 142
- Goodwill and Other Intangible Assets (“SFAS 142”). As of December 31, 2008 and 2007,
goodwill was $1,724,000 of which $103,000 and $1,621,000 relates to business acquisitions in
prior periods in the Climate Control and Chemical Businesses, respectively.

F-12

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Accrued Insurance Liabilities - We are self-insured up to certain limits for group health,
workers’ compensation and general liability claims. Above these limits, we have commercial
insurance coverage for our contractual exposure on group health claims and statutory limits
under workers’ compensation obligations. We also carry excess umbrella insurance of $50
million for most general liability risks excluding environmental risks. We have a separate $30
million insurance policy covering pollution liability at our El Dorado and Cherokee Facilities.
Our accrued insurance liabilities are based on estimates of claims, which include the incurred
claims amounts plus estimates of future claims development calculated by applying our historical
claims development factors to our incurred claims amounts. We also consider the reserves
established by our insurance adjustors and/or estimates provided by attorneys handling the
claims, if any. In addition, our accrued insurance liabilities include estimates of incurred, but not
reported, claims and other insurance-related costs. Accrued insurance liabilities are included in
accrued and other liabilities. It is possible that the actual development of claims could exceed our
estimates.

Amounts recoverable from our insurance carriers over the self-insured limits are included in
accounts receivable.

Product Warranty - 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 periodically 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.

F-13

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

It is possible that future warranty costs could exceed our estimates.

Changes in our product warranty obligation are as follows:

Balance at
Beginning
of Year

Additions-
Charged to
Costs and
Expenses

Deductions-
Costs
Incurred

Balance at
End
of Year

(In Thousands)

$ 1,944

$ 5,514

$ 4,638

$ 2,820

$ 1,251

$ 3,325

$ 2,632

$ 1,944

861

$ 2,199

$ 1,809

$ 1,251

2008

2007

2006

Plant Turnaround Costs - We expense the costs relating to planned major maintenance
activities (“Turnarounds”) as they are incurred by our Chemical Business as described as the
direct expensing method within Financial Accounting Standards Board (“FASB”) Staff Position
No. AUG AIR-1.

Income Taxes - We account for income taxes in accordance with SFAS 109 – Accounting for
Income Taxes (“SFAS 109”) and we adopted FIN No. 48 – Accounting for Uncertainty in
Income Taxes (“FIN 48”) on January 1, 2007. We recognize deferred tax assets and liabilities
for the expected future tax consequences attributable to tax net operating loss (“NOL”)
carryforwards, tax credit carryforwards, and differences between the financial statement carrying
amounts and the tax basis of our assets and liabilities. We establish valuation allowances if we
believe it is more-likely-than-not that some or all of deferred tax assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We do not recognize a tax benefit unless
we conclude that it is more-likely-than-not that the benefit will be sustained on audit by the
taxing authority based solely on the technical merits of the associated tax position. If the
recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax
benefit that, in our judgment, is greater than 50% likely to be realized. We record interest related
to unrecognized tax positions in interest expense and penalties in operating other expense.

F-14

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Contingencies - We accrue for contingent losses when such losses are probable and reasonably
estimable. In addition, we recognize contingent gains when such gains are realized or realizable
and earned. Our Chemical Business is subject to specific federal and state regulatory compliance
laws and guidelines. We have developed policies and procedures related to regulatory
compliance. We must continually monitor whether we have maintained compliance with such
laws and regulations and the operating implications, if any, and amount of penalties, fines and
assessments that may result from noncompliance. Loss contingency liabilities are included in
current and noncurrent accrued and other liabilities and are based on current estimates that may
be revised in the near term.

Asset Retirement Obligations - 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 in accordance of FASB Interpretation (“FIN”) 47 – Accounting for
Conditional Asset Retirement Obligations (“FIN 47”).

Stock Options - Effective January 1, 2006, we adopted SFAS 123(R)-Share-Based Payment
“SFAS 123(R)”) using the modified prospective method, which requires equity awards to be
accounted for under the fair value method. For equity awards with only service conditions that
have a graded vesting period, we recognize compensation cost on a straight-line basis over the
requisite service period for the entire award. In addition, we issue new shares of common stock
upon the exercise of stock options.

Revenue Recognition - We recognize revenue for substantially all of our operations at the time
title to the goods transfers to the buyer and there remain no significant future performance
obligations by us. Revenue relating to construction contracts is recognized using the percentage-
of-completion method based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Sales of warranty contracts are
recognized as revenue ratably over the life of the contract. See discussion above under “Product
Warranty” for our accounting policy for recognizing warranty expense.

F-15

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Recognition of Insurance Recoveries - 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.

Cost of Sales - Cost of sales includes materials, labor and overhead costs to manufacture the
products sold plus inbound freight, purchasing and receiving costs, inspection costs, internal
transfer costs and warehousing costs (excluding certain handling costs directly related to loading
product being shipped to customers in our Chemical Business which are included in selling,
general and administrative expense). In addition, recoveries and gains from precious metals
(Chemical Business), sales of material scrap (Climate Control Business), and business
interruption insurance claims are reductions to cost of sales. Also gains and losses (realized and
unrealized) from our commodities and foreign currency futures/forward contracts are included in
cost of sales.

Selling, General and Administrative Expense - Selling, general and administrative expense
(“SG&A”) includes costs associated with the sales, marketing and administrative functions. Such
costs include personnel costs, including benefits, advertising costs, commission expenses,
warranty costs, office and occupancy costs associated with the sales, marketing and
administrative functions. SG&A also includes outbound freight in our Climate Control Business
and certain handling costs directly related to product being shipped to customers in our Chemical
Business. These handling costs primarily consist of personnel costs for loading product into
transportation equipment, rent and maintenance costs related to the transportation equipment,
and certain indirect costs.

Shipping and Handling Costs - For the Chemical Business in 2008, 2007 and 2006, shipping
costs of $16,333,000, $15,209,000 and $17,448,000, respectively, are included in net sales as
these costs relate to amounts billed to our customers. In addition, in 2008, 2007, and 2006,
handling costs of $5,432,000, $5,249,000, and $4,950,000, respectively, are included in SG&A
as discussed above under “Selling, General and Administrative Expense.” For the Climate
Control Business, shipping and handling costs of $11,047,000, $11,057,000 and $10,326,000 are
included in SG&A for 2008, 2007 and 2006, respectively.

Advertising Costs - Costs in connection with advertising and promotion of our products are
expensed as incurred. Such costs amounted to $2,180,000 in 2008, $1,791,000 in 2007 and
$1,233,000 in 2006.

F-16

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Income per Common Share - Net income applicable to common stock is computed by
adjusting net income by the amount of preferred stock dividends, dividend requirements and
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
year. Diluted income per share is based on net income applicable to common stock plus preferred
stock dividends and dividend requirements 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.

Recently Issued Accounting Pronouncements - In September 2006, FASB issued SFAS No.
157 - Fair Value Measurements (“SFAS 157”). SFAS 157 is definitional and disclosure oriented
and addresses how companies should approach measuring fair value when required by GAAP; it
does not create or modify any current GAAP requirements to apply fair value accounting. SFAS
157 provides a single definition for fair value that is to be applied consistently for all accounting
applications, and also generally describes and prioritizes according to reliability the methods and
input used in valuations. SFAS 157 prescribes various disclosures about financial statement
categories and amounts which are measured at fair value, if such disclosures are not already
specified elsewhere in GAAP. The new measurement and disclosure requirements of SFAS 157
became effective for the Company on January 1, 2008. The provisions of SFAS 157 were
applied prospectively. See Note 15 - Derivatives, Hedges and Financial Instruments.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”), which
delayed the effective date of SFAS 157 for nonfinancial assets and liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis. FSP 157-2 will
become effective for the Company beginning in the first quarter of 2009 and will be applied
prospectively. We currently do not expect a significant impact from adopting FSP 157-2.

In March 2008, the FASB issued SFAS No. 161 - Disclosures about Derivative Instruments and
Hedging Activities; an Amendment of SFAS 133 (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities for the purpose of improving the
transparency of financial reporting. The new disclosure requirements of SFAS 161 will become
effective for the Company beginning in the first quarter of 2009 and we expect that the
provisions will be applied prospectively. We currently do not expect a significant impact from
adopting SFAS 161.

F-17

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

3. Income Per Share

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

During 2008,

• we purchased 400,000 shares of treasury stock;
• we issued 490,304 shares of our common stock as the result of the exercise of stock

options;

• we granted 417,000 shares of stock options;
• 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 $6,000, respectively; and
• we acquired $19.5 million aggregate principal amount of our 5.5% Convertible Senior

Subordinated Notes due 2012 (the “2007 Debentures”).

During 2007,

• we sold $60 million of the 2007 Debentures;
•

the remaining $4,000,000 of the 7% Convertible Senior Subordinated Debentures due
2011 (the “2006 Debentures”) was converted into 564,789 shares of common stock;
• we issued 2,262,965 shares of common stock for 305,807 shares of our Series 2 $3.25
convertible, exchangeable Class C preferred stock (“Series 2 Preferred”) that were
tendered pursuant to a tender offer;

• we redeemed 25,820 shares of our Series 2 Preferred and issued 724,993 shares of

common stock for 167,475 shares of our Series 2 Preferred;

• we received shareholders’ approval in granting 450,000 shares of non-qualified stock

options on June 14, 2007;

• we issued 582,000 and 112,500 shares of our common stock as the result of the exercise

of stock options and a warrant, respectively;

• we paid cash dividends of approximately $678,000 on the shares of Series 2 Preferred

which we redeemed as discussed above; and

• we paid cash dividends on the Series B Preferred, Series D Preferred and Noncumulative

Preferred totaling approximately $1,890,000, $360,000 and $6,000, respectively.

During 2006,

• we sold $18 million of the 2006 Debentures;
• $14 million of the 2006 Debentures was converted into 1,977,499 shares our common

stock;

• we issued 374,400 shares of our common stock as the result of the exercise of stock

options;

• 104,548 shares of our Series 2 Preferred was exchanged for 773,655 shares of our

common stock; and

• we paid partial cash dividends totaling approximately $262,000 on certain preferred

stock.

F-18

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

3. Income Per Share (continued)

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

Numerator:

Net income

Dividends and dividend requirements on Series B Preferred
Dividend requirements on shares of Series 2 Preferred which
did not exchange pursuant to tender offer or redemption in
2007 or exchange agreements in 2006

Dividends and dividend requirements on shares of Series 2

Preferred which were redeemed in 2007

Dividend requirements and stock dividend on shares of
Series 2 Preferred pursuant to tender offer in 2007 (1)
Dividend requirements and stock dividend on shares of
Series 2 Preferred pursuant to exchange agreements in
2006 (2)

Dividends and dividend requirements on Series D Preferred
Dividends on Noncumulative Preferred

Total dividends, dividend requirements and stock

dividends on preferred stock

Numerator for basic net income per share - net income
applicable to common stock

Dividends and dividend requirements on preferred stock

assumed to be converted, if dilutive

Interest expense including amortization of debt issuance

costs, net of income taxes, on convertible debt assumed to
be converted, if dilutive

Numerator for diluted net income per common share

Denominator:

Denominator for basic net income per common share -
weighted-average shares

Effect of dilutive securities:

Convertible preferred stock
Convertible notes payable
Stock options
Warrants

Dilutive potential common shares

Denominator for dilutive net income per common share – adjusted

2007
2008
(Dollars In Thousands, Except Per Share Amounts)

2006

36,547
(240)

46,882
(240 )

15,515
(240)

-
(60)
(6)

(306)

36,241

306

)
(272

)
(59

)
(4,971

-
(60 )
(6 )

)
(5,608

41,274

637

(547

)

(84

)

(993

)

(705
)
(60)
(1)

(2,630

)

12,885

1,925

1,624
38,171

1,276
43,187

1,083
15,893

21,170,418

19,579,664

14,331,963

939,126
1,478,200
544,994
-
2,962,320

1,478,012
1,200,044
1,160,100
77,824
3,915,980

3,112,483
2,100,325
1,261,661
65,227
6,539,696

weighted-average shares and assumed conversions

24,132,738

23,495,644

20,871,659

Basic net income per common share

Diluted net income per common share

1.71

1.58

2.11

1.84

.90

.76

F-19

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

3. Income Per Share (continued)

(1) As discussed in Note 17 - Non-Redeemable Preferred Stock, in February 2007 we began a
tender offer to exchange shares of our common stock for up to 309,807 of the 499,102
outstanding shares of the Series 2 Preferred. The tender offer expired on March 12, 2007 and our
board of directors accepted the shares tendered on March 13, 2007. Because the exchanges under
the tender offer were pursuant to terms other than the original terms, the transactions were
considered extinguishments of the preferred stock. In addition, the transactions qualified as
induced conversions under SFAS 84 – Induced Conversions of Convertible Debt (“SFAS 84”).
In accordance with Emerging Issues Task Force (“EITF”) Topic No. D-42, the excess of the fair
value of the common stock issued over the fair value of the securities issuable pursuant to the
original conversion terms was subtracted from net income in computing net income per share.
Because our Series 2 Preferred are cumulative and the dividend requirements have been included
in computing net income per share in previous periods and as an element of the exchange
transactions, we effectively settled the dividends in arrears, the amount subtracted from net
income in 2007 represents the excess of the fair value of the common stock issued over the fair
value of the securities issuable pursuant to the original conversion terms less the dividends in
arrears as March 13, 2007.

(2) As discussed in Note 17 - Non-Redeemable Preferred Stock, during October 2006, we
entered into several separate individually negotiated agreements (“Exchange Agreements”) with
certain holders of our Series 2 Preferred. Because the exchanges were pursuant to terms other
than the original terms, the transactions were considered extinguishments of the preferred stock.
In addition, the transactions qualified as induced conversions under SFAS 84. In accordance with
EITF Topic No. D-42, the excess of the fair value of the common stock issued over the fair value
of the securities issuable pursuant to the original conversion terms was subtracted from net
income in computing net income per share. Because our Series 2 Preferred are cumulative and
the dividend requirements have been included in computing net income per share in previous
years and as an element of the exchange transactions, we effectively settled the dividends in
arrears, the amount subtracted from net income in 2006 represents the excess of the fair value of
the common stock issued over the fair value of the securities issuable pursuant to the original
conversion terms less the dividends in arrears as of the date of the Exchange Agreements plus the
2006 dividend requirements prior to the date of the Exchange Agreements.

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:

Stock options
Series 2 Preferred pursuant to tender offer in 2007 (A)
Series 2 Preferred pursuant to exchange agreements in

2006 (A)

2008

2007

2006

506,142
-

240,068
261,090

-
-

506,142

501,158

348,366
348,366

(A) In accordance with EITF Topic No. D-53, the shares associated with the tender offer in 2007 and the
exchange agreements in 2006 were considered separately from other convertible shares of securities in
computing net income per common share for 2007 and 2006, respectively.

F-20

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

4. Accounts Receivable

Trade receivables
Insurance claims
Other

Allowance for doubtful accounts

December 31,

2008

2007

(In Thousands)

$ 78,092
252
1,231
79,575

(729)

$ 78,846

$ 68,234
2,469
1,182
71,885
(1,308 )
$ 70,577

Concentrations of credit risk with respect to trade receivables are limited due to the large number
of customers comprising our customer bases and their dispersion across many different industries
and geographic areas, however, six customers account for approximately 24% of our total net
receivables at December 31, 2008.

