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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2008

OR



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

For the transition period from
                to

Commission File Number 333-123747

Kraton
Polymers LLC

(Exact name of Register as specified in its Charter)



|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                      |  | 94-2805249                          
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. Employer Identification No.)

15710 John F. Kennedy Blvd. Suite 300, Houston, TX 77032

(Address of Principal Executive Offices) (Zip Code)

281-504-4700

(Registrants Telephone Number, Including Area Code)

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

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

Large accelerated filer:   ̈    Accelerated filer:   ̈    Non-accelerated filer:  þ    Smaller
reporting company:   ̈

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).    YES   ̈    NO  þ









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TABLE OF CONTENTS



|                             |  |                                                                                             |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                             |  | PAGE
|Part IFinancial Information
|                             |  |                                                                                            
|Item 1.                      |  | Financial Statements                                                                        |  |     
|                             |  | Consolidated Balance SheetsJune 30, 2008 (Unaudited) and December 31, 2007                 |  | F-1 
|                             |  | Consolidated Statements of Operations (Unaudited)Three Months Ended June 30, 2008 and 2007 |  | F-2 
|                             |  | Consolidated Statements of Operations (Unaudited)Six Months Ended June 30, 2008 and 2007   |  | F-3 
|                             |  | Consolidated Statements of Cash Flows (Unaudited)Six Months Ended June 30, 2008 and 2007   |  | F-4 
|                             |  | Notes to Consolidated Financial Statements (Unaudited)                                      |  | F-5 
|                             |  |                                                                                            
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 1   
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                  |  | 14  
|Item 4.                      |  | Controls and Procedures                                                                     |  | 14  
|                            
|Part IIOther Information   
|                             |  |                                                                                            
|Item 1.                      |  | Legal Proceedings                                                                           |  | 15  
|Item 1A.                     |  | Risk Factors                                                                                |  | 15  
|Item 2.                      |  | Unregistered Sales Of Equity Securities and Use of Proceeds                                 |  | 15  
|Item 3.                      |  | Defaults Upon Senior Securities                                                             |  | 15  
|Item 4.                      |  | Submission of Matters to a Vote of Securityholders                                          |  | 15  
|Item 5.                      |  | Other Information                                                                           |  | 15  
|Item 6.                      |  | Exhibits                                                                                    |  | 15  



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FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of
1995. We may also make forward-looking statements in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K, in press releases and other written materials, and in oral statements made by our officers,
directors or employees to third parties. All statements, other than statements of historical fact, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements about our plans, strategies and prospects under the
headings Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements are often characterized by the use of words such as
believes, estimates, expects, projects, may, will, intends, plans or anticipates, or by discussions of strategy, plans or intentions. Such
forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from historical results or any future
results, performance or achievements expressed, suggested or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:



| |  |  | competitive pressures in the specialty chemicals industry,
| | - |  | ----------------------------------------------------------



| |  |  | changes in prices or availability of raw materials used in our business,
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in levels of consumer spending or preferences,
| | - |  | ------------------------------------------------------



| |  |  | overall economic conditions,
| | - |  | ----------------------------



| |  |  | the level of our indebtedness and exposure to interest rate and currency fluctuations,
| | - |  | --------------------------------------------------------------------------------------



| |  |  | governmental regulations and trade restrictions,
| | - |  | ------------------------------------------------



| |  |  | acts of war or terrorism in the United States or worldwide, political or financial instability in the countries where our goods are manufactured and sold, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other risks and uncertainties described in this report and the Companys other reports and documents.
| | - |  | -----------------------------------------------------------------------------------------------------

These statements are based on current plans, estimates, beliefs and projections, and therefore you should not place undue reliance on them.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly in light of new information or future events.



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PART IFINANCIAL INFORMATION



|ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

Kraton Polymers LLC

Consolidated Balance Sheets

June 30, 2008 and December 31, 2007

(In thousands of U.S. dollars)



|                                                                                      |  |              |           |                  |   |        
|------------------------------------------------------------------------------------- |  | ------------ | --------- | ---------------- | - | -------
|                                                                                      |  | June 30,2008 |           | December 31,2007
|                                                                                      |  | (Unaudited)  |           |                 
|Assets                                                                                |  |              |           |                  |   |        
|Current assets:                                                                       |  |              |           |                  |   |        
|Cash and cash equivalents                                                             |  | $            | 21,352    |                  | $ | 48,277 
|Receivables, net of allowances of $1,589 and $1,542                                   |  |              | 177,052   |                  |   | 140,321
|Inventories of products, net                                                          |  |              | 277,414   |                  |   | 256,323
|Inventories of materials and supplies, net                                            |  |              | 12,813    |                  |   | 12,170 
|Other current assets                                                                  |  |              | 12,109    |                  |   | 12,404 
|                                                                                      |  |              |           |                  |   |        
|Total current assets                                                                  |  |              | 500,740   |                  |   | 469,495
|Property, plant and equipment, less accumulated depreciation of $175,967 and $157,643 |  |              | 398,273   |                  |   | 402,270
|Identifiable intangible assets, less accumulated amortization of $32,688 and $29,205  |  |              | 72,874    |                  |   | 76,356 
|Investment in unconsolidated joint venture                                            |  |              | 10,618    |                  |   | 10,326 
|Deferred financing costs                                                              |  |              | 10,124    |                  |   | 10,323 
|Other long-term assets                                                                |  |              | 18,870    |                  |   | 16,124 
|                                                                                      |  |              |           |                  |   |        
|Total assets                                                                          |  | $            | 1,011,499 |                  | $ | 984,894
|                                                                                      |  |              |           |                  |   |        
|Liabilities and Members Equity                                                       |  |              |           |                  |   |        
|Current liabilities:                                                                  |  |              |           |                  |   |        
|Current portion of long-term debt                                                     |  | $            | 3,445     |                  | $ | 3,445  
|Accounts payable-trade                                                                |  |              | 107,573   |                  |   | 102,952
|Other payables and accruals                                                           |  |              | 60,617    |                  |   | 55,816 
|Due to related party                                                                  |  |              | 16,077    |                  |   | 24,505 
|Deferred income taxes                                                                 |  |              | 9,029     |                  |   | 9,827  
|Insurance note payable                                                                |  |              |          |                  |   | 494    
|                                                                                      |  |              |           |                  |   |        
|Total current liabilities                                                             |  |              | 196,741   |                  |   | 197,039
|Long-term debt, net of current portion                                                |  |              | 523,298   |                  |   | 535,020
|Deferred income taxes                                                                 |  |              | 41,161    |                  |   | 39,443 
|Long-term liabilities                                                                 |  |              | 31,218    |                  |   | 30,682 
|                                                                                      |  |              |           |                  |   |        
|Total liabilities                                                                     |  |              | 792,418   |                  |   | 802,184
|                                                                                      |  |              |           |                  |   |        
|Commitments and contingencies (note 9)                                                |  |              |           |                  |   |        
|Members equity:                                                                      |  |              |           |                  |   |        
|Common equity                                                                         |  |              | 154,704   |                  |   | 143,149
|Accumulated other comprehensive income                                                |  |              | 64,377    |                  |   | 39,561 
|                                                                                      |  |              |           |                  |   |        
|Total members equity                                                                 |  |              | 219,081   |                  |   | 182,710
|                                                                                      |  |              |           |                  |   |        
|Total liabilities and members equity                                                 |  | $            | 1,011,499 |                  | $ | 984,894
|                                                                                      |  |              |           |                  |   |        