5. Inventories

December 31, 2008:

Climate Control products
Chemical products
Industrial machinery and components

December 31, 2007:

Climate Control products
Chemical products
Industrial machinery and components

Finished
Goods

Work-in-
Process

Raw
Materials

Total

(In Thousands)

7,550
18,638
4,491
$ 30,679

9,025
15,409
3,743
$ 28,177

2,954
-
-
2,954

3,569
-
-
3,569

$ 21,521
5,656
-
$ 27,177

$ 32,025
24,294
4,491
$ 60,810

$ 19,412
5,718
-
$ 25,130

$ 32,006
21,127
3,743
$ 56,876

F-21

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

5. Inventories (continued)

At December 31, 2008 and 2007, inventory reserves for certain slow-moving inventory items
(primarily Climate Control products) were $514,000 and $460,000, respectively. In addition,
inventory reserves for certain nitrogen-based inventories provided by our Chemical Business
were $3,627,000 and $13,000 at December 31, 2008 and 2007, respectively, because cost
exceeded the net realizable value.

Changes in our inventory reserves are as follows:

Balance at
Beginning
of Year

Additions-
Provision for
(realization of)
losses

Deductions-
Write-offs/
disposals

Balance at
End
of Year

(In Thousands)

2008

473

2007

$ 1,255

2006

$ 2,423

3,824

(384)

(711)

156

$ 4,141

398

473

457

$ 1,255

The provision for losses are included in cost of sales (realization of losses are reductions to cost
of sales) in the accompanying consolidated statements of income.

6. Precious Metals

At December 31, 2008 and 2007, precious metals were $14,691,000 and $10,935,000,
respectively, and are included in supplies, prepaid items and other in the accompanying
consolidated balance sheets.

Precious metals are used as a catalyst in the Chemical Business manufacturing process. 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.

F-22

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

6. Precious Metals (continued)

Precious metals expense, net, consists of the following:

2008

2007
(In Thousands)

2006

Precious metals expense
Recoveries of precious metals
Gains on sales of precious metals
Precious metals expense, net

7,786
(1,458)

-
6,328

6,352
(1,783)
(2,011)
2,558

$ 4,823
(2,082 )
-
$ 2,741

Precious metals expense is included in cost of sales (recoveries and gains on sales of precious
metals are reductions to cost of sales) in the accompanying consolidated statements of income.

7. Property, Plant and Equipment

Machinery, equipment and automotive
Buildings and improvements
Furniture, fixtures and store equipment
Assets under capital leases
Construction in progress
Capital spare parts
Land

Less accumulated depreciation

Useful lives
in years

3-20
8-30
3-5
10
N/A
N/A
N/A

December 31,

2008

2007

(In Thousands)

$ 173,678
28,457
6,716
1,076
8,514
2,344
4,082
224,867
120,575
$ 104,292

$ 151,633
27,510
7,458
1,907
6,648
1,662
2,194
199,012
119,320
$ 79,692

Machinery, equipment and automotive primarily includes the categories of property and
equipment and estimated useful lives as follows: chemical processing plants and plant
infrastructure (15-20 years); production, fabrication, and assembly equipment (7-15 years);
certain processing plant components (3-10 years); and trucks, automobiles, trailers, and other
rolling stock (3-7 years). At December 31, 2008 and 2007, assets under capital leases consist of
$1,076,000 and $1,907,000 of machinery, equipment and automotive, respectively. Accumulated
depreciation for assets under capital leases were $193,000 and $244,000 at December 31, 2008
and 2007, respectively.

8. Debt Issuance Costs, net

Debt issuance costs of $2,607,000 and $4,213,000 are net of accumulated amortization of
$2,980,000 and $2,368,000 as of December 31, 2008 and 2007, respectively.

F-23

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

8. Debt Issuance Costs, net (continued)

During 2008, we acquired a portion of the 2007 Debentures. As a result, approximately $764,000
of the unamortized debt issuance costs associated with the 2007 Debentures acquired was
charged against the gain on extinguishment of debt in 2008.

During 2007, we incurred debt issuance costs of $4,429,000 which included $3,224,000 relating
to the 2007 Debentures and $1,139,000 relating to the $50 million loan agreement (“Secured
Term Loan”). In addition, the remaining portion of the 2006 Debentures was converted into our
common stock. As a result of the conversions, approximately $266,000 of the remaining
unamortized debt issuance costs associated with the 2006 Debentures were charged against
capital in excess of par value in 2007. Also, the Senior Secured Loan due in 2009 was repaid
with the proceeds from the Secured Term Loan. As a result, approximately $1,331,000 of the
remaining unamortized debt issuance and other debt-related costs associated with the Senior
Secured Loan was charged to interest expense in 2007.

In 2006, we incurred debt issuance costs of $1,480,000 relating to the 2006 Debentures. During
2006, a portion of the 2006 Debentures were converted into our common stock. As a result of the
conversions, approximately $998,000 of the debt issuance costs, net of amortization, associated
with the 2006 Debentures was charged against capital in excess of par value.

9. Investment in Affiliate

Cepolk Holding, 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 December 31, 2008 and 2007, our investment was $3,628,000 and
$3,426,000, respectively. As of December 31, 2008, the Partnership and general partner to the
Partnership is indebted to a term lender (“Lender”) of the Project for approximately $3,578,000
with a term extending to December 2010. 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. No
liability has been established for this pledge since it was entered into prior to adoption of FIN 45.
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.

F-24

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

10. Current and Noncurrent Accrued and Other Liabilities

Fair value of derivatives
Accrued payroll and benefits
Deferred revenue on extended warranty contracts
Customer deposits
Accrued insurance
Accrued warranty costs
Accrued death benefits
Accrued commissions
Accrued contractual manufacturing obligations
Accrued interest
Billings in excess of costs and estimated earnings on

uncompleted contracts

Accrued income taxes
Deferred rent expense
Accrued precious metals costs
Accrued executive benefits
Other

Less noncurrent portion
Current portion of accrued and other liabilities

11. Redeemable Preferred Stock

December 31,

2008

2007

(In Thousands)

8,347
6,422
4,028
3,242
2,971
2,820
2,687
2,433
2,230
2,003

1,882
1,704
1,424
1,298
1,111
4,265
48,867
9,631
39,236

172
5,362
3,387
9,525
2,975
1,944
2,051
2,256
1,548
1,056

62
4,540
4,300
1,359
1,040
4,278
45,855
6,913
$ 38,942

At December 31, 2008 and 2007, we had 547 shares and 585 shares, respectively, outstanding of
Noncumulative Preferred. Each share of Noncumulative Preferred, $100 par value, is convertible
into 40 shares of our common stock at the option of the holder at any time and entitles the holder
to one vote. The Noncumulative Preferred is redeemable at par at the option of the holder or the
Company. The Noncumulative Preferred provides for a noncumulative annual dividend of 10%,
payable when and as declared. During 2008, 2007 and 2006, our board of directors declared and
we paid dividends totaling $6,000 (10.00 per share), $6,000 ($10.00 per share) and $1,000 ($1.24
per share), respectively, on the then outstanding Noncumulative Preferred. At December 31,
2008 and 2007, the Noncumulative Preferred was $52,000 and $56,000, respectively, and is
classified as accrued and other liabilities in the accompanying consolidated balance sheets.

F-25

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

12. Long-Term Debt

Working Capital Revolver Loan due 2012 (A)
5.5% Convertible Senior Subordinated Notes due 2012 (B)
Secured Term Loan due 2012 (C)
Other, with a current weighted-average interest rate of 6.70%,
most of which is secured by machinery, equipment and real
estate (D)

Less current portion of long-term debt (E)
Long-term debt due after one year (E)

December 31,

2008

2007

(In Thousands)

-
40,500
50,000

-
60,000
50,000

14,660
105,160
1,560
$ 103,600

12,107
122,107
1,043
$ 121,064

(A)
ThermaClime and its subsidiaries (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 December 31, 2008 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 December 31, 2008, amounts available
for additional borrowing under the Working Capital Revolver Loan were $49.5 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.

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 (“EDNC”) but excluding the assets securing the Secured
Term Loan discussed in (C) below and certain distribution-related assets of El Dorado Chemical
Company (“EDC”). EDNC is neither a borrower nor guarantor of the Working Capital Revolver
Loan. The carrying value of the pledged assets is approximately $204 million at December 31,
2008.

A prepayment premium of $500,000 is due to the lender should the Borrowers elect to prepay the
facility prior to April 13, 2009. This premium is reduced to $250,000 during the following
twelve-month period ending April 12, 2010 and is eliminated thereafter.

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

F-26

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

12. Long-Term Debt (continued)

ratio of not greater than 4.50 to 1, which requirements are measured quarterly on a trailing
twelve-month basis and as defined in the agreement. ThermaClime was in compliance with those
covenants during 2008. 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, 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) On June 28, 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 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. The 2007 Debentures are
eligible for resale by the investors under Rule144A 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 (the “Trustee”),
governing the 2007 Debentures. The Trustee 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, which began on January 1,
2008.

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.

During 2008, we acquired $19.5 million aggregate principal amount of the 2007 Debentures for
$13.2 million and recognized a gain on extinguishment of debt of $5.5 million, after writing off
$0.8 million of the unamortized debt issuance costs associated with the 2007 Debentures
acquired. In addition, see discussion concerning $5.0 million of the 2007 Debentures being held
by the Golsen Group in Note 22-Related Party Transactions.

F-27

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

12. Long-Term Debt (continued)

$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.

We may redeem some or all of the 2007 Debentures at any time on or after July 2, 2010, 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. If a fundamental change (as defined in the
Indenture) occurs on or prior to June 30, 2010, under certain circumstances, we will pay, in
addition to the repurchase price, a make-whole premium on the 2007 Debentures converted in
connection with, or tendered for repurchase upon, the fundamental change. The make-whole
premium will be payable in our common stock or the same form of consideration into which our
common stock has been exchanged or converted in the fundamental change. The amount of the
make-whole premium, if any, will be based on our stock price on the effective date of the
fundamental change. No make-whole premium will be paid if our stock price in connection with
the fundamental change is less than or equal to $23.00 per share.

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.

We used a portion of the net proceeds to redeem our remaining outstanding shares of Series 2
Preferred; to repay certain outstanding mortgages and equipment loans; to pay dividends in
arrears on our outstanding shares of Series B Preferred and Series D Preferred, all of which were
owned by an affiliate; and to reduce the outstanding borrowings under the Working Capital
Revolver Loan. In addition, we have currently invested a portion of the net proceeds in U.S.
Treasury obligations (cash equivalents).

In connection with using a portion of the net proceeds of the 2007 Debentures to initially reduce
the outstanding borrowings under the Working Capital Revolver Loan, ThermaClime entered
into a $25 million demand promissory note (“Demand Note”) with the Company. In addition, the

F-28

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

12. Long-Term Debt (continued)

Company, ThermaClime, and certain of its subsidiaries entered into a subordination agreement
with the lender of the Senior Secured Loan which, among other things, states that the Demand
Note is unsecured and subordinated to the Senior Secured Loan and allows for payments on the
Demand Note by ThermaClime to the Company provided there is no potential default or event of
default, as defined in the Senior Secured Loan.

In conjunction with the 2007 Debentures, we entered into a Registration Rights Agreement (the
“5.5% Registration Rights Agreement”) with the QIBs. However, pursuant to the terms of the
5.5% Registration Rights Agreement, we are no longer obligated to maintain the effectiveness of
the 5.5% Registration Statement.

(C) In November 2007, ThermaClime and certain of its subsidiaries entered into a $50 million
loan agreement (the “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 December 31, 2008 was approximately 6.19%.
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 our El Dorado
and Cherokee Facilities. The carrying value of the pledged assets is approximately $61 million at
December 31, 2008.

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.

A prepayment premium equal to 1% of the principal amount prepaid is due to the lender should
the borrowers elect to prepay on or prior to November 6, 2009. This premium is reduced to 0.5%
during the following twelve-month period and is eliminated thereafter.

F-29

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

12. Long-Term Debt (continued)

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
the Secured Term Loan, the lender may declare an event of default.

(D) Amounts include capital lease obligations of $716,000 and $1,230,000 at December 31,
2008 and 2007, respectively.

(E) Maturities of long-term debt for each of the five years after December 31, 2008 are as
follows (in thousands):

2009
2010
2011
2012
2013
Thereafter

1,560
1,699
1,698
92,188
1,725
6,290
$ 105,160

13. Income Taxes

Provisions (benefits) for income taxes are as follows:

Current:
Federal
State

Total Current

Deferred:
Federal
State

Total Deferred

Provisions for income taxes

2008

2007
(In Thousands)

2006

$ 17,388
1,651
$ 19,039

$ 5,260
1,980
$ 7,240

312
589
901

595
(858)
$
(263)
$ 18,776

$ (4,095 )
(605 )
$ (4,700 )
$ 2,540

$
$

-
-
-
901

For 2008, the current provision for federal income taxes of approximately $17.4 million includes
regular federal income tax after the consideration of permanent and temporary differences
between income for GAAP and tax purposes. The current provision for state income taxes of
approximately $1.7 million in 2008 includes regular state income tax and provisions for
uncertain state income tax positions. (See discussion of FIN 48 below). At December 31, 2007,
we had federal and state NOL carryforwards and we utilized all of the federal NOL
carryforwards during 2008 and a significant portion of the state NOL carryforwards.

F-30

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

The 2008 deferred tax benefit of $0.3 million results from the recognition of changes in our prior
year deferred tax assets and liabilities, and the utilization of state NOL carryforwards and other
temporary differences. We reduce income tax expense for investment tax credits in the year they
are earned. The gross amount of the investment tax credits available to offset state income taxes
is approximately $0.6 million and includes credits for the tax years 2004-2008. The investment
tax credits do not expire and carryforward indefinitely.

During 2008, we performed a detailed analysis of all our deferred tax assets and liabilities and
determined that our state net NOL carryforwards were understated by approximately $34.2
million. The addition of the tax benefits of these state NOL carryforwards increased our deferred
tax assets and decreased our deferred tax expense by approximately $1.1 million, net of the
valuation allowance discussed below. During 2008, we utilized the remaining federal NOL
carryforwards of approximately $0.7 million and approximately $32.8 million of state NOL
carryforwards to reduce tax expense. We have remaining state tax NOL carryforwards of
approximately $35 million that begin expiring in 2009 and no federal NOL carryforwards
remaining.

During 2008, we determined it was more-likely-than-not that approximately $6.7 million of the
state NOL carryforwards would not be able to be utilized before expiration and a valuation
allowance for the deferred tax assets associated with these state NOL carryforwards, net of
federal benefit, of approximately $0.3 million was established. We considered both positive and
negative evidence in our determination. The negative evidence considered primarily included
our history of losses by certain entities and jurisdictions, both as to amount and trend and
uncertainties surrounding our ability to generate sufficient taxable income in the individual states
to utilize these state NOL carryforwards.

Our overall effective tax rate in 2008 is reduced by permanent tax differences, the effect of the
change to prior year deferred items and the provision for uncertain tax positions.

The current provision for federal income taxes of $5.3 million for 2007 includes regular federal
income tax and alternative minimum income tax (“AMT”). The current provision of state
income taxes of $2.0 million for 2007 includes the provision for 2007 state income taxes, as well
as $1.0 million for uncertain state income tax positions recognized in accordance with FIN 48 as
discussed below.

The 2007 benefit for deferred taxes of $4.7 million results from the reversal of valuation
allowance on deferred tax assets, the benefit of AMT credits, and other temporary differences. At
December 31, 2006, we had regular NOL carryforwards of approximately $49.9 million. We
account for income taxes under the provisions of SFAS 109, which requires recognition of future
tax benefits (NOL carryforwards and other temporary differences) subject to a valuation
allowance if it is determined that it is more-likely-than-not that such asset will not be realized. In
determining whether it is more-likely-than-not that we will not realize such tax asset, SFAS 109
requires that all negative and positive evidence be considered (with more weight given to

F-31

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

evidence that is “objective and verifiable”) in making the determination. Prior to 2007, we had
valuation allowances in place against the net deferred tax assets arising from the NOL
carryforwards and other temporary differences. Prior to 2007, management considered certain
negative evidence in determining that it was “more-likely-than-not” that the net deferred tax
assets would not be utilized in the foreseeable future, thus a valuation allowance was required.

The negative evidence considered primarily included our history of losses, both as to amount and
trend and uncertainties surrounding our ability to generate sufficient taxable income to utilize
these NOL carryforwards.

As the result of improving financial results during 2007 including some unusual transactions
(settlement of pending litigation and insurance recovery of business interruption claim) and our
expectation of generating taxable income in the future, we determined in the third quarter of
2007 that there was sufficient objective and verifiable evidence to conclude that it was more-
likely-than-not that we would be able to realize the net deferred tax assets. As a result, we
reversed the valuation allowances as a benefit for income taxes and recognized deferred tax
assets and deferred tax liabilities.

Due to regular tax NOL carryforwards, the only current tax expense for 2006 was for federal
AMT and state income taxes as shown above.

When non-qualified stock options (“NSOs”) are exercised, the grantor of the options is permitted
to deduct the spread between the fair market value of the stock issued and the exercise price of
the NSOs as compensation expense in determining taxable income. Under SFAS 109, income tax
benefits related to stock-based compensation deductions in excess of the compensation expense
recorded for financial reporting purposes are not recognized in earnings as a reduction of income
tax expense for financial reporting purposes. As a result, during 2008 and 2007, the stock-based
compensation deduction recognized in our income tax return will exceed the stock-based
compensation expense recognized in earnings. The excess tax benefit realized (i.e., the resulting
reduction in the current tax liability) related to the excess stock-based compensation tax
deduction of $2.4 million and $1.7 million, in 2008 and 2007, respectively, is accounted for as an
increase in capital in excess of par value rather than a decrease in the provision for income taxes.

SFAS 123(R) specifies that if the grantor of NSOs will not currently reduce its tax liability from
the excess tax benefit deduction taken at the time of the taxable event (option exercised) because
it has a NOL carryforward that is increased by the excess tax benefit, then the tax benefit should
not be recognized until the deduction actually reduces current taxes payable. At December 31,
2008 and 2007, we had approximately $0.6 million and $2.3 million, respectively, in
unrecognized federal and state tax benefits resulting from the exercise of NSOs since the
effective date of SFAS 123(R) on January 1, 2006. We estimate that a significant portion of the
benefit at December 31, 2008 will be realized in 2009 when our current tax liability is reduced
by these items.

F-32

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at
December 31, 2008 and 2007 include:

2008

2007

(In Thousands)

Deferred tax assets
Amounts not deductible for tax purposes:

Allowance for doubtful accounts
Asset impairment
Inventory reserves
Deferred compensation
Other accrued liabilities
Uncertain income tax positions
Hedging
Other

Capitalization of certain costs as inventory for tax purposes
Net operating loss carryforwards
Alternative minimum tax credit carryforwards
State tax credits
Total deferred tax assets

Less valuation allowance on deferred tax assets

775
683
1,614
3,445
3,260
411
3,610
452
1,123
865
-
392
16,630

(268 )

906
902
204
2,700
2,439
655
-
512
900
779
3,911
-
13,908
-
$ 13,908

Net deferred tax assets

16,362

Deferred tax liabilities
Accelerated depreciation used for tax purposes
Excess of book gain over tax gain resulting from sale of assets
Investment in unconsolidated affiliate
Total deferred tax liabilities

Net deferred tax assets

Consolidated balance sheet classification:
Net current deferred tax assets
Net non-current deferred tax liabilities
Net deferred tax assets

Net deferred tax assets by tax jurisdiction:
Federal
State
Net deferred tax assets

F-33

9,860
340
1,199
11,399

$ 7,273
541
1,394
$ 9,208

4,963 $ 4,700

11,417
(6,454 )
4,963

$ 10,030
(5,330)
$ 4,700

3,609
1,354
4,963

$ 3,921
779
$ 4,700

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

All of our income before taxes relates to domestic operations. Detailed below are the differences
between the amount of the provision for income taxes and the amount which would result from
the application of the federal statutory rate to “Income from continuing operations before
provision for income taxes” for the year ended December 31:

Provisions for income taxes at federal statutory rate
Effect of discontinued operations and other
Federal alternative minimum tax
State current and deferred income taxes
Provision for uncertain tax positions
Other permanent differences
Domestic production activities deduction
Effect of change to prior year deferred items (A)
Changes in the valuation allowance related to

deferred tax assets (A)

State tax credits
Provisions for income taxes

2007
(In Thousands)
$ 17,176

403

-
1,939
1,047
451
-
-

2006

$ 5,834
58
312
383
-
264
-
-

2008

$ 19,363
(282)
-
2,213

(74)
327
(820)
(1,827)

268
(392)

)
(18,476
-
2,540

(5,950
)
-
901

$ 18,776

(A) During 2008, we performed a detailed analysis of all our deferred tax assets and liabilities
and determined that our deferred tax assets were understated by approximately $1,827,000. As a
part of our analysis, we reviewed the realizability of these deferred tax assets and determined that
a valuation allowance of approximately $268,000 was required. Accordingly, the addition of the
deferred tax assets and the associated valuation allowance resulted in a tax benefit of $1,559,000
in our income tax provision for 2008.

On January 1, 2007, we adopted FIN 48, which requires that 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. Further, FIN 48 prescribes the amount to be recorded in the financial
statements as the amount most likely to be realized assuming a review by tax authorities having
all relevant information and applying current conventions. FIN 48 also clarifies the financial
statement classification of tax-related penalties and interest and sets forth new disclosures
regarding unrecognized tax benefits.

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). As of December 31, 2006 we had a $300,000 accrued for an
uncertain tax position related to state income taxes. As a result of the implementation of FIN 48,
we recognized a $120,000 increase in the liability for uncertain tax positions related to state
income taxes, which was accounted for as an increase to the January 1, 2007 accumulated deficit

F-34

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

balance. In 2007, we commissioned a nexus study by an independent public accounting firm to
determine if we and our subsidiaries had any activities that would create nexus and to calculate
the potential additional state income tax liability in accordance with FIN 48. As a result of this
nexus study, we recognized additional current state income tax expense of $1,047,000 in 2007,
partially offset by a deferred tax benefit of $536,000 from additional state NOL carryforwards. In
addition to the FIN 48 liability recorded as a result of the nexus study, we reclassified $150,000
of state income tax from the current payable account to the FIN 48 liability to properly reflect
this as an uncertain tax position.

During 2008, we entered into multiple voluntary disclosure agreements with various states and
resolved many of our outstanding state tax liabilities for payments of approximately $606,000.
The settlement of many of these liabilities was for less than the amounts previously estimated
and accrued in accordance with FIN 48. As a result, we reduced the FIN 48 liability and state
tax provision by $504,000. Additionally during 2008, we evaluated if we and our subsidiaries
had any new nexus creating activities in any state taxing jurisdictions that had not previously
been considered. As a result, we recognized additional state income tax expense of $391,000 in
2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2008

2007

(In Thousands)

Balance at beginning of year
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of year

$ 1,617 $

420
192
-
1,031
391
(26 )
(504)
-
(606)
898 $ 1,617

If the tax benefit of these uncertain tax positions were recognized in the financial statements, the
tax benefit would decrease the annual effective tax rate by reducing the total state tax provision
by approximately $300,000 and $700,000, net of federal expense, in 2008 and 2007,
respectively.

Interest recognized relating to unrecognized tax benefits is included interest expense and
penalties are included in other expense. During 2008 and 2007, we recognized $181,000 and
$253,000, respectively, in interest and penalties associated with unrecognized tax benefits (none
in 2006). We had approximately $288,000 and $315,000 accrued for interest and penalties at
December 31, 2008 and 2007, respectively.

We plan to continue to negotiate voluntary disclosure agreements and file prior year tax returns
with various taxing authorities in 2009. Therefore, we anticipate that the total amount of
unrecognized tax benefits will decrease by approximately $200,000 by December 31, 2009 as a

F-35

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

13. Income Taxes (continued)

result of state tax payments made as part of the voluntary disclosure agreement process or other
resolutions.

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 1994 through 2004 remain subject to
examination for the purpose of determining the amount of remaining tax NOL and other
carryforwards. With few exceptions, the 2005-2007 years remain open for all purposes of
examination by the IRS and other major tax jurisdictions.

14. Commitments and Contingencies

Capital and Operating Leases - We and our subsidiaries lease certain property, plant and
equipment under capital leases and non-cancelable operating leases in accordance with SFAS 13-
Accounting for Leases (“SFAS 13”). Leased assets meeting capital lease criteria have been
capitalized and the present value of the related lease payments is included in long-term debt.
Future minimum payments on leases, including the Baytown Facility lease (“Baytown Lease”)
discussed below, with initial or remaining terms of one year or more at December 31, 2008, are
as follows:

Operating Leases

Capital
Leases

Baytown
Lease

Others

Total

2009
2010
2011
2012
2013
Thereafter

Total minimum lease payments
Less amounts representing interest
Present value of minimum lease

payments included in long-term debt $

285
282
176
64
-
-
807
91

716

(In Thousands)

4,881
-
-
-
-
-
4,881

3,345
2,378
1,830
1,502
615
1,223
10,893

8,511
2,660
2,006
1,566
615
1,223
16,581

Rent expense under all operating lease agreements, including month-to-month leases, was
$13,801,000 in 2008, $13,793,000 in 2007 and $12,587,000 in 2006. Renewal options are
available under certain of the lease agreements for various periods at approximately the existing
annual rental amounts.

Baytown Facility - Our wholly owned subsidiary, EDNC operates a nitric acid plant (the
“Baytown Facility”) at a Baytown, Texas chemical facility in accordance with the Baytown
Nitric Acid Project and Supply Agreement, as amended, (the “Original Bayer Agreement”) with
Bayer Material Science, LLC (“Bayer”). See discussion below under “Bayer Agreement”
concerning a new long-term contract. Under the terms of the Original Bayer Agreement, EDNC

F-36

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

is leasing the Baytown Facility pursuant to a leveraged lease (the “Baytown Lease”) from an
unrelated third party with an initial lease term of ten years, which expires in 2009. The total
amount of future minimum payments due under the Baytown Lease is being charged to rent
expense on the straight-line method over the initial ten-year term of the lease. The difference
between rent expense recorded and the amount paid is charged to deferred rent expense which is
included in accrued and other liabilities in the accompanying consolidated balance sheets. The
Company and its subsidiaries have not provided a residual value guarantee on the value of the
equipment related to the Baytown Lease. As discussed below under “Bayer Agreement”,
pursuant to the terms of the Original Bayer Agreement, Bayer has provided notice of exercise of
its option to purchase from a third party all of the assets comprising the Baytown Facility, except
certain assets that are owned by El Dorado Nitrogen, L.P. (“EDN”), a subsidiary of EDNC, for
use in the production process (the “EDN Assets”). EDNC’s ability to perform on its lease
commitments is contingent upon Bayer’s performance under the Original Bayer Agreement.
EDC has guaranteed the performance of EDNC’s obligations under the Original Bayer
Agreement.

Bayer Agreement - On October 23, 2008, EDN and EDC, both subsidiaries of the Company,
entered into a new Nitric Acid Supply Operating and Maintenance Agreement (the “Bayer
Agreement”) with Bayer. The Bayer Agreement will replace the Original Bayer Agreement, as
of June 24, 2009. The Bayer Agreement is for a term of five years, with renewal options.

Pursuant to the terms of the Original Bayer Agreement, Bayer has provided notice of exercise of
its option to purchase from a third party all of the assets comprising the Baytown Facility, except
the EDN Assets. EDN will continue to be responsible for the maintenance and operation of the
Baytown Facility in accordance with the terms of the Bayer Agreement. In addition, EDC will
continue to guarantee the performance of EDN’s obligations under the Bayer Agreement.

If there is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment of certain fees to EDN.

Purchase and Sales Commitments – In addition to the purchase and sales commitments
relating to the Baytown Facility and the Bayer Agreement discussed above, we have the
following significant purchase and sales commitments.

F-37

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

Effective January 1, 2009, under an agreement with its principal supplier of anhydrous ammonia,
EDC will purchase a majority of its anhydrous ammonia requirements using a market price-
based formula plus transportation to the chemical production facility located in El Dorado,
Arkansas (the “El Dorado Facility”) through at least December 2010.

In 1995, EDC entered into a product supply agreement with a third party whereby EDC is
required to make monthly facility fee and other payments, which aggregate $95,000 as of
December 31, 2008. In return for this payment, EDC is entitled to certain quantities of
compressed oxygen produced by the third party. Except in circumstances as defined by the
agreement, the monthly payment is payable regardless of the quantity of compressed oxygen
used by EDC. The initial term of this agreement is through October 2010. If the agreement is not
terminated as of the end of the initial term, the agreement automatically renews for a 5-year term
and on a year-by-year basis thereafter. EDC can terminate the agreement without cause upon a
12-month notice given on or before October 8, 2009 at a cost of approximately $573,000 as of
December 31, 2008. After October 8, 2009, this agreement can be terminated upon a 12-month
notice at no additional cost. Based on EDC’s estimate of compressed oxygen demands of the
plant, the cost of the oxygen under this agreement is expected to be favorable compared to
floating market prices. Purchases under this agreement aggregated $1,347,000, $1,078,000 and
$1,052,000 in 2008, 2007, and 2006, respectively.

At December 31, 2008, our Climate Control Business had purchase commitments under futures
contracts for 2 million pounds of copper through March 2009 at a weighted-average cost of
$1.72 per pound. At December 31, 2008, our Chemical Business had purchase commitments
under futures/forward contracts for 9,000 metric tons of anhydrous ammonia through March
2009 at a weighted-average cost of $320 per metric ton and for approximately 970,000 MMBtu
of natural gas through December 2009 at a weighted-average cost of $10.08 per MMBtu.

At December 31, 2008, we also had standby letters of credit outstanding of $0.7 million.

At December 31, 2008, we had deposits from customers of $3.2 million for forward sales
commitments including $1.8 million relating to our Chemical Business and $1.0 million relating
to our Climate Control Business.

In 2001, EDC entered into a long-term cost-plus industrial grade ammonium nitrate supply
agreement (“Supply Agreement”) with a third party. Under the Supply Agreement, as amended,
EDC will supply from the El Dorado Facility approximately 210,000 tons of industrial grade
ammonium nitrate per year, which is approximately 91% of the plant’s manufacturing capacity
for that product, for a term through June 2011.

Employment and Severance Agreements - We have an employment agreement and severance
agreements with several of our officers. The agreements, as amended, provide for annual base
salaries, bonuses and other benefits commonly found in such agreements. In the event of
termination of employment due to a change in control (as defined in the agreements), the
agreements provide for payments aggregating $10 million at December 31, 2008.

F-38

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

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 in accordance with FIN 47. 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 located in El Dorado, Arkansas within our Chemical Business generates
process wastewater, which includes storm water. The process water discharge and storm-water
runoff 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 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.