See accompanying notes to consolidated financial statements.



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Kraton Polymers LLC

Consolidated Statements of Operations

Three Months Ended June 30, 2008
and 2007

(in thousands of U.S. dollars)

(Unaudited)



|                                                          |  |              |         |   |              |   |         |  
|--------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                                          |  | June 30,2008 |         |   | June 30,2007 |  
|Revenues:                                                 |  |              |         |   |              |   |         |  
|Sales                                                     |  | $            | 328,362 |   |              | $ | 287,326 |  
|Other                                                     |  |              | 17,007  |   |              |   | 7,570   |  
|                                                          |  |              |         |   |              |   |         |  
|Total revenues                                            |  |              | 345,369 |   |              |   | 294,896 |  
|Cost of goods sold                                        |  |              | 282,823 |   |              |   | 243,460 |  
|                                                          |  |              |         |   |              |   |         |  
|Gross profit                                              |  |              | 62,546  |   |              |   | 51,436  |  
|Research and development expenses                         |  |              | 7,403   |   |              |   | 6,529   |  
|Selling, general, and administrative expenses             |  |              | 19,909  |   |              |   | 16,605  |  
|Depreciation and amortization of identifiable intangibles |  |              | 13,110  |   |              |   | 11,828  |  
|Earnings in unconsolidated joint venture                  |  |              | (159    | ) |              |   | (95     | )
|Interest expense, net                                     |  |              | 9,418   |   |              |   | 9,402   |  
|                                                          |  |              |         |   |              |   |         |  
|Income before income taxes                                |  |              | 12,865  |   |              |   | 7,167   |  
|Income tax provision                                      |  |              | (2,649  | ) |              |   | (949    | )
|                                                          |  |              |         |   |              |   |         |  
|Net income                                                |  | $            | 10,216  |   |              | $ | 6,218   |  
|                                                          |  |              |         |   |              |   |         |  

See accompanying notes to consolidated financial statements.



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Kraton Polymers LLC

Consolidated Statements of Operations

Six Months Ended June 30, 2008 and
2007

(in thousands of U.S. dollars)

(Unaudited)



|                                                          |  |              |         |   |              |   |         |  
|--------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                                          |  | June 30,2008 |         |   | June 30,2007 |  
|Revenues:                                                 |  |              |         |   |              |   |         |  
|Sales                                                     |  | $            | 584,650 |   |              | $ | 527,828 |  
|Other                                                     |  |              | 27,580  |   |              |   | 13,894  |  
|                                                          |  |              |         |   |              |   |         |  
|Total revenues                                            |  |              | 612,230 |   |              |   | 541,722 |  
|Cost of goods sold                                        |  |              | 500,899 |   |              |   | 457,961 |  
|                                                          |  |              |         |   |              |   |         |  
|Gross profit                                              |  |              | 111,331 |   |              |   | 83,761  |  
|Research and development expenses                         |  |              | 15,321  |   |              |   | 13,052  |  
|Selling, general, and administrative expenses             |  |              | 45,364  |   |              |   | 33,614  |  
|Depreciation and amortization of identifiable intangibles |  |              | 27,762  |   |              |   | 23,878  |  
|Earnings in unconsolidated joint venture                  |  |              | (220    | ) |              |   | (325    | )
|Interest expense, net                                     |  |              | 19,803  |   |              |   | 20,132  |  
|                                                          |  |              |         |   |              |   |         |  
|Income (loss) before income taxes                         |  |              | 3,301   |   |              |   | (6,590  | )
|Income tax provision                                      |  |              | (2,495  | ) |              |   | (388    | )
|                                                          |  |              |         |   |              |   |         |  
|Net income (loss)                                         |  | $            | 806     |   |              | $ | (6,978  | )
|                                                          |  |              |         |   |              |   |         |  

See accompanying notes to consolidated financial statements.



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Kraton Polymers LLC

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2008 and
2007

(in thousands of U.S. dollars)

(Unaudited)