F-39

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

The El Dorado Facility has demonstrated its ability to comply with the more restrictive permit
limits, and the rules that support the more restrictive dissolved minerals rules have been revised
to authorize a permit modification to adopt achievable dissolved minerals permit limits. The
ADEQ and EDC have entered into a consent administration 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 dispose of the El Dorado Facility’s wastewater
into the creek adjacent to the El Dorado Facility. We believe the El Dorado Facility can comply
with revised permit; however, as of December 31, 2008, the ADEQ has not issued the revised
permit.

2. Air Matters

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. 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 has agreed, within certain limitations, to
pay and has been paying one-half of the costs incurred under the consent order subject to
reallocation.

F-40

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

Based on additional modeling of the site, our subsidiary and Chevron are pursuing a course with
the state of Kansas of long-term surface and ground water monitoring to track the natural decline
in contamination, instead of the soil excavation proposed previously. The state of Kansas
approved our proposal to perform two years of surface and groundwater monitoring and to
implement a Mitigation Work Plan to acquire additional field data in order to more accurately
characterize the nature and extent of contaminant migration off-site. The two-year monitoring
requirement expired in February 2009. The data from the monitoring program has not been
evaluated by the state of Kansas and the potential costs of addition monitoring or required
remediation, if any, is unknown.

B. Other Pending, Threatened or Settled Litigation

1. Climate Control Business

A proposed class action was filed in the Illinois state district court in September 2007 alleging
that certain evaporator coils sold by one of our subsidiaries in the Climate Control Business,
Climate Master, Inc. (“Climate Master”) in the state of Illinois from 1990 to approximately 2003
were defective. The complaint requests certification as a class action for the State of Illinois,
which request has not yet been heard by the court. The plaintiffs asserted claims based upon
negligence, strict liability, breach of implied warranties, unjust enrichment and the Illinois
Consumer Fraud and Deceptive Business Practices Act. The plaintiffs have dismissed the first
three of these claims, and the last two of these claims remain pending. Climate Master has filed a
motion for summary judgment as to the remaining claims, and that motion is pending. Climate
Master has removed this action to federal court. Climate Master has also filed its answer denying
the plaintiffs’ claims and asserting several affirmative defenses. Climate Master’s insurers have
been placed on notice of this matter. One of these insurers has denied coverage, one is out of
business and has been liquidated and one insurer advised that it will monitor the litigation subject
to a reservation of rights to decline coverage. The policies associated with insurers that have not
declined coverage in this matter and remain in business have deductible amounts ranging from
$100,000 to $250,000. Climate Master intends to vigorously defend itself in connection with this
matter. Currently, the Company is unable to determine the amount of damages or the likelihood
of any losses resulting from this claim. Therefore, no liability has been established at December
31, 2008.

F-41

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

2. Other

MEI Drafts

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 Preferred or to issue our
common stock for a portion of our Series 2 Preferred pursuant to a private exchange, that it
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 is 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:

F-42

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

•

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.

•

fraudulent inducement and fraud,

• violation of 14(d) of the Securities and Exchange Act of 1934 and Rule 14d-10,

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

• violation of 18 of the Exchange Act,

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

• breach of fiduciary duty.

F-43

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

14. Commitments and Contingencies (continued)

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, 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. As of December 31, 2008, a liability of $100,000 has
been established for the Jayhawk claims.

Securities and Exchange Commission

Other Claims and Legal Actions

15. Derivatives, Hedges and Financial Instruments

F-44

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

15. Derivatives, Hedges and Financial Instruments (continued)

based on quoted prices for similar contracts and valuation inputs other than quoted prices that are
observable for these contracts. The valuations of contracts classified as Level 3 are based on the
average ask/bid prices obtained from a broker relating to a low volume market. However at
December 31, 2008, the terms of the contracts classified as Level 3 do not exceed three months.

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 mature in March 2009. In April 2007, we purchased two interest rate cap
contracts for a cost of $621,000, which set a maximum three-month LIBOR base rate of 5.35%
on $50 million. In April 2008, we exchanged the two interest rate cap contracts purchased in
2007 for an interest rate cap contract (“2008 Interest Rate Cap Contract”), which sets a
maximum three-month LIBOR base rate of 4.56% on $25 million. The cost basis of the 2008
Interest Rate Cap Contract was $239,000 based on the estimated fair value of the two contracts
surrendered (which was also the carrying value at the time of the exchange) in accordance with
Accounting Principle Board Opinion No. 29 - Accounting for Nonmonetary Transactions, as
amended (“APB 29”). In April 2008, we also 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 exchanged the 2008 Interest Rate Cap Contract for an interest rate swap,
which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012.
The cost basis of the new interest rate swap is $354,000 based on the estimated fair value of the
2008 Interest Rate Cap Contract surrendered (which was also the carrying value at the time of
the exchange) in accordance with APB 29.

These contracts are free-standing derivatives and are accounted for on a mark-to-market basis in
accordance with SFAS 133. At December 31, 2008, the fair value of these contracts (unrealized
loss) was $2,437,000 and is included in current and noncurrent accrued and other liabilities. At
December 31, 2007, the fair value of these contracts (unrealized gain) was $426,000 and is
included in other assets. For 2008 and 2007, we recognized losses of $2,871,000 and $355,000,
respectively, and we recognized a gain of $113,000 in 2006 on such contracts. In addition, the
cash used to purchase these contracts is included in cash flows from continuing investing
activities.

Commodities Futures/Forward 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 in accordance with SFAS 133. At December 31, 2008 and 2007, the fair value of these
contracts (unrealized loss) was $5,910,000 and $172,000 and is included in accrued and other
liabilities. For 2008, 2007 and 2006, we recognized losses of $7,717,000, $1,317,000 and

F-45

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

15. Derivatives, Hedges and Financial Instruments (continued)

$1,516,000, respectively, on such contracts. In addition, the cash flows relating to these contracts
are included in cash flows from continuing operating activities.

Foreign Currency Contracts

One of our business operations purchases industrial machinery and related components from
vendors outside of the United States. During 2008 as part of our foreign currency risk
management, we entered into several foreign currency contracts, which set the U.S. Dollar/Euro
exchange rates through March 2009. These contracts are free-standing derivatives and are
accounted for on a mark-to-market basis in accordance with SFAS 133. At December 31, 2008,
the fair value of these contracts (unrealized gain) was $35,000 and is included in supplies,
prepaid items and other (none at December 31, 2007). For 2008, we recognized losses of
$187,000 (none in 2007 and 2006) on such contracts. In addition, the cash flows relating to these
contracts are included in cash flows from continuing operating activities.

The following details our assets and liabilities at December 31, 2008 that are measured at fair
value on a recurring basis:

Fair Value Measurements at
December 31, 2008 Using
Significant
Other
Observable
Inputs
(Level 2)

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Unobservable
Inputs
(Level 3)

Description

December 31,
2008

Assets:

Foreign currency contracts $

35 $

(In Thousands)

Liabilities:

Commodities
futures/forward contracts
Interest rate contracts

Total

5,910
2,437
8,347 $

863

-
863

3,659
2,437
6,096

1,388
-
1,388

F-46

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

15. Derivatives, Hedges and Financial Instruments (continued)

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 2008:

Commodities
Futures/Forward
Contracts
(In Thousands)

Beginning balance
Total realized and unrealized loss included

in earnings

Purchases, issuances, and settlements
Transfers in and/or out of Level 3
Ending balance

)
(1,388
-
-

(1,388)

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

Total losses included in earnings:

Cost of sales
Interest expense

Change in unrealized gains and losses relating
to contracts still held at December 31, 2008:

Cost of sales
Interest expense

2008
(In Thousands)

(7,904)
(2,871)
$ (10,775)

(5,875)
(2,825)
(8,700)

In accordance with SFAS 107 - Disclosures about Fair Value of Financial Instruments (“SFAS
107”), the following discussion of fair values is not indicative of the overall fair value of our
assets and liabilities since the provisions of SFAS 107 do not apply to all assets, including
intangibles.

As of December 31, 2008 and 2007, due to their short-term nature, the carrying values of
financial instruments classified as cash, restricted cash, accounts receivable, accounts payable,
short-term financing and drafts payable, and accrued and other liabilities approximated their
interest rate contracts, commodities
estimated fair values. Carrying values for our
futures/forward contracts, and foreign currency contracts approximate their fair value since they
are accounted for on a mark-to-market basis, as discussed above. At December 31, 2008, the
estimated fair value of the Secured Term Loan is based on defined LIBOR rates plus 10%

F-47

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

15. Derivatives, Hedges and Financial Instruments (continued)

utilizing information obtained from the lender. At December 31, 2007, carrying values for
variable debt, including the Secured Term Loan, was believed to approximate their fair value.
Fair values for 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 December 31, 2008, the estimated fair value of the 2007
Debentures is based on quoted prices obtained from a broker for these debentures. At December
31, 2007, the estimated fair value of the 2007 Debentures was based on the conversion rate and
market price of our common stock at December 31, 2007.

December 31, 2008

December 31, 2007

Estimated
Fair Value

Carrying

Value

Estimated
Fair Value

Carrying
Value

(In Thousands)

$ 20,939 $ 50,000
-
8

-
8

$ 50,000
-
155

27,338
14,949

40,500
14,652
$ 63,234 $ 105,160

61,632
12,298
$ 124,085

60,000
11,952
$ 122,107

Variable Rate:

Secured Term Loan
Working Capital Revolver Loan
Other debt

Fixed Rate:

5.5% Convertible Senior Subordinated Notes
Other bank debt and equipment financing

Other

In 1997, we entered into an interest rate forward agreement to effectively fix the interest rate of a
long-term lease commitment (not for trading purposes). In 1999, we executed a long-term lease
agreement (initial lease term of ten years) and terminated the forward agreement at a net cost of
$2.8 million. We historically accounted for this cash flow hedge under the deferral method (as an
adjustment of the initial term lease rentals). Upon adoption of SFAS 133 in 2001, the remaining
deferred cost amount was reclassified from other assets to accumulated other comprehensive loss
and is being amortized to operations over the term of the lease arrangement. At December 31,
2008 and 2007, accumulated other comprehensive loss consisted of the remaining deferred cost
of $120,000 and $411,000, respectively. The amount amortized to operations was $291,000,
$290,000 and $289,000 for 2008, 2007 and 2006, respectively. The associated income tax
benefits were minimal in 2008 and there were no income tax benefits allocated to these expenses
in 2007 and 2006. We expect the remaining deferred cost to be amortized to operations in 2009.

16. Stockholders’ Equity

Approval of Stock Incentive Plan in 2008 - During the second quarter of 2008, our board of
directors adopted our 2008 Incentive Stock Plan (the “2008 Plan”), which plan was approved by
our shareholders at our annual meeting of shareholders held on June 5, 2008. The number of

F-48

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

shares of our common stock available for issuance under the 2008 Plan is 1,000,000 shares,
subject to adjustment. Under the 2008 Plan, awards may be made to any employee, officer or
director of the Company and its affiliated companies. An award may also be granted to any
consultant, agent, advisor or independent contractor for bona fide services rendered to the
Company or any affiliate (as defined in the 2008 Plan), subject to certain conditions. The 2008
Plan will be administered by the compensation and stock option committee (the “Committee”) of
our board of directors.

Our board of directors or the Committee may amend the 2008 Plan, except that if any applicable
statute, rule or regulation requires shareholder approval with respect to any amendment of the
2008 Plan, then to the extent so required, shareholder approval will be obtained. Shareholder
approval will also be obtained for any amendment that would increase the number of shares
stated as available for issuance under the 2008 Plan. Unless sooner terminated by our board of
directors, the 2008 Plan expires on June 5, 2018.

The following may be granted by the Committee under the 2008 Plan:

Stock Options - The Committee may grant either incentive stock options or non-qualified stock
options. The Committee sets option exercise prices and terms, except that the exercise price of a
stock option may be no less than 100% of the fair market value, as defined in the 2008 Plan, of
the shares on the date of grant. At the time of grant, the Committee will have sole discretion in
determining when stock options are exercisable and when they expire, except that the term of a
stock option cannot exceed 10 years.

Stock Appreciation Rights (“SARs”) - The Committee may grant SARs as a right in tandem
with the number of shares underlying stock options granted under the 2008 Plan or on a stand-
alone basis. SARs are the right to receive payment per share of the SAR exercised in stock or in
cash equal to the excess of the share’s fair market value, as defined in the 2008 Plan, on the date
of exercise over its fair market value on the date the SAR was granted. Exercise of an SAR
issued in tandem with stock options will result in the reduction of the number of shares
underlying the related stock option to the extent of the SAR exercise.

Stock Awards, Restricted Stock, Restricted Stock Units, and Other Awards - The Committee
may grant awards of restricted stock, restricted stock units, and other stock and cash-based
awards, which may include the payment of stock in lieu of cash (including cash payable under
other incentive or bonus programs) or the payment of cash (which may or may not be based on
the price of our common stock).

Stock-Based Compensation – During 2008, the Committee approved the grants under the 2008
Plan of 372,000 shares of qualified stock options (the “2008 Qualified Options”) to certain
employees and our board of directors (with each recipient abstaining as to himself) approved the
grants of 45,000 shares of non-qualified stock options (“2008 Non-Qualified Options”) to our
outside directors. The exercise price of the 2008 Qualified and Non-Qualified Options was equal
to the market value of our common stock at the date of grant. The 2008 Qualified and Non-

F-49

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

Qualified Options vest at the end of each one-year period at the rate of 16.5% per year for the
first five years and the remaining unvested options will vest at the end of the sixth year. Pursuant
to the terms of the 2008 Non-Qualified Options, if a termination event occurs, as defined, the
non-vested 2008 Non-Qualified Options will become fully vested and exercisable for a period of
one year from the date of the termination event. Excluding the non-qualified stock options
relating to a termination event, the 2008 Qualified and Non-Qualified Options expire in 2018.
Under SFAS 123(R), the fair value for the 2008 Qualified and Non-Qualified Options was
estimated, using an option pricing model, as of the date of the grant, which date was also the
service inception date.

On June 19, 2006, the Committee granted 450,000 shares of non-qualified stock options (the
“2006 Options”) to certain Climate Control Business employees, which were subject to
shareholders’ approval. The exercise price of the 2006 Options is $8.01 per share, which is based
on the market value of our common stock at the date the board of directors granted the shares
(June 19, 2006). The 2006 Options vest over a ten-year period at a rate of 10% per year and
expire on September 16, 2016 with certain restrictions. Under SFAS 123(R), the fair value for
the 2006 Options was estimated, using an option pricing model, as of the date we received
shareholders’ approval which occurred during our 2007 annual shareholders’ meeting on June
14, 2007. Under SFAS 123(R) for accounting purposes, the grant date and service inception date
is June 14, 2007.

The fair values for the 2008 Qualified and Non-Qualified Options and the 2006 Options were
estimated using a Black-Scholes-Merton option pricing model with the following assumptions:

•

risk-free interest rate based on an U.S. Treasury zero-coupon issue with a term
approximating the estimated expected life as of the grant date;

• a dividend yield based on historical data;
• volatility factors of the expected market price of our common stock based on historical
volatility of our common stock since it has been traded on the American Stock Exchange
(and subsequently, the New York Stock Exchange), and;

• a weighted-average expected life of the options based on the historical exercise behavior

of these employees and outside directors, if applicable.

F-50

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

The following table summarizes information about these granted stock options:

Weighted-average risk-free interest rate
Dividend yield
Weighted-average expected volatility
Weighted-average expected forfeiture rate
Weighted-average expected life (years)
Total weighted-average remaining vesting

period (years)

Total fair value of options granted
Total stock-based compensation expense (1)
Income tax benefit

2008

2007

2006

2.91%
-
35.4%
1.86%
5.98

5.16 %
-
24.7 %
0 %

5.76

N/A
N/A
N/A
N/A
N/A

6.64
$ 1,503,000
$ 811,000
$ (316,000)

8.46
$ 6,924,000
$ 421,000
$ (164,000 )

N/A
N/A
N/A
N/A

(1) For 2008, $803,000 is included in SG&A and $8,000 is included in cost of sales. For 2007,
the total amount is included in SG&A.