|                                                                                                   |  |              |          |   |              |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ------------ | - | ------- | -
|                                                                                                   |  | June 30,2008 |          |   | June 30,2007 |  
|Cash flows provided by (used in) operating activities:                                             |  |              |          |   |              |   |         |  
|Net income (loss)                                                                                  |  | $            | 806      |   |              | $ | (6,978  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |              |          |   |              |   |         |  
|Depreciation and amortization of identifiable intangibles                                          |  |              | 27,762   |   |              |   | 23,878  |  
|Amortization of deferred financing costs                                                           |  |              | 1,156    |   |              |   | 1,066   |  
|(Gain) loss on disposal of fixed assets                                                            |  |              | (8       | ) |              |   | 201     |  
|Undistributed earnings in joint venture                                                            |  |              | 821      |   |              |   | (219    | )
|Deferred tax benefit                                                                               |  |              | (1,269   | ) |              |   | (1,010  | )
|Non-cash compensation related to equity awards                                                     |  |              | 749      |   |              |   | 1,212   |  
|Gain on interest rate swaps                                                                        |  |              |         |   |              |   | (1,553  | )
|Decrease (increase) in working capital:                                                            |  |              |          |   |              |   |         |  
|Accounts receivable                                                                                |  |              | (30,194  | ) |              |   | (16,609 | )
|Inventories of products, materials and supplies                                                    |  |              | (12,483  | ) |              |   | (6,433  | )
|Other assets                                                                                       |  |              | (2,729   | ) |              |   | (6,673  | )
|Accounts payable-trade, other payables and accruals, and other long-term liabilities               |  |              | 9,263    |   |              |   | 38,031  |  
|Due to related party                                                                               |  |              | (7,737   | ) |              |   | (1,799  | )
|                                                                                                   |  |              |          |   |              |   |         |  
|Net cash provided by (used in) operating activities                                                |  |              | (13,863  | ) |              |   | 23,114  |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Cash flows (used in) provided by investing activities:                                             |  |              |          |   |              |   |         |  
|Purchase of property, plant and equipment                                                          |  |              | (9,686   | ) |              |   | (11,033 | )
|Proceeds from sale of property, plant and equipment                                                |  |              | 17       |   |              |   | 20      |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Net cash used in investing activities                                                              |  |              | (9,669   | ) |              |   | (11,013 | )
|                                                                                                   |  |              |          |   |              |   |         |  
|Cash flows provided by (used in) financing activities:                                             |  |              |          |   |              |   |         |  
|Borrowings under debt obligations                                                                  |  |              | 154,750  |   |              |   |        |  
|Repayment of debt obligations                                                                      |  |              | (166,472 | ) |              |   | (963    | )
|Proceeds from cash contribution from member                                                        |  |              | 10,000   |   |              |   |        |  
|Net (payment of) proceeds from insurance note payable                                              |  |              | (494     | ) |              |   | 3,215   |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Net cash provided by (used in) financing activities                                                |  |              | (2,216   | ) |              |   | 2,252   |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Effect of exchange rate differences on cash and cash equivalents                                   |  |              | (1,177   | ) |              |   | (1,002  | )
|                                                                                                   |  |              |          |   |              |   |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |              | (26,925  | ) |              |   | 13,351  |  
|Cash and cash equivalents, beginning of period                                                     |  |              | 48,277   |   |              |   | 43,601  |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $            | 21,352   |   |              | $ | 56,952  |  
|                                                                                                   |  |              |          |   |              |   |         |  
|Supplemental disclosure cash flow information:                                                     |  |              |          |   |              |   |         |  
|Cash paid during the period for income taxes, net of refunds received                              |  | $            | 5,451    |   |              | $ | 5,981   |  
|Cash paid during the period for interest                                                           |  | $            | 20,453   |   |              | $ | 14,130  |  

See accompanying notes to consolidated financial statements.



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Kraton Polymers LLC

Notes to Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

(a) Organization and Description of Business

Kraton Polymers LLC, or Kraton, together with its direct and indirect
subsidiaries, unless otherwise indicated, are collectively referred to as we our, ours, and us, and is the parent of Elastomers Holdings LLC (holding company of Kratons United States operations),
Kraton Polymers Holdings B.V. (holding company of the rest of our world operations) and Kraton Polymers Capital Corporation (a company with no obligations). Polymer Holdings LLC, or Polymer Holdings, owns 100% of our equity interests. TJ Chemical
Holdings LLC, or TJ Chemical, owns 100% of the equity interests of Polymers Holdings. TJ Chemical is indirectly owned by TPG Partners III, L.P., TPG Partners IV, L.P. and certain of the parallel investment entities of said parties, entities
affiliated with or managed by J.P. Morgan Partners, LLC and affiliates and Kraton Management LLC.

We produce styrenic block copolymers
(SBCs), a family of specialty chemical products whose chemistry we pioneered over 40 years ago. SBCs are highly engineered synthetic elastomers which enhance the performance of numerous products by delivering a variety of performance
characteristics, including greater flexibility, resilience, strength, durability and processability. Our specialty polymers are typically processed with other products to achieve customer specific performance characteristics in a variety of
applications. The versatility of our portfolio of polymers is due to a wide range of distinctive molecular structures, which can be precisely controlled and tailored to unique design and performance characteristics. Each polymer requires a
significant amount of testing and certification, which, combined with our proprietary chemistry encourages strong customer loyalty.

We
operate six plants globally, including our flagship Belpre, Ohio plant in the United States, the largest SBC plant in the world, as well as plants in Germany, France, The Netherlands, Brazil and Japan. The plant in Japan is operated by a
manufacturing joint venture.

(b) Basis of Presentation

The consolidated financial statements presented herein are for Kraton and its consolidated subsidiaries, each of which is a wholly-owned subsidiary.

The consolidated balance sheets, the consolidated statements of operations and the consolidated statements of cash flows for the periods
presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. Operating results for the six months ended June 30, 2008 are not necessarily indicative of
results to be expected for the year ending December 31, 2008. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified in the prior period to conform to the current
period presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires estimates and assumptions that affect the reported amounts as well as certain disclosures. Our financial statements include amounts that are based on managements best estimates and judgments. Actual results could
differ from these estimates.

These consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto reported in our Form 10-K for the year ended December 31, 2007. The accompanying consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange
Commission (SEC) for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States.



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(c) Recently Issued Accounting Standards

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 162, The Hierarchy of
Generally Accepted Accounting Principles(SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We are currently evaluating the potential effect of SFAS No. 162 on the
Companys financial position, results of operations and cash flows.

In March, 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments and Hedging Accountsan Amendment of SFAS No. 133(SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entitys derivative and hedging
activities. The guidance of SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the potential effect of SFAS No. 161 on the Companys financial position, results of operations
and cash flows.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business
Combinations (SFAS No. 141R). SFAS No. 141R establishes principles and requirements over business combinations and its effects. The guidance of SFAS No. 141R is effective for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The potential effect of SFAS No. 141R on the Companys consolidated financial statements will be dependent upon future business
combinations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115(SFAS No. 159), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits an entity to
choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Effective
January 1, 2008, we adopted SFAS No. 159 with no material impact on our consolidated financial statements.

(2) Share-Based Compensation

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS
No. 123R), which is a revision of FASB Statement No. 123. SFAS No. 123(R) addresses all forms of share-based compensation including stock options and restricted stock. SFAS No. 123R requires the benefit of tax deductions in
excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow in the accompanying consolidated statements of cash flows. The company adopted the provisions of SFAS No. 123(R) effective
January 1,2006, using the modified-prospective method and we elected to use the Black-Scholes Merton option-pricing model to estimate the grant-date fair value of share-based awards. We record non-cash compensation expense for the
restricted membership units, notional membership units and option awards over the vesting period using the straight-line method. See footnote 10(a).



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Information pertaining to option activity for the six months ended June 30, 2008 is as follows
(number of options in thousands):



|                                 |  |                 |        |   |                              |   |     
|-------------------------------- |  | --------------- | ------ | - | ---------------------------- | - | ----
|                                 |  | NumberOfOptions |        |   | WeightedAverageExercisePrice
|Outstanding at December 31, 2007 |  | $               | 14,670 |   |                              | $ | 1.00
|Granted                          |  |                 | 10,763 |   |                              | $ | 1.00
|Exercised                        |  |                 |       |   |                              |   |    
|Forfeited                        |  |                 | (3,460 | ) |                              | $ | 1.00
|                                 |  |                 |        |   |                              |   |     
|Outstanding at June 30, 2008     |  |                 | 21,973 |   |                              | $ | 1.00
|                                 |  |                 |        |   |                              |   |     

In June 2008, the Company recorded an adjustment to reduce stock compensation expense related to
its accounting for forfeitures of certain stock options that should have been reflected in prior periods. The Company evaluated the materiality of the adjustment including both qualitative and quantitative considerations, and concluded that the
adjustment was not material to current or prior periods.

(3) Restructuring Activities

As part of our ongoing efforts to improve efficiencies and increase productivity, we have implemented a number of restructuring initiatives.

We restructured our research and technical service organizations to better align our research and product development capabilities with our
customers needs and market requirements and to focus on our core capabilities. We recorded a liability for restructuring costs, consisting primarily of severance and other staffing-related costs of $1.7 million and $0.5 million in the three
month periods ended March 31, 2008 and June 30, 2008, respectively. The costs were recorded in research and development expenses in the consolidated statements of operations. We currently expect that substantially all of the cash
expenditures will be paid by the end of the first quarter of 2009.

On September 20, 2007, we decided to exit the SIS plant at our
Pernis facility, which we completed in the second quarter of 2008. SIS production formerly conducted at the Pernis location is now performed at our other production facilities. In September 2007, we recorded a liability associated with the exit plan
of approximately $2.1 million, consisting of $1.8 million in contractor workforce reductions and $0.3 million in other associated costs. The entire amount of the charge consisted of future cash expenditures. We anticipate that
substantially all of the cash expenditures will be paid by the end of 2008.

As of June 30, 2008, there was a total liability for
restructuring costs of approximately $2.0 million, of which $1.4 million is related to unpaid severance costs which are expected to be paid by the end of the first quarter of 2009. Of the exit activity cost of approximately $0.6 million,
$0.3 million is associated with the exit of the SIS plant at our Pernis, The Netherlands facility, which is expected to be paid in 2008. The remaining $0.3 million is associated with the closure of our office in London, United Kingdom and
is expected to be paid over the next several years ending in the second quarter of 2011. The following table summarizes the activities related to the Companys restructuring liability by component (in thousands):

The following table summarizes the activities related to the Companys restructuring liability by component (in thousands):



|                             |  |                    |        |   |                    |   |        |       |  |   |        |  
|---------------------------- |  | ------------------ | ------ | - | ------------------ | - | ------ | ----- |  | - | ------ | -
|                             |  | SeveranceCosts (1) |        |   | Exit ActivityCosts |   |        | Total | 
|Accrued at December 31, 2007 |  | $                  | 294    |   |                    | $ | 2,402  |       |  | $ | 2,696  |  
|Accruals                     |  |                    | 2,185  |   |                    |   |       |       |  |   | 2,185  |  
|Cash payments                |  |                    | (1,094 | ) |                    |   | (1,826 | )     |  |   | (2,920 | )
|                             |  |                    |        |   |                    |   |        |       |  |   |        |  
|Accrued at June 30, 2008     |  | $                  | 1,385  |   |                    | $ | 576    |       |  | $ | 1,961  |  
|                             |  |                    |        |   |                    |   |        |       |  |   |        |  



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(4) Detail of Certain Balance Sheet Accounts

The components of inventories of products and other payables and accruals are as follows (in thousands):



|                              |  |              |         |                  |   |        
|----------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                              |  | June 30,2008 |         | December 31,2007
|Inventories of products, net: |  |              |         |                  |   |        
|Finished products             |  | $            | 219,478 |                  | $ | 212,125
|Work in progress              |  |              | 4,314   |                  |   | 3,858  
|Raw materials                 |  |              | 53,622  |                  |   | 40,340 
|                              |  |              |         |                  |   |        
|                              |  | $            | 277,414 |                  | $ | 256,323
|                              |  |              |         |                  |   |        
|Other payables and accruals:  |  |              |         |                  |   |        
|Employee related              |  | $            | 14,815  |                  | $ | 12,178 
|Interest                      |  |              | 11,424  |                  |   | 13,680 
|Property and other taxes      |  |              | 6,472   |                  |   | 3,735  
|Customer rebates              |  |              | 4,784   |                  |   | 6,561  
|Income taxes payable          |  |              | 3,253   |                  |   | 4,643  
|Other                         |  |              | 19,869  |                  |   | 15,019 
|                              |  |              |         |                  |   |        
|                              |  | $            | 60,617  |                  | $ | 55,816 
|                              |  |              |         |                  |   |        

(5) Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows (in thousands):



|                                              |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|--------------------------------------------- |  | ------------------------- | ------ | ---- | ----------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                              |  | Three Month EndedJune 30, |        |      | Six Month EndedJune 30, |       
|                                              |  | 2008                      |        | 2007 |                         |        | 2008 |  | 2007 |       
|Net income (loss)                             |  | $                         | 10,216 |      | $                       | 6,218  |      |  | $    | 806    |  | $ | (6,978 | )
|Foreign currency translation adjustments      |  |                           | 2,968  |      |                         | 4,369  |      |  |      | 21,881 |  |   | 8,009  |  
|Unrealized (loss) gain on interest rate swaps |  |                           | 4,345  |      |                         | (1,416 | )    |  |      | 2,935  |  |   | (1,863 | )
|                                              |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total comprehensive income (loss)             |  | $                         | 17,529 |      | $                       | 9,171  |      |  | $    | 25,622 |  | $ | (832   | )
|                                              |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  