For the 2008 Qualified and Non-Qualified Options and the 2006 Options, we will be amortizing
the respective total estimated fair value (adjusted for forfeitures) through 2014 and 2016,
respectively. At December 31, 2008, the total stock-based compensation expense not yet
recognized is $7,166,000 relating to the non-vested stock options.

Qualified Stock Option Plans - At December 31, 2008, we have options outstanding under a
1993 Stock Option and Incentive Plan (“1993 Plan”), a 1998 Stock Option Plan (“1998 Plan”)
and the 2008 Plan as discussed above. The 1993 and 1998 Plans have expired, and accordingly,
no additional options may be granted from these plans. Options granted prior to the expiration of
these plans continue to remain valid thereafter in accordance with their terms. As discussed
above, under the 2008 Plan, we are authorized to grant awards (including options) to purchase up
to 1,000,000 shares of our common stock. At December 31, 2008, there are 583,000 awards
available to be granted under the 2008 Plan. At December 31, 2008, there were 13,500 options
outstanding related to the 1993 Plan and 274,600 options outstanding relating to the 1998 Plan,
all of which were exercisable, and 372,000 options outstanding relating to the 2008 Plan, none of
which were exercisable. The exercise price of the outstanding options granted under these plans
was equal to the market value of our common stock at the date of grant.

F-51

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

The following information relates to our qualified stock option plans:

2008

Outstanding at beginning of year
Granted
Exercised
Cancelled, forfeited or expired
Outstanding at end of year

Weighted-Average
Exercise Price

Shares
456,404 $
372,000 $
(158,304) $
(10,000) $
660,100 $

1.73
9.36
1.51
1.25
6.09

Exercisable at end of year

288,100 $

1.87

2008

2007

Weighted-average fair value of options granted during year $

3.58

N/A

2006

N/A

Total intrinsic value of options exercised during the year

Total fair value of options vested during the year

3,140,000 $ 1,108,000

1,886,000

The following table summarizes information about qualified stock options outstanding and
exercisable at December 31, 2008:

Exercise Prices

$ 1.25
$ 2.73
$ 5.10
$ 7.86 - $ 8.17
$ 9.69 - $ 9.97
$ 1.25 - $ 9.97

Shares
Outstanding

202,000
65,000
21,100
69,000
303,000
660,100

Stock Options Outstanding

Weighted-
Average
Remaining
Contractual
Life in Years

0.58
2.92
6.92
9.92
9.83
6.24

Weighted-
Average
Exercise
Price

$
$
$
$
$
$

1.25
2.73
5.10
7.87
9.69
6.09

Intrinsic
Value of
Shares
Outstanding

$ 1,428,000
363,000
68,000
31,000
(416,000)
$ 1,474,000

F-52

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

Exercise Prices

$ 1.25
$ 2.73
$ 5.10
$ 1.25 - $ 5.10

Shares
Exercisable

202,000
65,000
21,100
288,100

Stock Options Exercisable

Weighted-
Average
Remaining
Contractual
Life in Years

0.58
2.92
6.92
1.57

Weighted-
Average
Exercise
Price

$
$
$
$

1.25
2.73
5.10
1.87

Intrinsic
Value of
Shares
Exercisable

$ 1,428,000
363,000
68,000
$ 1,859,000

Non-Qualified Stock Option Plans - Our board of directors approved the grants of non-
qualified stock options to our outside directors, our Chief Executive Officer, Chief Financial
Officer and certain key employees, included in the tables below. The exercise prices are
generally based on the market value of our common stock at the dates of grants.

In addition to the 2008 Plan as discussed above, we have an Outside Directors Stock Option Plan
(the “Outside Director Plan”). The Outside Director Plan authorizes the grant of non-qualified
stock options to each member of our board of directors who is not an officer or employee of the
Company or its subsidiaries. The maximum number of options that may be issued under the
Outside Director Plan is 400,000 of which 280,000 are available to be granted at December 31,
2008. At December 31, 2008, there are 45,000 and 15,000 options outstanding related to the
2008 Plan and Outside Director Plan, respectively.

The following information relates to our non-qualified stock option plans:

Outstanding at beginning of year
Granted
Exercised
Surrendered, forfeited, or expired
Outstanding at end of year

2008

Weighted-Average
Exercise Price

Shares
917,500 $ 4.64
45,000 $ 7.86
(332,000) $ 1.83
(3,000) $ 4.19
627,500 $ 6.36

Exercisable at end of year

222,500

$ 3.37

2008

2007

2006

Weighted-average fair value of options granted during year $

3.80

15.39

N/A

Total intrinsic value of options exercised during the year

Total fair value of options vested during the year

4,357,000

$ 10,042,000

147,000

692,000

F-53

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

16. Stockholders’ Equity (continued)

The following tables summarize information about non-qualified stock options outstanding and
exercisable at December 31, 2008:

Exercise Prices

$ 1.25
$ 2.73
$ 7.86 - $ 8.01
$ 1.25 - $ 8.01

Shares
Outstanding

135,000
22,500
470,000
627,500

Exercise Prices

$ 1.25
$ 2.73
$ 8.01
$ 1.25 - $ 8.01

Shares
Exercisable

135,000
22,500
65,000
222,500

Stock Options Outstanding

Weighted-
Average
Remaining
Contractual
Life in Years

0.58
2.92
7.96
6.19

Weighted-
Average
Exercise
Price

$
$
$
$

1.25
2.73
8.00
6.36

Intrinsic
Value of
Shares
Outstanding

954,000
126,000
152,000
$ 1,232,000

Stock Options Exercisable

Weighted-
Average
Remaining
Contractual
Life in Years

0.58
2.92
7.75
2.91

Weighted-
Average
Exercise
Price

$
$
$
$

1.25
2.73
8.01
3.37

Intrinsic
Value of
Shares
Exercisable

954,000
126,000
20,000
$ 1,100,000

Preferred Share Rights Plan – On December 2, 2008, we entered into a renewed rights
agreement with UMB Bank, n.a., as rights agent, providing for a new preferred share rights plan,
which renews and amends our existing preferred share rights plan, that expired as of January 5,
2009. See Note 23-Subsequent Event for a discussion concerning the new preferred share rights
plan.

Other – In November 2007, the Jayhawk Group exercised a warrant to purchase 112,500 shares
of our common stock for $3.49 per share.

During 2008, we purchased 400,000 shares of treasury stock for the average price of $12.05 per
share.

As of December 31, 2008, we have reserved 3.7 million shares of common stock issuable upon
potential conversion of convertible debt, preferred stocks and stock options pursuant to their
respective terms.

F-54

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

17. Non-Redeemable Preferred Stock

Series B Preferred -The 20,000 shares of Series B Preferred, $100 par value, are convertible, in
whole or in part, into 666,666 shares of our common stock (33.3333 shares of common stock for
each share of preferred stock) at any time at the option of the holder and entitle the holder to one
vote per share. The Series B Preferred provides for annual cumulative dividends of 12% from
date of issue, payable when and as declared. All of the outstanding shares of the Series B
Preferred are owned by the Golsen Group.

Series 2 Preferred -The Series 2 Preferred had no par value and had a liquidation preference of
$50.00 per share plus dividends in arrears and was convertible at the option of the holder at any
time, unless previously redeemed, into our common stock at an initial conversion price of $11.55
per share (equivalent to a conversion rate of approximately 4.329 shares of common stock for
each share of Series 2 Preferred), subject to adjustment under certain conditions. Upon the
mailing of notice of certain corporate actions, holders had special conversion rights as discussed
below. The Series 2 Preferred was redeemable at our option, in whole or in part, at $50.00 per
share, plus dividends in arrears to the redemption date. Dividends on the Series 2 Preferred were
cumulative and payable quarterly in arrears. As the result of the transactions discussed below, no
shares of Series 2 Preferred were issued and outstanding at December 31, 2008 and 2007.

Exchange Agreements in 2006

During October 2006, we entered into Exchange Agreements with certain holders of our Series 2
Preferred. Pursuant to the terms of the Exchange Agreements, we issued 773,655 shares of our
common stock in exchange for 104,548 shares of Series 2 Preferred and the waiver by the
holders of their rights to all unpaid dividends. As a result, we effectively settled the dividends in
arrears on the Series 2 Preferred exchanged totaling approximately $2.4 million ($23.2625 per
share). Because the exchanges were pursuant to terms other the original terms, the transactions
were considered extinguishments of the preferred stock. In addition, the transactions qualified as
induced conversions under SFAS 84. Accordingly, we recorded a charge (stock dividend) to
accumulated deficit of approximately $2.9 million which equaled the excess of the fair value of
the common stock issued over the fair value of the common stock issuable pursuant to the
original conversion terms. To measure fair value, we used the closing price of our common stock
on the day the parties entered into an Exchange Agreement.

Jayhawk Agreement in 2006

During November 2006, the Company entered into the Jayhawk Agreement with the Jayhawk
Group. Under the Jayhawk Agreement, the Jayhawk Group agreed to tender (discussed below)
180,450 shares of the 346,662 shares of the Series 2 Preferred, if the Company made an
exchange or tender offer for the Series 2 Preferred. In addition, as a condition to the Jayhawk
Group’s obligation to tender such shares of Series 2 Preferred in an exchange/tender offer, the
Jayhawk Agreement further provided that the Golsen Group would exchange only 26,467 of the
49,550 shares of Series 2 Preferred beneficially owned by them. As a result, only 309,807 of the
499,102 shares of Series 2 Preferred outstanding would be eligible to participate in an
exchange/tender offer, with the remaining 189,295 being held by the Jayhawk Group and the
Golsen Group.

F-55

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

17. Non-Redeemable Preferred Stock (continued)

Completion of Tender Offer in 2007

On January 26, 2007, our board of directors approved and on February 9, 2007, we began a
tender offer to exchange shares of our common stock for up to 309,807 of the 499,102
outstanding shares of the Series 2 Preferred. The tender offer expired on March 12, 2007 and our
board of directors accepted the shares tendered on March 13, 2007. The terms of the tender offer
provided for the issuance by the Company of 7.4 shares of common stock in exchange for each
share of Series 2 Preferred tendered in the tender offer and the waiver of all rights to the
dividends in arrears on the Series 2 Preferred tendered. As a result of this tender offer, we issued
2,262,965 shares of our common stock for 305,807 shares of Series 2 Preferred that were
tendered. As a result, we effectively settled the dividends in arrears on the Series 2 Preferred
tendered totaling approximately $7.3 million ($23.975 per share).

Because the exchanges under the tender offer were pursuant to terms other than the original
terms, the transactions were considered extinguishments of the preferred stock. Also the
transactions qualified as induced conversions under SFAS 84. Accordingly, we recorded a
charge (stock dividend) to accumulated deficit of approximately $12.3 million which equaled the
excess of the fair value of the common stock issued over the fair value of the common stock
issuable pursuant to the original conversion terms. To measure fair value, we used the closing
price of our common stock on March 13, 2007.

Included in the amounts discussed above and pursuant to the Jayhawk Agreement and the terms
of the tender offer, the Jayhawk Group and the Golsen Group tendered 180,450 and 26,467
shares, respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares, respectively, of our
common stock. As a result, we effectively settled the dividends in arrears on these shares of
Series 2 Preferred tendered totaling approximately $4.96 million with $4.33 million relating to
the Jayhawk Group and $0.63 million relating to the Golsen Group.

No fractional shares were issued so cash was paid in lieu of any additional shares in an amount
equal to the fraction of a share times the closing price per share of our common stock on the last
business day immediately preceding the expiration date of the tender offer.

Completion of Redemption in 2007

On July 11, 2007, our board of directors approved the redemption of all of our remaining
outstanding Series 2 Preferred. We mailed a notice of redemption to all holders of record of our
Series 2 Preferred on July 12, 2007. The redemption date was August 27, 2007, and each share
of Series 2 Preferred that was redeemed received a redemption price of $50.00 plus $26.25 per
share in dividends in arrears pro-rata to the date of redemption.

The holders of shares of Series 2 Preferred had the right to convert each share into 4.329 shares
of our common stock, which right to convert terminated 10 days prior to the redemption date. If
a holder converted its shares of Series 2 Preferred, the holder was not entitled to any dividends in

F-56

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

17. Non-Redeemable Preferred Stock (continued)

arrears as to the shares of Series 2 Preferred converted. As a result, 167,475 shares of Series 2
Preferred were converted (of which 155,012 shares were converted by the Jayhawk Group) into
724,993 shares of our common stock (of which 671,046 shares were issued to the Jayhawk
Group).

As a result of the conversions, only 25,820 shares of Series 2 Preferred were redeemed (of which
23,083 shares were held by the Golsen Group) for a total redemption price of $1,291,000 (of
which approximately $1,154,000 was paid to the Golsen Group). In addition, we paid
approximately $678,000 in dividends in arrears (of which approximately $606,000 was paid to
the Golsen Group). The shares of the Series 2 Preferred were redeemed using a portion of the
net proceeds of the 2007 Debentures.

Other Series 2 Preferred Transactions

During 2006, we purchased 1,600 shares of Series 2 Preferred in the open market for $95,000
(average cost of $59.74 per share). These shares were cancelled by the Company. During 2007,
we cancelled 18,300 shares of Series 2 Preferred previously held as treasury stock.

Series D Preferred -The Series D Preferred have no par value and are convertible, in whole or
in part, into 250,000 shares of our common stock (1 share of common stock for 4 shares of
preferred stock) at any time at the option of the holder. Dividends on the Series D Preferred are
cumulative and payable annually in arrears at the rate of 6% per annum of the liquidation
preference of $1.00 per share. Each holder of the Series D Preferred shall be entitled to .875
votes per share. All of the outstanding shares of Series D Preferred are owned by the Golsen
Group.

Cash Dividends Paid – During 2008, we paid the following cash dividends on our non-
redeemable preferred stock:

• $240,000 on the Series B Preferred ($12.00 per share); and
• $60,000 on the Series D Preferred ($0.06 per share).

In addition to the settlement of the dividends in arrears relating to the tender offer in 2007 and
the Exchange Agreements in 2006 as discussed above, during 2007, we paid the following cash
dividends on our non-redeemable preferred stock:

• $1,890,000 on the Series B Preferred ($94.52 per share);
• $678,000 on the Series 2 Preferred ($26.25 per share); and
• $360,000 on the Series D Preferred ($0.36 per share).

F-57

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

17. Non-Redeemable Preferred Stock (continued)

During 2006, we paid the following cash dividends on our non-redeemable preferred stock:

• $30,000 on the Series B Preferred ($1.48 per share); and
• $231,000 on the Series 2 Preferred ($0.40 per share).

At December 31, 2008, there were no dividends in arrears.

Other - At December 31, 2008, we are authorized to issue an additional 229,454 shares of $100
par value preferred stock and an additional 4,000,000 shares of no par value preferred stock.
Upon issuance, our board of directors will determine the specific terms and conditions of such
preferred stock.

18. Executive Benefit Agreements and Employee Savings Plans

In 1981, we entered into individual death benefit agreements with certain key executives (“1981
Agreements”). Under the 1981 Agreements, should the executive die while employed, we are
required to pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. At December 31, 2008, the monthly
installments specified in the 1981 Agreements total $34,000 and the aggregate undiscounted
death benefits are $4,100,000. The benefits under the 1981 Agreements are forfeited if the
respective executive’s employment is terminated for any reason prior to death. The 1981
Agreements may be terminated by the Company at any time and for any reason prior to the death
of the employee.

In 1992, we entered into individual benefit agreements with certain key executives (“1992
Agreements”) that provide for annual benefit payments for life (in addition to salary) ranging
from $16,000 to $18,000 payable in monthly installments when the employee reaches age 65. As
of December 31, 2008 and 2007, the liability for benefits under the 1992 Agreements is
$1,111,000 and $1,040,000, respectively, which is included in current and noncurrent accrued
and other liabilities in the accompanying consolidated balance sheets. The liability reflects the
present value of the remaining estimated payments at discount rates of 4.97% and 5.70% as of
December 31, 2008 and 2007, respectively. Future estimated undiscounted payments aggregate
to $2.1 million as of December 31, 2008. For 2008, 2007and 2006 charges to SG&A for these
benefits were $166,000, $106,000 and $75,000, respectively. As part of the 1992 Agreements,
should the executive die prior to attaining the age of 65, we will pay the beneficiary named in the
agreement in 120 equal monthly installments aggregating to an amount specified in the
agreement. This amount is in addition to any amount payable under the 1981 Agreement should
that executive have both a 1981 and 1992 agreement. At December 31, 2008, the aggregate
undiscounted death benefit payments specified in the 1992 Agreements are $302,000. The
benefits under the 1992 Agreements are forfeited if the respective executive’s employment is
terminated prior to age 65 for any reason other than death. The 1992 Agreements may be
terminated by the Company at any time and for any reason prior to the death of the employee.

F-58

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

18. Executive Benefit Agreements and Employee Savings Plans (continued)

In 2005, we entered into a death benefit agreement (“2005 Agreement”) with our CEO. The
Death Benefit Agreement provides that, upon our CEO’s death, we will pay to our CEO’s
designated beneficiary, a lump-sum payment of $2,500,000 to be funded from the net proceeds
received by us under certain life insurance policies on our CEO’s life that are owned by us. We
are obligated to keep in existence life insurance policies with a total face amount of no less than
$2,500,000 of the stated death benefit. As of December 31, 2008, the life insurance policies
owned by us on the life of our CEO have a total face amount of $7,000,000. The benefit under
the 2005 Agreement is not contingent upon continued employment and may be amended at any
time by written agreement executed by the CEO and the Company.

As of December 31, 2008, the liability for death benefits under the 1981, 1992 and 2005
Agreements is $2,687,000 ($2,051,000 at December 31, 2007), which is included in current and
noncurrent accrued and other liabilities. We accrue for such liabilities when they become
probable and discount the liabilities to their present value.

To assist us in funding the benefit agreements discussed above and for other business reasons,
we purchased life insurance contracts on various individuals in which we are the beneficiary. As
of December 31, 2008, the total face amount of these policies is $20,700,000 of which
$2,500,000 of the proceeds is required to be paid under the 2005 Agreement as discussed above.
Some of these life insurance policies have cash surrender values that we have borrowed against.
The cash surrender values are included in other assets in the amounts of $1,504,000 and
$1,151,000, net of borrowings of $1,967,000 and $1,859,000 at December 31, 2008 and 2007,
respectively. Increases in cash surrender values of $461,000, $548,000 and $432,000 are netted
against the premiums paid for life insurance policies of $832,000, $836,000 and $837,000 in
2008, 2007 and 2006 respectively, and are included in SG&A.

We sponsor a savings plan under Section 401(k) of the Internal Revenue Code under which
participation is available to substantially all full-time employees. We do not presently contribute
to this plan except for EDC and Cherokee Nitrogen Company’s (“CNC”) union employees and
EDNC employees, which amounts were not material for each of the three years ended December
31, 2008.

19. Property and Business Interruption Insurance Recoveries

El Dorado Facility - Beginning in October 2004 and continuing into June 2005, the Chemical
Business’ results were adversely affected as a result of the loss of production due to a mechanical
failure which led to a fire at one of the four nitric acid plants at the El Dorado Facility. The plant
was restored to normal production in June 2005. We filed insurance claims for recovery of
business interruption and property losses related to this incident. For 2006, we realized insurance
recoveries of $882,000 relating to the business interruption claim, which was recorded as a
reduction to cost of sales.

F-59

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

19. Property and Business Interruption Insurance Recoveries (continued)

Cherokee Facility - As a result of damage caused by Hurricane Katrina in August 2005, the
natural gas pipeline servicing the chemical production facility located in Cherokee, Alabama (the
“Cherokee Facility”) suffered damage and the owner of the pipeline declared an event of Force
Majeure. This event of Force Majeure caused curtailments and interruption in the delivery of
natural gas to the Cherokee Facility through the first quarter of 2006. CNC’s insurer was
promptly put on notice of a claim and during 2006, CNC filed a business interruption claim
relating to this incident. In 2007, we realized insurance recoveries of $3,750,000 relating to this
business interruption claim, which were recorded as a reduction to cost of sales.

20. Other Expense, Other Income and Non-Operating Other Income, net

2008

Year ended December 31,
2007
(In Thousands)

2006

Other expense:

Settlements and potential settlements of litigation
and potential litigation (1)
Impairments of long-lived assets (2)
Losses on sales and disposals of property and

equipment

Income tax related penalties
Other miscellaneous expense (3)

Total other expense

Other income:

Litigation judgment and settlements (4)
Arbitration award
Other miscellaneous income (3)

Total other income

Non-operating other income, net:

Interest income
Miscellaneous income (3)
Miscellaneous expense (3)

Total non-operating other income, net

158
152
90
1,184

8,235
-
241
8,476

592
192

350
250

378
34
174
$ 1,186

300
286

-
5
131
722

3,272
-
223
3,495

-
1,217
342
$ 1,559

$ 1,270
-
(174)
$ 1,096

$ 1,291
73
(100 )
$ 1,264

523
199
(98)
624

(1) For 2008, $325,000 relates to potential settlements recognized associated with various
asserted claims, of which $225,000 relates to the Climate Control Business. In addition,
$267,000 relates to various settlements reached, of which $67,000 relates to the Chemical
Business. During 2007, a settlement was reached relating to alleged damages claimed by a
customer of our Climate Control Business. During 2006, a settlement was reached relating to
an asserted financing fee.

F-60

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

20. Other Expense, Other Income and Non-Operating Other Income, net (continued)

(2) Based on estimates of the fair values obtained from external sources and estimates made
internally based on inquiry and other techniques, we recognized the following impairments:

2008

Year ended December 31,
2007
(In Thousands)

2006

Corporate assets
Chemical Business assets

192 $
-
192 $

- $

250
250 $

-
286
286

(3) Amounts represent numerous unrelated transactions, none of which are individually

significant requiring separate disclosure.

(4) For 2008, income from litigation judgment and settlements includes approximately $7.6
million, net of attorneys’ fees, relating to a litigation judgment involving a subsidiary within
our Chemical Business. On June 6, 2008, we received proceeds of approximately $11.2
million for this litigation judgment, which includes interest of approximately $1.4 million
and from which we paid attorneys’ fees of approximately $3.6 million. The payment of
attorneys’ fees of 31.67% of our recovery was contingent upon the cash receipt of the
litigation judgment. Cash flows relating to this litigation judgment are included in cash flows
from continuing operating activities, except for the portion of the judgment associated with
the recovery of damages relating to property, plant and equipment and its pro-rata portion of
the attorneys’ fees. These cash flows are included in cash flows from continuing investing
activities. In addition, a settlement was reached for $0.4 million for the recovery of certain
environmental-related costs incurred in previous periods relating to property used by
Corporate and other business operations. During 2007, our Chemical Business reached a
settlement with Dynegy, Inc. and one of its subsidiaries, relating to a previously reported
lawsuit. This settlement reflects the net proceeds of approximately $2.7 million received by
the Cherokee Facility and the retention by the Cherokee Facility of a disputed accounts
payable amount of approximately $0.6 million.

21. Segment Information

Factors Used by Management to Identify the Enterprise’s Reportable Segments and
Measurement of Segment Income or Loss and Segment Assets

We have two reportable segments: the Climate Control Business and the Chemical Business. Our
reportable segments are based on business units that offer similar products and services. The
reportable segments are each managed separately because they manufacture and distribute
distinct products with different production processes.

We evaluate performance and allocate resources based on operating income or loss. The
accounting policies of the reportable segments are the same as those described in the summary of
significant accounting policies.

F-61

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

21. Segment Information (continued)

Description of Each Reportable Segment

Climate Control – The Climate Control Business segment manufactures and sells the

following variety of heating, ventilation, and air conditioning (“HVAC”) products:

• geothermal and water source heat pumps,
• hydronic fan coils, and
• other HVAC products including large custom air handlers, modular chiller systems

and other products and services.

These HVAC products are primarily for use in commercial and residential new building
construction, renovation of existing buildings and replacement of existing systems. Our various
facilities located in Oklahoma City comprise substantially all of the Climate Control segment’s
operations. Sales to customers of this segment primarily include original equipment
manufacturers, contractors and independent sales representatives located throughout the world.

Chemical –The Chemical Business segment manufactures and sells:

• concentrated, blended and regular nitric acid, mixed nitrating acids, metallurgical and
commercial grade anhydrous ammonia, sulfuric acid, and high purity ammonium
nitrate for industrial applications,

• anhydrous ammonia, ammonium nitrate, urea ammonium nitrate, and ammonium

nitrate ammonia solution for agricultural applications, and
industrial grade ammonium nitrate and solutions for the mining industry.

•

Our primary manufacturing facilities are located in El Dorado, Arkansas, Cherokee, Alabama
and Baytown, Texas. Sales to customers of this segment primarily include industrial users of
acids throughout the United States and parts of Canada; farmers, ranchers, fertilizer dealers and
distributors located in the Central and Southeastern United States; and explosive manufacturers
in the United States.

As of December 31, 2008, our Chemical Business employed 397 persons, with 129 represented
by unions under agreements, which will expire in July through November of 2010.

Other - The business operation classified as “Other” primarily sells industrial machinery and

related components to machine tool dealers and end users located primarily in North America.

F-62

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

21. Segment Information (continued)

Segment Financial Information

Information about our continuing operations in different industry segments for each of the three
years in the period ended December 31, is detailed below:

2008

2007
(In Thousands)

2006

Net sales:

Climate Control:

Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products

Total Climate Control

$ 190,960
83,472
36,948
311,380

$ 165,115
85,815
35,435
286,365

$ 134,210
59,497
27,454
221,161

Chemical:

Industrial acids and other chemical products
Agricultural products
Mining products

Total Chemical
Other

Gross profit:

Climate Control
Chemical
Other

Operating income (loss):
Climate Control
Chemical
General corporate expenses and other business

operations, net (1)

Interest expense
Gain on extinguishment of debt
Non-operating income, net:

Climate Control
Chemical
Corporate and other business operations

Provisions for income taxes
Equity in earnings of affiliate - Climate Control
Income from continuing operations

F-63

162,941
152,802
108,374
424,117
13,470
$ 748,967

96,633
37,991
4,256
$ 138,880

95,754
117,158
75,928
288,840
11,202
$ 586,407

$ 83,638
44,946
4,009
$ 132,593

95,208
89,735
75,708
260,651
10,140
$ 491,952

$ 65,496
22,023
3,343
$ 90,862

38,944
31,340

$ 34,194
35,011

$ 25,428
9,785

(11,129
)
59,155
(11,381)
5,529

1
27
1,068
(18,776)
937
36,560

(10,194
)
59,011
(12,078)

2
109
1,153
(2,540)
877
$ 46,534

(8,074
)
27,139
(11,915)
-

1
311
312
(901)
821
$ 15,768

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

21. Segment Information (continued)

(1) General corporate expenses and other business operations, net consist of the following:

Gross profit-Other
Selling, general and administrative:

Personnel costs
Professional fees
Office overhead
Property, franchise and other taxes
Advertising
Shareholders relations
All other

Total selling, general and administrative
Other income
Other expense
Total general corporate expenses and other business

2008

2007
(In Thousands)

2006

4,256

4,009

3,343

(7,937)
(4,759)
(650)
(313)
(269)
(74)
(1,498)
(15,500)
766
(651)

(6,879 )
(4,299 )
(646 )
(314 )
(244 )
(154 )
(1,626 )
(14,162 )

53
(94 )

(5,862)
(3,004)
(598)
(198)
(188)
(58)
(1,221)
(11,129)
28
(316)

operations, net

$ (11,129

)

)
(10,194

(8,074

)

Information about our property, plant and equipment and total assets by industry segment is
detailed below:

2008

2007
(In Thousands)

2006

Depreciation of property, plant and equipment:

Climate Control
Chemical
Corporate assets and other

Total depreciation of property, plant and equipment $

Additions to property, plant and equipment:

3,433
10,232
165
13,830

Climate Control
Chemical
Corporate assets and other

Total additions to property, plant and equipment

12,111
25,130
457
37,698

3,195
8,929
147
12,271

6,778
9,151
294
16,223

2,591
8,633
157
$ 11,381

7,600
6,482
37
$ 14,119

Total assets at December 31:

Climate Control
Chemical
Corporate assets and other (A)

Total assets

$ 117,260
145,518
72,989
$ 335,767

$ 102,737
121,864
82,953
$ 307,554

$ 97,166
109,122
13,639
$ 219,927

(A) At December 31, 2008, 2007 and 2006, the amount includes cash and cash equivalents of
$45.9 million, $55.9 million and $1.6 million, respectively. Also at December 31, 2008, and 2007,
the amount includes deferred income taxes of $11.4 million and $10.0 million, respectively (none
at December 31, 2006).

F-64

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

21. Segment Information (continued)

Net sales by industry segment include net sales to unaffiliated customers as reported in the
consolidated financial statements. Net sales classified as “Other” consist of sales of industrial
machinery and related components. Intersegment net sales are not significant.

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.

Our chief operating decision makers use operating income (loss) by industry segment for
purposes of making decisions that include resource allocations and performance evaluations.
Operating income (loss) by industry segment represents gross profit by industry segment less
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.

Identifiable assets by industry segment are those assets used in the operations of each industry.
Corporate assets and other are those principally owned by the parent company or by subsidiaries
not involved in the two identified industries.

All net sales and long-lived assets relate to domestic operations for the periods presented.

Net sales to unaffiliated customers include foreign export sales as follows:

Geographic Area

2008

Canada
Middle East
Mexico, Central and South America
Europe
South and East Asia
Caribbean
Other

$ 24,749
4,994
2,954
2,119
1,645
491
148
$ 37,100

2007
(In Thousands)
$ 14,206
9,523
2,053
3,069
2,218
1,119
129
$ 32,317

2006

$ 14,869
688
3,240
1,732
1,271
968
390
$ 23,158

Major Customers

Net sales to one customer, Bayer, of our Chemical Business segment represented approximately
11%, 7% and 7% of our total net sales for 2008, 2007 and 2006, respectively. See discussion
under “Baytown Facility” and “Bayer Agreement” in Note 14 – Commitments and
Contingencies.

F-65

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

21. Segment Information (continued)

Net sales to one customer, Orica USA, Inc., (“Orica”) of our Chemical Business segment
represented approximately 11%, 9% and 10% of our total net sales for 2008, 2007 and 2006,
respectively. Under the terms of the Supply Agreement, EDC will supply from the El Dorado
Facility industrial grade ammonium nitrate to Orica through June 2011.