Accumulated other comprehensive income consists of the following (in thousands):



|                                                   |  |              |        |                  |   |       
|-------------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                                   |  | June 30,2008 |        | December 31,2007
|Foreign currency adjustments                       |  | $            | 56,232 |                  | $ | 34,351
|Unrealized gain on interest rate swaps, net of tax |  |              | 2,935  |                  |   |      
|Pension adjustment, net of tax                     |  |              | 5,210  |                  |   | 5,210 
|                                                   |  |              |        |                  |   |       
|Total accumulated other comprehensive income       |  | $            | 64,377 |                  | $ | 39,561
|                                                   |  |              |        |                  |   |       



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(6) Long-Term Debt

Long-term debt consists of the following (in thousands):



|                                       |  |              |         |                  |   |        
|-------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                       |  | June 30,2008 |         | December 31,2007
|Senior Secured Credit Facilities:      |  |              |         |                  |   |        
|Term Loans                             |  | $            | 326,743 |                  | $ | 338,465
|8.125% Notes                           |  |              | 200,000 |                  |   | 200,000
|                                       |  |              |         |                  |   |        
|Total debt                             |  |              | 526,743 |                  |   | 538,465
|Less current portion of long-term debt |  |              | 3,445   |                  |   | 3,445  
|                                       |  |              |         |                  |   |        
|Total long-term debt                   |  | $            | 523,298 |                  | $ | 535,020
|                                       |  |              |         |                  |   |        

(a) Term Loans and Revolving Loans

We entered into a senior secured credit agreement dated as of December 23, 2003. The agreement and subsequent amendments to the agreement are defined
herein as the Credit Agreement.

The Credit Agreement provides for a term facility, or Term Facility, of $385.0 million, and a revolving
facility, or Revolving Facility, of up to $75.5 million (after entering into a Joinder Agreement on June 7, 2006). We refer to the loans made under the Revolving Facility collectively as the Revolving Loans, and the loans made under the Term
Facility collectively as the Term Loans.

Three of our wholly-owned subsidiaries, Kraton Polymers U.S. LLC, Elastomers Holdings LLC, and
Kraton Polymers Capital Corporation (collectively, the Guarantor Subsidiaries), along with Polymer Holdings, have guaranteed the Credit Agreement and we refer to these guarantors, together with Kraton, as the Loan Parties. The Credit
Agreement is secured by a perfected first priority security interest in all of each Loan Partys tangible and intangible assets, including intellectual property, real property, all of our capital stock and the capital stock of our domestic
subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of each Loan Party. As of June 30, 2008, we had no outstanding Revolving Loans. In June 2008 we made a $10.0 million voluntary prepayment of outstanding indebtedness
under the Term Loans. The following is a summary of the material terms of the Credit Agreement.

Maturity

The Revolving Loans are payable in a single maturity on May 12, 2011. The Term Loans are payable in 24 consecutive equal quarterly installments, in
an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loans. The remaining balance is payable in four equal quarterly installments commencing on September 30, 2012 and ending on May 12, 2013.

Interest

The Term Loans bear
interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus 1.00% per annum. In general, interest is payable quarterly, subject to the interest period selected by us, per the Credit
Agreement. The average effective interest rate on the Term Loans for the six months ended June 30, 2008 was 4.9 % compared to 6.6% for the six months ended June 30, 2007. The Revolving Loans bear interest at a rate equal to the
adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum, depending on our leverage ratio, or at our option, the base rate plus a margin of between 1.00% and 1.50% per annum, depending on our leverage ratio. A commitment
fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears. In February 2008, we entered into a $325 million notional amount interest rate swap agreement to
protect against Eurodollar interest rate fluctuations, which we sold in June 2008. See footnote 7(a) for a description of the swap agreement.



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Mandatory Prepayments

The Term Facility is subject to mandatory prepayment with, in general: (1) 100% of the net cash proceeds of certain asset sales, subject to certain
reinvestment rights; (2) 100% of the net cash proceeds of certain insurance and condemnation payments, subject to certain reinvestment rights; (3) 50% of the net cash proceeds of equity offerings (declining to 25%, if a leverage ratio is
met); (4) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the Credit Agreement); and (5) 50% of our excess cash flow, as defined in the Credit Agreement (declining to 25%, if a leverage ratio
is met and to 0% if a further leverage ratio is met). Any such prepayment is applied first to the Term Facility and thereafter to the Revolving Facility.

Covenants

The Credit Agreement contains certain affirmative covenants including, among
others, covenants to furnish the Lenders with financial statements and other financial information and to provide the Lenders notice of material events and information regarding collateral.

The Credit Agreement contains certain negative covenants that, among other things, restrict our ability, subject to certain exceptions, to incur
additional indebtedness, grant liens on our assets, undergo fundamental changes, make investments, sell assets, make acquisitions, engage in sale and leaseback transactions, make restricted payments, engage in transactions with our affiliates, amend
or modify certain agreements and charter documents and change our fiscal year. We are required to maintain a fiscal quarter end interest coverage ratio of 2.50:1.00 through December 31, 2008, 2.75:1.00 beginning March 31, 2009 and
3.00:1.00 beginning March 31, 2010 and thereafter. In addition, we are required to maintain a fiscal quarter end leverage ratio not to exceed 4.95 through December 31, 2008, 4.45 beginning March 31, 2009 and 4.00 beginning
December 31, 2009 and thereafter.

On January 14, 2008, we received an equity investment of $10.0 million, of which
$9.6 million was included in the financial covenant calculation for the twelve-month period ending December 31, 2007 and will continue to be included in the fiscal quarter covenant calculations through the fiscal quarter ending
September 30, 2008 pursuant to the equity cure provisions included in the Credit Agreement. As of June 30, 2008, we were in compliance with all covenants under the Credit Agreement.

(b) Senior Subordinated Notes Due January 15, 2014

On December 23, 2003, we issued $200.0 million aggregate principal amount of Senior Subordinated Notes. The following is a summary of the material terms of the 8.125% Notes.

Maturity Date.The 8.125% Notes mature on January 15, 2014.

Interest Payment Dates.Interest on the 8.125% Notes is payable semi-annually on January 15 and July 15 each year, commencing
July 15, 2004.

Guarantees.The 8.125% Notes are guaranteed on a senior subordinated basis by all of our existing and
future subsidiaries that guarantee the indebtedness under our senior secured credit facility described above.

Security and Ranking.The 8.125% Notes and the guarantees are general unsecured obligations and are subordinated to Kratons and its guarantor subsidiaries existing and future senior indebtedness, including indebtedness under the senior secured credit
facility, and rank equally with Kratons and its guarantor subsidiaries future senior subordinated indebtedness. The 8.125% Notes and the guarantees effectively rank junior to our secured indebtedness and to the secured indebtedness of
all of our guarantor subsidiaries to the extent of the value of the assets securing the indebtedness and are structurally subordinated to all liabilities of Kratons subsidiaries that are not guarantors of the 8.125% Notes.



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Optional Redemption.Generally, we cannot elect to redeem the 8.125% Notes until
January 15, 2009. After such date, we may elect to redeem the 8.125% Notes at certain predetermined redemption prices, plus accrued and unpaid interest.

Covenants.The 8.125% Notes contain certain affirmative covenants including requirements to furnish the holders of 8.125% Notes with financial statements and other financial information and to provide
the holders of 8.125% Notes notice of material events. The 8.125% Notes contain certain negative covenants including limitations on indebtedness, limitations on restricted payments, limitations on restrictions on distributions from certain
subsidiaries, and limitations on lines of business and merger and consolidations. As of June 30, 2008, we were in compliance with all covenants under the 8.125% Notes.

(7) Financial Instruments

(a) Interest Rate Swap Agreements

In February 2008, we entered into a $325 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar
interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, which resulted in a total cost of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the
exposure of the variability of future cash flows subject to the variable quarterly interest rates on $325 million of the Term Facility. We settled the swap early in June, 2008 and realized cash proceeds of $4.6 million resulting in a gain on the
sale of $4.6 million. The gain is deferred in accumulated other comprehensive income at June 30, 2008 and will be reclassified as a reduction in interest expense through March 31, 2010 using the effective interest method, unless we determine that
the forecasted interest payments under the Term Facility are probable not to occur, in which the gain would then be reclassified immediately to interest expense.

Prior to an amendment to the Credit Agreement dated March 12, 2006, under the term loan portion of the senior secured credit facility, we were required to hedge, or otherwise protect a portion of the variable
rate debt against interest rate fluctuations. As a result, we entered into two interest rate swap agreements in the amount of $80.0 million effective June 11, 2004, and $80 million effective July 6, 2004, which were designated as cash flow
hedges. In June 2007, the Company recorded an adjustment to interest expense related to its accounting for interest rate swaps that should have been reflected in prior periods. The Company evaluated the materiality of the adjustment, including both
qualitative and quantitative considerations, and concluded that the adjustment was not material to current or prior periods.

As of
January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair ValueMeasurements (SFAS No. 157). SFAS 157 establishes a three-tier value hierarchy, categorizing the inputs used to
measure fair value. The hierarchy can be described as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly;
and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. From time to time, we enter into derivative financial instruments that are measured at fair value.
However, as of June 30, 2008, we had no financial assets and liabilities measured at fair value on a recurring basis.



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(b) Fair Value of Financial Instruments

The following table presents the carrying values and approximate fair values of our long-term debt at June 30, 2008 and December 31, 2007 (in
thousands):



|             |  |               |         |                   |   |               |  |            |         |  |   |        
|------------ |  | ------------- | ------- | ----------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|             |  | June 30, 2008 |         | December 27, 2007
|             |  | CarryingValue |         | Fair Value        |   | CarryingValue |  | Fair Value
|Term loans   |  | $             | 326,743 |                   | $ | 326,743       |  | $          | 338,465 |  | $ | 338,465
|8.125% Notes |  |               | 200,000 |                   |   | 101,250       |  |            | 200,000 |  |   | 187,250

The Term Loans are variable interest rate securities, and as such, the fair value approximates
their carrying value.

(8) Income Taxes

Income taxes are recorded utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with the differences between the financial accounting basis and tax basis of the assets and
liabilities, and the ultimate realization of any deferred tax assets resulting from such differences. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, as we have no intention to repatriate these
earnings. These foreign earnings could become subject to additional tax if remitted, or deemed remitted, as a dividend; however, it is not practicable to estimate the additional amount of taxes payable.

The effective tax rate for the six months ended June 30, 2008 was approximately 75.6 % as compared to a rate of (5.9%) in the six months
ended June 30, 2007. Our effective tax rate for the six months ended June 30, 2008 was higher than our statutory rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period
and due to the mix of pre-tax income between foreign and domestic tax jurisdictions.

As of June 30, 2008, we had total unrecognized
tax benefits of $0.5 million that, if recognized, would have had an impact on our effective tax rate. These unrecognized benefits were substantially unchanged from December 31, 2007. We recognize interest and penalties related to unrecognized
tax benefits within the provision for income taxes in our consolidated statement of operations. During the six months ended June 30, 2008, we did not recognize any material interest and penalties related to unrecognized tax benefits, and at
June 30, 2008, we had accrued less than $0.1 million for interest and penalties. As of June 30, 2008, we believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within
one year, and no material changes have occurred in our estimates or are expected to occur in events related to anticipated changes in our unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of June 30, 2008, our 2004 through 2007 U.S. federal income tax returns remain open to
examination. In addition, open tax returns to state and foreign jurisdictions remain subject to examination.

(9) Commitments and Contingencies

Legal Proceedings

Pursuant to the sale agreements between us and Shell Chemicals relating to the separation from Shell Chemicals in 2001, Shell Chemicals has agreed to indemnify us for certain liabilities and obligations to third parties or claims against us
by a third party relating to matters arising prior to the closing of the acquisition by Ripplewood Chemical, subject to certain time limitations. Shell Chemicals has been named in several lawsuits relating to the elastomers business that we have
acquired. In particular, claims have been filed against Shell Chemicals alleging workplace



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asbestos exposure at the Belpre, Ohio facility. We are indemnified by Shell Chemicals with respect to these claims, subject to certain time limitations. In
addition, we and Shell Chemicals have entered into a consent order relating to certain environmental remediation at the Belpre, Ohio facility.