Unplanned Maintenance Downtime at the Cherokee Facility

22. Related Party Transactions

Golsen Group

In connection with the completion of our March 2007 tender offer for our outstanding shares of
our Series 2 Preferred, members of the Golsen Group tendered 26,467 shares of Series 2
Preferred in exchange for our issuance to them of 195,855 shares of our common stock. As a
result, we effectively settled approximately $0.63 million in dividends in arrears on the shares of
Series 2 Preferred tendered. The tender by the Golsen Group was a condition of the Jayhawk
Group’s agreement to tender shares of Series 2 Preferred in the tender offer as discussed in Note
17.

After the completion of our March 2007 tender offer relating to the Series 2 Preferred, the
Golsen Group held 23,083 shares of Series 2 Preferred. Pursuant to our redemption of the
remaining outstanding Series 2 Preferred during August 2007, the Golsen Group redeemed
23,083 shares of Series 2 Preferred and received the cash redemption amount of approximately
$1.76 million pursuant to the terms of our redemption of all of our outstanding Series 2
Preferred. The redemption price was $50.00 per share of Series 2 Preferred, plus $26.25 per
share in dividends in arrears pro-rata to the date of redemption.

During the fourth quarter of 2008, the Golsen Group acquired from an unrelated third party $5.0
million of the 2007 Debentures. At December 31, 2008, accrued interest of approximately $0.1
million relates to the portion of debentures held by the Golsen Group.

Cash Dividends

During 2006, we paid nominal cash dividends to holders of certain series of our preferred stock.
These dividend payments included $91,000 and $133,000 to the Golsen Group and the Jayhawk
Group, respectively.

F-66

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

22. Related Party Transactions (continued)

As discussed above, during 2007, we paid cash dividends to the Golsen Group of approximately
$606,000 related to 23,083 shares of Series 2 Preferred redeemed.

In September 2007, we paid the dividends in arrears on our outstanding preferred stock utilizing
a portion of the net proceeds of the sale of the 2007 Debentures and working capital, including
approximately $2,250,000 of dividends in arrears on our Series B Preferred and our Series D
Preferred, all of the outstanding shares of which are owned by the Golsen Group.

Quail Creek Bank

Bernard Ille, a member of our board of directors, is a director of Quail Creek Bank, N.A. (the
“Bank”). The Bank was a lender to one of our subsidiaries. During 2007 and 2006, the subsidiary
made interest and principal payments on outstanding debt owed to the Bank in the respective
amount of $.1 million and $3.3 million in 2007 and $.3 million and $1.6 million in 2006 (none in
2008). The debt accrued interest at an annual interest rate of 8.25%. The loan was secured by
certain of the subsidiary’s property, plant and equipment. This loan was paid in full in June 2007
utilizing a portion of the net proceeds of our sale of the 2007 Debentures.

23. Subsequent Events (Unaudited)

Preferred Share Rights Plan – On January 5, 2009, a renewed shareholder rights plan became
effective upon the expiration of our previous shareholder rights plan. The rights plan will impact
a potential acquirer unless the acquirer negotiates with our board of directors and the board of
directors approves the transaction. Pursuant to the renewed plan, one preferred share purchase
right (a “Right”) is attached to each currently outstanding or subsequently issued share of our
common stock. Prior to becoming exercisable, the Rights trade together with our common stock.
In general, the Rights will become exercisable if a person or group (other than the acquirer)
acquires or announces a tender or exchange offer for 15% or more of our common stock. Each
Right entitles the holder to purchase from us one one-hundredth of a share of Series 4 Junior
Participating Preferred Stock, no par value (the “Preferred Stock”), at an exercise price of $47.75
per one one-hundredth of a share, subject to adjustment. If a person or group acquires 15% or
more of our common stock, each Right will entitle the holder (other than the acquirer) to
purchase shares of our common stock (or, in certain circumstances, cash or other securities)
having a market value of twice the exercise price of a Right at such time. Under certain
circumstances, each Right will entitle the holder (other than the acquirer) to purchase the
common stock of the acquirer having a market value of twice the exercise price of a Right at
such time. In addition, under certain circumstances, our board of directors may exchange each
Right (other than those held by the acquirer) for one share of our common stock, subject to
adjustment. If the Rights become exercisable, holders of our common stock (other than the

F-67

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

23. Subsequent Events (Unaudited) (continued)

acquirer), will receive the number of Rights they would have received if their units had been
redeemed and the purchase price paid in our common stock. Our board of directors may redeem
the Rights at a price of $0.01 per Right generally at any time before 10 days after the Rights
become exercisable.

Pryor Facility - We have been considering activating a portion of an idle chemical facility (the
“Pryor Facility”) located in Pryor, Oklahoma and owned by one of our non-ThermaClime
subsidiaries. The activation of the Pryor Facility is subject to securing a sales agreement with a
strategic customer to purchase and distribute the majority of the urea ammonium nitrate
(“UAN”) production. We are currently in discussions with several large strategic industry
customers regarding an agreement to sell or distribute the UAN production at the Pryor Facility.

In February 2009, we received our permits to operate the Pryor Facility. Therefore, we are
proceeding with the preparations to start the facility. Barring unforeseen delays and subject to
securing a sales or distribution agreement as discussed above, we expect to start production at the
Pryor Facility during the third quarter of 2009. If the Pryor Facility becomes operational, we plan
to produce and sell UAN and anhydrous ammonia. Our initial cost estimate to activate the Pryor
Facility was $15 to $20 million, with approximately 50% being for capital expenditures and the
remainder for expenses. The estimated start up costs include those cost to bring the plant up to
full UAN production status. Our estimate of the total remaining cost to activate the Pryor Facility
is approximately $13 million to $17 million. Approximately $6 million to $8 million will be
capitalized and the remaining portion will be expensed as incurred. We plan to fund this project
from our available cash on hand and working capital. However, the actual timeframe to begin
production and the total remaining cost to activate the facility could be significantly different
from our current estimates.

F-68

LSB Industries, Inc.

Supplementary Financial Data

Quarterly Financial Data (Unaudited)

(In Thousands, Except Per Share Amounts)

March 31

June 30

September 30 December 31

Three months ended

2008

Net sales
Gross profit (1)
Income from continuing operations (1) (2)
Net income (loss) from discontinued operations
Net income
Net income applicable to common stock

$ 160,455
$ 37,757
$ 10,907
-
$ 10,907
$ 10,601

$ 198,052
$ 43,741
$ 17,924

(17)

$ 17,907
$ 17,907

$ 210,920
$ 31,169
4,157
$
4
4,161
4,161

$
$

$ 179,540
$ 26,213
3,572
$
-
3,572
3,572

$
$

Income per common share:
Basic:

Income from continuing operations
Income (loss) from discontinued operations, net
Net income

Diluted:

Income from continuing operations
Income (loss) from discontinued operations, net
Net income

2007

.50
-
.50

.46
-
.46

.85
-
.85

.75
-
.75

.20
-
.20

.18
-
.18

.17
-
.17

.16
-
.16

Net sales
Gross profit (1)
Income from continuing operations (1) (2)
Net income (loss) from discontinued operations
Net income
Net income applicable to common stock

$ 147,385
$ 32,052
$ 10,847

(29)

$ 10,818
5,631
$

$ 156,756
$ 34,657
$ 13,221
-
$ 13,221
$ 13,003

$ 147,613
$ 35,172
$ 17,919
377
$ 18,296
$ 18,093

$ 134,653
$ 30,712
4,547
$
-
4,547
4,547

$
$

Income per common share:
Basic:

Income from continuing operations
Income (loss) from discontinued operations, net
Net income

Diluted:

Income from continuing operations
Income (loss) from discontinued operations, net
Net income

.32
-
.32

.28
-
.28

.66
-
.66

.58
-
.58

.87
.02
.89

.75
.02
.77

.22
-
.22

.20
-
.20

F-69

LSB Industries, Inc.

Supplementary Financial Data

Quarterly Financial Data (Unaudited) (continued)

(1) The following items increased (decreased) gross profit and income from continuing operations:

Changes in unrealized gains (losses) relating to
commodities contracts still held at period end:

2008
2007

Unplanned maintenance downtime – Cherokee

Facility:

2008
2007

Turnaround costs:
2008
2007

Precious metals, net of recoveries and gains:

2008
2007

Changes in inventory reserves:
2008
2007

Business interruption insurance recoveries:

2007

March 31

June 30

September 30 December 31

Three months ended

(In Thousands)

$
$

53
302

-
-

(247)
(163)

(2,460)

(898)

(169)
317

$
$

808
(386)

-
-

(366)
(182)

(1,102)

(494)

(15)
28

$
$

(5,391 )
120

(5,100 )
(1,100 )

(881 )
(534 )

(1,304 )

(278 )

(216 )
15

1,500

$
$

(3,576)
(241)

-
-

(4,461)
(2,483)

(1,462)
(888)

(3,424)
24

2,250

F-70

LSB Industries, Inc.

Supplementary Financial Data

Quarterly Financial Data (Unaudited) (continued)

(2) The following items increased (decreased) income from continuing operations:

March 31

June 30

September 30 December 31

Three months ended

(In Thousands)

Judgment, settlements and potential settlements
of litigation and potential litigation:

2008
2007

Gain on extinguishment of debt:
2008

Benefit (provision) for income taxes:
2008 (A)
2007

$
$

350
-

$
$

7,518
-

(6,720)
(344)

$ (10,709)
(188)
$

$
$

-
3,272

(2,388 )
1,549

$
$

(225)
(350)

5,529

1,041
(3,557)

(A) During the three months ended December 31, 2008, we performed a detailed analysis of all our
deferred tax assets and liabilities and determined that our deferred tax assets were understated by
approximately $1,827,000. As a part of our analysis, we reviewed the realizability of these deferred tax
assets and determined that a valuation allowance of approximately $268,000 was required. Accordingly,
the addition of the deferred tax assets and the associated valuation allowance resulted in a tax benefit of
$1,559,000 in our income taxes for the three months ended December 31, 2008. In addition, the net effect
of these adjustments increased basic and diluted net income per share by $0.07 and $0.06, respectively,
for the year ended December 31, 2008.

F-71

LSB Industries, Inc.

Schedule I - Condensed Financial Information of Registrant

Condensed Balance Sheets

The following condensed financial statements in this Schedule I are of the parent company only,
LSB Industries, Inc.

December 31,

2008

2007

(In Thousands)

$ 25,720
46
85
32,235
31,400
89,486

186
-
100,179
2,468
$ 192,319

432
3,816
52
9
4,309

40,500
2,558
3,947

3,000
2,496
127,337
19,804
152,637
11,632
141,005
$ 192,319

$ 35,051
149
101
6,971
29,886
72,158

156
6,400
92,007
3,572
$ 174,293

401
2,582
56
13
3,052

60,002
2,558
3,146

3,000
2,447
123,336
(16,437)
112,346
6,811
105,535
$ 174,293

Assets
Current assets:

Cash
Accounts receivable, net
Supplies, prepaid items and other
Due from subsidiaries
Notes receivable from a subsidiary

Total current assets

Property, plant and equipment, net
Note receivable from a subsidiary
Investments in and due from subsidiaries
Other assets, net

Liabilities and Stockholders’ Equity
Current liabilities:

Accounts payable
Accrued and other liabilities
Redeemable, noncumulative, convertible preferred stock
Current portion of long-term debt

Total current liabilities

Long-term debt
Due to subsidiaries
Noncurrent accrued and other liabilities

Stockholders’ equity:
Preferred stock
Common stock
Capital in excess of par value
Accumulated retained earnings (deficit)

Less treasury stock
Total stockholders’ equity

See accompanying notes.

F-72

LSB Industries, Inc.

Schedule I - Condensed Financial Information of Registrant

Condensed Statements of Income

2008

Year ended December 31,
2007
(In Thousands)

2006

Fees under service, tax sharing and management

agreements with subsidiaries

Selling, general and administrative expense
Litigation judgment
Gain on sale of precious metals
Other expense (income), net

$ 3,501

2,801

$ 2,801

6,108
(7,560)

-
65

5,361
-

(4,259 )
(402 )

4,367
-
-
(308)

Operating income (loss)

4,888

2,101

(1,258)

Interest expense
Gain on extinguishment of debt
Interest and other non-operating income, net

5,988

(5,529)
(3,342)

5,142
-

(3,309 )

4,452
-
(1,355)

Income (loss) from continuing operations

7,771

268

(4,355)

Equity in earnings of subsidiaries
Net income (loss) from discontinued operations

28,789

(13)

46,266
348

20,123
(253)

Net income

$ 36,547

$ 46,882

$ 15,515

See accompanying notes.

F-73

LSB Industries, Inc.

Schedule I - Condensed Financial Information of Registrant

Condensed Statements of Cash Flows

2008

Year ended December 31,
2007
(In Thousands)

2006

Net cash flows provided (used) by operating activities

1,140

5,953

(985)

Cash flows from investing activities:

Capital expenditures
Proceeds from litigation judgment associated with
property, plant and equipment of a subsidiary

Payment of legal costs relating to litigation judgment
associated with property, plant and equipment of a
subsidiary

Proceeds from sales of property and equipment
Notes receivable from a subsidiary
Payments received on notes receivable from a

subsidiary

Payment (purchase) of senior unsecured notes of a

subsidiary
Other assets

Net cash provided (used) by investing activities

Cash flows from financing activities:

Acquisition of 5.5% convertible debentures
Payments on other long-term debt
Payments of debt issuance costs
Proceeds from 5.5% convertible debentures, net of fees
Proceeds from 7% convertible debentures, net of fees
Net change in due to/from subsidiaries
Purchase of treasury stock
Proceeds from exercise of stock options
Proceeds from exercise of warrant
Excess income tax benefit on stock options exercised
Dividends paid on preferred stock
Acquisition of non-redeemable preferred stock

Net cash provided (used) by financing activities
Net increase (decrease) in cash

(71)

(30)

5,948

(1,884
)
-
-

4,886

-
2

(29,886)

-
-
(6,400)

-
(274)
8,605

6,950
(147)
(23,152)

(6,950
)
(209)
(13,589)

(13,207)
(6)
-
-
-

(3,972)
(4,821)
846
-
2,390
(306)
-

(19,076)
(9,331)

-
(4)
(209)

56,985
-

(4,832)

-
1,522
393
1,740
(2,934)
(1,292)
51,369
34,170

-
(1,655)
(356)
-
16,876
(1,134)
-
298
-
-
(262)
(95)
13,672
(902)

Cash at the beginning of year

35,051

881

1,783

Cash at the end of year

25,720

$ 35,051

881

See accompanying notes.

F-74

LSB Industries, Inc.

Schedule I - Condensed Financial Information of Registrant

Notes to Condensed Financial Statements

1. Basis of Presentation - The accompanying condensed financial statements of the parent
company include the accounts of LSB Industries, Inc. (the “Company”) only. The Company’s
investments in subsidiaries are stated at cost plus equity in undistributed earnings (losses) of
subsidiaries since date of acquisition. These condensed financial statements should be read in
conjunction with the Company’s consolidated financial statements.

2. Debt Issuance Costs - During 2008, we acquired a portion of the 2007 Debentures. As a
result, approximately $764,000 of the unamortized debt issuance costs associated with the 2007
Debentures acquired was charged against the gain on extinguishment of debt in 2008.

During 2007, we incurred debt issuance costs of $3,224,000 relating to the 2007 Debentures. In
addition, the remaining portion of the 2006 Debentures was converted into our common stock.
As a result of the conversions, approximately $266,000 of the remaining debt issuance costs, net
of amortization, associated with the 2006 Debentures were charged against capital in excess of
par value in 2007.

In 2006, the Company incurred debt issuance costs of $1,480,000 relating to the 2006
Debentures. During 2006, a portion of the 2006 Debentures were converted into our common
stock. As a result of the conversions, approximately $998,000 of the debt issuance costs, net of
amortization, associated with the 2006 Debentures was charged against capital in excess of par
value.

3. Commitments and Contingencies - The Company has guaranteed the payment of principal
and interest under the terms of various debt agreements of its subsidiaries. Subsidiaries’ long-
term debt outstanding at December 31, 2008, which is guaranteed by the Company is as follows
(in thousands):

Secured Term Loan due 2012
Other, most of which is collateralized by machinery, equipment and real estate

$ 50,000
10,459
$ 60,459

In addition, the Company has guaranteed approximately $24.4 million of our subsidiaries
insurance bonds and approximately $5.8 million of one of our subsidiaries purchases of natural
gas.

See Notes 12 and 14 of the notes to the Company’s consolidated financial statements for
discussion of the long-term debt and commitments and contingencies.

4. Preferred Stock and Stockholders’ Equity - At December 31, 2008 and 2007, a subsidiary
of the Company owns 2,451,527 shares of the Company’s common stock, which shares have
been considered as issued and outstanding in the accompanying Condensed Balance Sheets
included in this Schedule I - Condensed Financial Information of Registrant. See Notes 3, 11, 16
and 17 of notes to the Company’s consolidated financial statements for discussion of matters
relating to the Company’s preferred stock and other stockholders’ equity matters.

F-75

LSB Industries, Inc.

Schedule I - Condensed Financial Information of Registrant

Notes to Condensed Financial Statements (continued)

5. Litigation Judgment - See Note 20 of the notes to the Company’s consolidated financial
statements for the discussion of the income from a litigation judgment.

6. Precious Metals - The Company had owned a specified quantity of precious metals used in
the production process at one of its subsidiaries. Precious metals are carried at cost, with cost
being determined using a FIFO basis. During 2007, the Company sold metals the subsidiary had
accumulated in excess of their production requirements. As a result, the Company recognized
gains of $4,259,000 for 2007 (none in 2008 and 2006) from the sale of these precious metals.
These gains included an intercompany profit of $2,248,000, which are eliminated in the
accompanying condensed statement of income through equity in earnings of subsidiaries. The
intercompany profit resulted from differences in the FIFO cost basis of these metals in relation to
the consolidated FIFO cost basis.

7. Gain on Extinguishment of Debt - During 2008, we acquired $19.5 million aggregate
principal amount of the 2007 Debentures for $13.2 million and recognized a gain on
extinguishment of debt of $5.5 million, after writing off $0.8 million of the unamortized debt
issuance costs associated with the 2007 Debentures acquired.

8. Interest Income - During 2006, the Company acquired an investment in senior unsecured
notes due 2007 (the “Notes”) of one of its subsidiaries, ThermaClime, of $6,950,000. During
2007, ThermaClime repaid the Notes. During 2007 and 2006, the Company earned interest of
$685,000 and $565,000, respectively, relating to the Notes. In 2006, the Company entered into a
$6,400,000 term loan due 2009 with ThermaClime. During 2008, 2007 and 2006, the Company
earned interest of $699,000, $698,000 and $331,000, respectively, relating to this term loan.
During 2007, the Company entered into two demand notes totaling $29,886,000 with
ThermaClime of which $4,886,000 was repaid in 2008. During 2008 and 2007, the Company
earned interest of $1,671,000 and $801,000, respectively, relating to these demand notes. In
addition, the Company has invested a portion of the net proceeds of the 2007 Debentures in U.S.
Treasury obligations (previously in money market investments). During 2008 and 2007, the
Company earned interest of $651,000 and $752,000, respectively, relating to these investments.

F-76

LSB Industries, Inc.

Schedule II - Valuation and Qualifying Accounts

Years ended December 31, 2008, 2007 and 2006

(In Thousands)

Balance at
Beginning of
Year

Additions-
Charges to
(Recoveries)
Costs and
Expenses

Deductions-
Write-offs/
Costs
Incurred

Balance at
End of
Year

1,308

2,269

2,680

460

829

1,028

970

371

858

426

210

258

268

$ 18,932

$ (18,932)

$ 25,598

950

1,819

837

156

398

457

729

1,308

2,269

514

460

829

970

268

6,666

$ 18,932

Description

Accounts receivable - allowance for
doubtful accounts (1):

2008

2007

2006

Inventory-reserve for slow-moving
items (1):

2008

2007

2006

Notes receivable - allowance for
doubtful accounts (1):

2008

2007

2006

Deferred tax assets - valuation (1):

2008

2007

2006

(1) Deducted in the consolidated balance sheet from the related assets to which the reserve applies.

Other valuation and qualifying accounts are detailed in our notes to consolidated financial statements.

F-77

2008 PERFORMANCE GRAPH &
PEER GROUP LIST

PERFORMANCE GRAPH

The following table compares the yearly percentage change in the cumulative total stockholder return of (a) the
Company, (b) a peer group of entities (“Peer Group”) from two distinct industries which represent the Company's
two primary lines of business (Climate Control and Chemical), (c) the NYSE Composite Stock Index (“NYSE
Index”), and (d) the American Stock Exchange Composite Stock Index (“AMEX Index”). Both the NYSE and
Amex Indices are presented below because we moved our listing from the American Stock Exchange to the New
York Stock Exchange in October 2008. The table set forth below covers the period from year-end 2003 through
year-end 2008.

12/31/03

12/31/04

12/30/05

12/29/06

12/31/07

12/31/08

D
O
L
L
A
R
S

450

400

350

300

250

200

150

100

LSB Industries Inc.

Peer Group

NYSE Index

AMEX Index

FISCAL YEAR ENDING

12/31/2003 12/31/2004 12/30/2005 12/29/2006 12/31/2007 12/31/2008

LSB Industries, Inc.
Peer Group
NYSE Index
AMEX Index

100.00
100.00
100.00
100.00

124.61
126.10
112.92
114.51

96.40
133.16
122.25
126.29

181.50
169.66
143.23
141.39

442.32
221.02
150.88
158.74

130.41
138.40
94.76
94.93

Assumes $100 invested at year-end 2003 in the Company, the Peer Group, the NYSE Index, and the AMEX

Index, and the investment of dividends, if any.

The Peer Group was developed for the Company by Morningstar, Inc. (Hemscott Data) and is comprised of all
companies that have specified Hemscott Data Group General Index Groups codes, which the Company believes
correspond to the Company’s primary lines of business. The Peer Group is comprised of (a) climate control
companies having Hemscott Data Group code 634 (general building materials) and (b) chemical companies having a
Hemscott Data Group codes 112 (agricultural chemicals) and 113 (specialty chemicals), and is provided for
comparison to the Company’s two primary lines of business, Climate Control and Chemical. The companies which
comprise the Peer Group are listed below. The Company has been advised that the cumulative total return of each
component company in the Peer Group has been weighted according to the respective company’s stock market
capitalization as of the beginning of each yearly period. In light of the Company’s unique industry diversification

and current market capitalization, the Company believes that the Peer Group is appropriate for comparison to the
Company. The AMEX Index line is provided because the Company moved its listing from the American Stock
Exchange to the New York Stock Exchange in October 2008. The above Performance Graph shall not be deemed
incorporated by reference by any general statement incorporating by reference this Annual Report into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934 (collectively, the “Acts”), except to the
extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed
to be soliciting material or to be filed under such Acts.

PEER GROUP

RENEWAL FUELS INC
RONSON CORP
RPM INTERNATIONAL INC DE
SCOTTS MIRACLE GROW CO
SENSIENT TECHNOLOGIES CP
SHENGDATECH INC

PACIFIC ETHANOL INC
PANDA ETHANOL INC
PENFORD CORP
PGT INC
POLY-PACIFIC INTERNAT
POLYPORE INTERNAT INC
PURE BIOFUELS CORP
QEP CO INC

FERRO CORP
FLEXIBLE SOLUTIONS INTL
FLOTEK INDUSTRIES INC
FOUR RIVERS BIOENERGY
FUDA FAUCET WORKS INC
GREEN PLAINS RENEWABLE
GRIFFON CORP
GULF RESOURCES INC
GUSHAN ENVIRON ENGY ADR QUAKER CHEMICAL CORP
H.B. FULLER CO
HEADWATERS INC
HELIX BIOMEDIX
IMPERIAL INDUSTRIES INC
INNOSPEC INC
INTERNAT BARRIER TECHNL
INTREPID TECHNOLOGY&RESR SIGMA-ALDRICH CORP
ISONICS CORP
ITRONICS INC
KMG CHEMICALS INC.
KOLORFUSION INTERNATIONL STRATOS RENEWABLES CORP
SYNGENTA AD FOR NVS
KREIDO BIOFUELS INC
SYNTHESIS ENERGY SYS INC
KRONOS WORLDWIDE INC
SYNTHETECH INC
LAPOLLA INDUSTRIES
TAT TECHNOL LTD
LUBRIZOL CORP THE
MACE SECURITY INTERNAT
TECUMSEH PRODUCTS CL A
MARTIN MARIETTA MATERIAL TECUMSEH PRODUCTS CL B
MDU RESOURCES GROUP INC
METHANEX CORPORATION
METWOOD INC
MOMENTUM BIOFUELS INC
MONSANTO CO
MOSAIC CO THE
NCI BUILDING SYSTEMS INC
NCOAT INC
NEW GENERATION BIOFUELS VERENIUM CORP
NEW ORIENTAL ENER & CHEM VERIDIEN CORP

AAON INC
ADA-ES INC
ADM TRONICS UNLIMITED
AE BIOFUELS INC
AGRIUM INC
ALL FUELS & ENERGY CO
ALLEGRO BIODIESEL CORP
ALTAIR NANOTECHNOLOGIES
ALTERNATIVE CNSTR TECH
AMCOL INTERNATIONAL CORP
AMERICAN PACIFIC CORP
AMERICAN VANGUARD CORP
AMERON INTERNAT CORP
ARMSTRONG WORLD IND INC
AVENTINE RENEWABLE ENRGY
BIOFUEL ENERGY CORP
BLASTGUARD INTERNAT INC
BLUEFIRE ETHANOL FUEL IN
BRASKEM PFD CL A ADR
CABOT CORP
CALCITECH LTD
CF INDUSTRIES HOLDINGS
CHEMTURA CORP
CHINA AGRI-BUSINESS INC
CHINA CLEAN ENERGY INC
CHINA HUAREN ORGANIC PRD
CHINA JIANYE FUEL INC
CHINA YINGXIA INTERNAT
COMPASS MINERALS INTL
CONTINENTAL MATERIALS CP
CONVERTED ORGANICS INC
CYANOTECH CORP
CYTEC INDUSTRIES INC
DIATECT INTERNAT CORP
DREW INDUSTRIES INC
DUPONT E I NEMOURS & CO
DYNAMOTIVE ENERGY SYSTMS NEWMARKET CORP
EARTH BIOFUELS INC
ECOLOGY COATINGS INC
EDEN BIOSCIENCE CORP
ETHANEX ENERGY INC
ETHOS ENVIRONMENTAL INC
FASTENAL COMPANY

TERRA INDUSTRIES INC
TERRA NITROGEN CO L.P.
TIGER RENEWABLE ENERGY L
U.S. LIME & MINERALS INC
UNITED ENERGY CORP
USG CORP
VALSPAR CORP THE
VERASUN ENERGY CORP

NO FIRE TECHNOLOGIES INC
OIL-DRI CORP OF AMERICA
OM GROUP INC
OMNOVA SOLUTIONS INC
ORION ETHANOL INC
OWENS CORNING INC

VIOSOLAR INC
VULCAN MATERIALS CO
W.R. GRACE & CO
WD-40 CO
WESTLAKE CHEMICAL CORP
WILLIAMS PARTNERS LP

SINOCUBATE INC
SOIL BIOGENICS LTD
SOLUTIA INC

Directors and Ofﬁ cers

LSB Directors

LSB Ofﬁ cers

RAYMOND B. ACKERMAN
Chairman Emeritus of
Ackerman McQueen, Inc.

MICHAEL G. ADAMS, C.P.A.
Vice President,
Corporate Controller

Subsidiary
Executive Ofﬁ cers

JOSEPH A. CAPPELLO
President,
ClimateCraft, Inc.

HEIDI L. BROWN, J.D., L.L.M.
Vice President,
Managing Counsel

DAN ELLIS
President,
Climate Master, Inc.

STEVEN J. GOLSEN
Co-Chairman, CEO
Climate Master, Inc. and
COO, Climate Control Business

PHIL GOUGH
Senior Vice President,
Agrochemical Group

BRIAN HAGGART
President,
Trison Construction, Inc.

LARRY L. JEWELL
President,
International Environmental
Corporation

ROSS MIGLIO
Executive Vice President,
ClimaCool Corp.

ANNE RENDON
President,
El Dorado Nitric Company

BRUCE SMITH
President,
Summit Machine Tool
Manufacturing Corp.

JUDI BURNETT
Assistant Vice President,
Risk Management

JOHN CARVER
Vice President,
Environmental and Safety
Compliance

JIM D. JONES, C.P.A.
Senior Vice President,
Treasurer

KRISTY CARVER, C.P.A.
Vice President,
Corporate Taxation

ANN MUISE-MILLER, J.D.
Assistant Vice President,
Associate General Counsel

JAMES WM. MURRAY, III, J.D.
Vice President, Senior
Associate General Counsel

PAUL RYDLUND
Senior Vice President,
Business Development

HAROLD RIEKER, C.P.A.
Vice President,
Principal Accounting Ofﬁ cer

DAVID M. SHEAR, J.D.
Senior Vice President,
General Counsel and Secretary

MIKE TEPPER
Senior Vice President,
International Operations

ROBERT C. BROWN, M.D.
V.P., Plaza Medical Group, P.C.
President and CEO
ClaimLogic, LLC

CHARLES (CHUCK) A. BURTCH
Former Executive Vice President
and West Division Manager
of BankAmerica

ROBERT BUTKIN, J.D.
Professor of Law and former Dean,
University of Tulsa, College of Law
Former Oklahoma State Treasurer

JACK E. GOLSEN
Board Chairman and CEO

BARRY H. GOLSEN, J.D.
Board Vice Chairman, COO and
President, LSB Industries and
President, Climate Control
Business

DAVID R. GOSS, C.P.A.
Executive Vice President
of Operations

BERNARD G. ILLE
Former CEO and Board Chairman
First Life Assurance Company

DONALD W. MUNSON
Former President of Lennox Corp
President Ducane Europe

RONALD V. PERRY
President, Prime Time Travel

HORACE G. RHODES, L.L.B.
Chairman,
Kerr, Irvine, Rhodes and Ables

TONY M. SHELBY, C.P.A.
Executive Vice President
of Finance, CFO

JOHN A. SHELLEY
President, CEO and Chairman,
The Bank of Union

Headquarters
LSB Industries, Inc.
16 South Pennsylvania Ave.
Oklahoma City, OK 73107
Tel: (405) 235-4546
Fax: (405) 235-5067
Email: info@lsb-okc.com

Investor Relations
The Equity Group Inc.
Linda Latman
Tel: (212) 836-9609
Fax: (212) 421-1278
Email: llatman@equityny.com

Independent Auditors
Ernst & Young LLP
Oklahoma City, OK

Security Listing
Common Stock listed on the
New York Stock Exchange
NYSE Ticker Symbol: LXU

Transfer Agent &
Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Tel: (800) 884-4225 (US & Canada)
(781) 575-4706 (outside US & Canada)

Website
www.lsb-okc.com
Visit our website for details
about our plants, products,
operations and policies.