(10)
Employee Benefits

(a) Investment in Kraton Management LLC (Management LLC)

We provided certain key employees who held interests in us prior to the acquisition the opportunity to roll over their interests into membership units of
Management LLC, which owns a corresponding number of membership units in TJ Chemical. The membership units are subject to customary tag-along and drag-along rights, as well as a Company call right in the event of termination of employment. As of
June 30, 2008, there were 1,936,000 membership units of Management LLC issued and outstanding.

(b) TJ Chemical Holdings
LLC 2004 Option Plan

On September 9, 2004, TJ Chemical adopted an option plan, or the Option Plan, which allows for the grant
to key employees, consultants, members and service providers of TJ Chemical and its affiliates, including the Company, of non-qualified options (Options) to purchase TJ Chemical membership units. All Options granted in fiscal 2005,
fiscal 2006 and fiscal 2007 had an exercise price of $1 per membership unit, which is equal to or in excess of the fair value of the membership unit on the date of grant.

In general, the Options vest and become exercisable in 20% or 33 1/3 % increments annually on each of the first five or three anniversaries of the grant date, respectively, so long as the holder of the Option is
still an employee on the vesting date. With respect to directors, however, their Options become exercisable in 50% increments annually on each of the first two anniversaries of the grant date, so long as the holder of the Option is still a director
on the vesting date. The exercise price per membership unit shall equal or exceed the fair market value of a membership unit on the date of grant. Upon a change in control, the Options will become 100% vested if the participants employment is
terminated without cause or by the participant for good reason (as each term is defined in the Option Plan) within the 2-year period immediately following such change in control.

A committee of TJ Chemicals board (the Committee) has been appointed to administer the Option Plan, including, without limitation, the
determination of the individuals to whom grants will be made, the number of membership units subject to each grant and the various terms of such grants. The Committee has the right to terminate all of the outstanding Options at any time and pay the
participants an amount equal to the excess, if any, of the fair market value of a membership unit as of such date over the exercise price with respect to such Option, or the spread. Generally, in the event of a merger, the Options will pertain to
and apply to the securities that the Option holder would have received in the merger. Generally, in the event of a dissolution, liquidation, sale of assets or any other merger, the Committee has the discretion to: (1) provide for an
exchange of the options for new options on all or some of the property for which the membership units are exchanged (as may be adjusted by the Committee); (2) cancel and cash out the options (whether or not then vested) at the value
of the spread; or (3) provide for a combination of both. Generally, the Committee may make appropriate adjustments with respect to the number of membership units covered by outstanding options and the exercise price in the event of any increase
or decrease in the number of membership units or any other corporate transaction not described in the preceding sentence.

On a termination
of a participants employment, unvested Options automatically expire and vested Options expire on the earlier of: (1) the commencement of business on the date the employment is terminated for cause; (2) 90 days after the date
employment is terminated for any reason other than cause, death or disability; (3) one year after the date employment is terminated by reason of death or disability; or (4) the tenth anniversary of the grant date for such Option. In the
event the participants employment is terminated by the Company without cause or by the executive officer for good reason within two years following a change in control, all Options become vested as of such termination.



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Generally, pursuant to TJ Chemicals operating agreement, membership units acquired pursuant to the
Option Plan are subject to customary tag-along and drag-along rights for the 180-day period following the later of a termination of employment and six months and one day following the date that units were acquired pursuant to the exercise of the
option. TJ Chemical has the right to repurchase each membership unit then owned by the participant at fair value, as determined in good faith by the Board of Directors of TJ Chemical. See footnote 10(e).

(c) Profits Units of Kraton Management, LLC (Management, LLC)

The Compensation Committee may grant Profits Units of Management LLC (subject to the 8% pool limitation described above) (Profits Units). Profits Units
are economically equivalent to options, except that they provide the recipient with an opportunity to recognize capital gains in the appreciation of TJ Chemicals and its affiliates and TJ Chemicals and its affiliates are not entitled to receive any
tax deductions at the time of grant or disposition of the Profits Units by the employee. Generally, pursuant to the applicable grant agreements, 50% of the Profits Units will vest when the fair value of TJ Chemicals assets equals or exceeds
two times the Threshold Amount, which is defined as the initial value of TJ Chemicals assets on the date of the grant, and 50% of the Profits Units will vest when the fair value of TJ Chemicals assets equals or exceeds three times the
threshold amount, provided that the participant is employed by Kraton or its subsidiaries on such vesting date and provided further, that 100% of the Profits Units shall become vested upon a change in control of TJ Chemical. If at the time TJ
Chemical makes a determination as to whether an individual is entitled to any appreciation with respect to the Profits Units, the value of the assets is more than two times, but less than three times the Threshold Amount, a pro rata portion of the
second tranche will vest based on the appreciation above the two times Threshold Amount. In the case of our President and Chief Executive Officer, if at the time TJ Chemical makes a determination as to whether he is entitled to any appreciation with
respect to the Profits Units, the value of the assets is more than two times, but less than three times the Threshold Amount, a pro rata portion of the second tranche will vest based on the appreciation above the two times Threshold Amount. If an
employees employment terminates prior to any applicable vesting date, such employee shall automatically forfeit all rights to any unvested Profits Units. Upon the occurrence of any distributions received by Management LLC, the holders of the
Profits Units will have a right to receive their pro rata share of the positive difference between initial value of the Profits Units, as determined by the profits unit award agreement, and the then current fair value of the Profits Units, as
determined in accordance with the terms of the agreement governing TJ Chemical and Management LLC. See footnote 10(e).

As of June 30,
2008, there were 1,025,000 Profits Units granted and not yet vested.

(d) Options and Profits Units Outstanding

The aggregate number of Options and Profits Units under the Option Plan shall not exceed 21,740,802, (the Aggregate Limit) representing 8% of the
outstanding membership units and Profits Units of TJ Chemical on March 31, 2004, on a fully diluted basis.

In the second quarter of
2008, 10,763,118 Options were granted. As of June 30, 2008, the total Options granted under the Option Plan amounted to 21,973,118. In addition, as of June 30, 2008, there were 1,025,000 Profits Units granted under the Option Plan and not
yet vested.

The aggregated number of Options and Profits Units under the Option Plan granted as of June 30, 2008, amounted to
22,998,118, or 1,257,316 in excess of the Aggregate Limit. The Company has received authorization from the Compensation Committee of the Companys Board to increase the Aggregate Limit to 23,740,802 (being an increase of 2,000,000 options) and
in this regard, the Company anticipates taking all required steps with TJ Chemical, the Companys parent, in the near term to amend the Option Plan to provide for the revised Aggregate Limit.

(e) Kraton Polymers LLC Executive Deferred Compensation Plan

The Named Executive Officers (as defined in the Annual Report on Form 10K filed with the Securities and Exchange Commission) have the option of deferring up to 50% of their annual bonus, if any, which is



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subsequently converted to notional membership units of TJ Chemical. Such Notional Units remain outstanding until either (1) a change in control or
(2) termination of employment. The amount held pursuant to the plan may ultimately be paid in units of Management LLC.

In 2007,
certain employees participated in the Kraton Executive Deferred Compensation Plan, which was originally approved by the Board of Directors of Kraton on September 9, 2004. Participants in the plan are permitted to elect to defer a portion
(generally, up to 50%) of their annual incentive bonus. Participating employees are credited with a number of phantom membership units based on the fair value of TJ Chemical membership units as of the date of deferral. Distributions from plan
accounts may be made in TJ Chemical membership units, Management LLC membership units, or cash, at the discretion of the committee. Such distributions will occur upon termination of the participants employment subject to a call right or upon a
change in control. We reserved 2,000,000 membership units for issuance pursuant to the Kraton Deferred Compensation Plan.

(f) 2008
Incentive Compensation Plan

On February 5, 2008, the Compensation Committee of the Board of Directors, or the Board, of Kraton
approved and adopted the 2008 Incentive Compensation Plan including the performance-based criteria by which potential payouts to participants will be determined. The total award under the Incentive Compensation Plan ranges from $0 to $18.0 million,
depending on the level of achievement against performance goals.

(g) Retirement Plans

The components of net periodic benefit cost related to pension benefits for the three and six months ended June 30, 2008 and June 30, 2007, are
as follows (in thousands):



|                                         |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                         |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                         |  | 2008                       |        |   | 2007                     |   |      | 2008 |  |   | 2007   |  
|Components of net periodic benefit cost: |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  
|Service cost                             |  | $                          | 603    |   |                          | $ | 644  |      |  | $ | 1,206  |   |  | $ | 1,288  |  
|Interest cost                            |  |                            | 1,059  |   |                          |   | 969  |      |  |   | 2,118  |   |  |   | 1,938  |  
|Expected return on plan assets           |  |                            | (1,032 | ) |                          |   | (908 | )    |  |   | (2,064 | ) |  |   | (1,816 | )
|                                         |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost                |  | $                          | 630    |   |                          | $ | 705  |      |  | $ | 1,260  |   |  | $ | 1,410  |  
|                                         |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  

The components of net periodic benefit cost related to other postretirement benefits for the three
and six months ended June 30, 2008 and June 30, 2007, are as follows (in thousands):



|                                         |  |                            |     |                          |   |      |  |      |     |  |   |    
|---------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                         |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|                                         |  | 2008                       |     | 2007                     |   | 2008 |  | 2007
|Components of net periodic benefit cost: |  |                            |     |                          |   |      |  |      |     |  |   |    
|Service cost                             |  | $                          | 88  |                          | $ | 88   |  | $    | 176 |  | $ | 176
|Interest cost                            |  |                            | 212 |                          |   | 187  |  |      | 424 |  |   | 374
|                                         |  |                            |     |                          |   |      |  |      |     |  |   |    
|Net periodic benefit cost                |  | $                          | 300 |                          | $ | 275  |  | $    | 600 |  | $ | 550
|                                         |  |                            |     |                          |   |      |  |      |     |  |   |    

(11) Industry Segment and Foreign Operations

We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, or SFAS 131, our chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and
assessing performance for the entire company. Since we operate in one segment and in one group of similar products, all financial segment and product line information required by SFAS 131 can be found in the consolidated financial statements.



F-15



---

##### Table of Contents

For geographic reporting, revenues are attributed to the geographic location in which the customers
facilities are located. Long-lived assets consist primarily of property, plant, and equipment, which are attributed to the geographic location in which they are located. Net revenues and long-lived assets by geographic region were as follows (in
thousands):



|                     |  |                            |         |                          |   |         |  |      |         |  |   |        
|-------------------- |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                     |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|                     |  | 2008                       |         | 2007                     |   | 2008    |  | 2007
|Net Revenues:        |  |                            |         |                          |   |         |  |      |         |  |   |        
|United States        |  | $                          | 111,113 |                          | $ | 101,379 |  | $    | 192,834 |  | $ | 187,960
|Germany              |  |                            | 40,888  |                          |   | 41,036  |  |      | 75,737  |  |   | 74,991 
|Japan                |  |                            | 16,168  |                          |   | 12,117  |  |      | 31,549  |  |   | 24,629 
|Italy                |  |                            | 25,433  |                          |   | 13,636  |  |      | 25,798  |  |   | 25,551 
|United Kingdom       |  |                            | 13,201  |                          |   | 9,699   |  |      | 20,948  |  |   | 19,061 
|France               |  |                            | 11,933  |                          |   | 8,226   |  |      | 21,104  |  |   | 13,964 
|China                |  |                            | 3,141   |                          |   | 11,515  |  |      | 18,726  |  |   | 19,548 
|Brazil               |  |                            | 10,665  |                          |   | 7,771   |  |      | 18,604  |  |   | 16,707 
|The Netherlands      |  |                            | 12,951  |                          |   | 15,501  |  |      | 42,656  |  |   | 27,443 
|Canada               |  |                            | 3,941   |                          |   | 5,380   |  |      | 14,595  |  |   | 10,125 
|Belgium              |  |                            | 7,056   |                          |   | 6,890   |  |      | 12,264  |  |   | 14,430 
|Poland               |  |                            | 11,240  |                          |   | 6,446   |  |      | 11,029  |  |   | 8,358  
|Taiwan               |  |                            | 3,422   |                          |   | 4,966   |  |      | 10,794  |  |   | 10,235 
|Turkey               |  |                            | 6,176   |                          |   | 4,205   |  |      | 9,425   |  |   | 7,012  
|Thailand             |  |                            | 5,841   |                          |   | 3,955   |  |      | 9,267   |  |   | 7,566  
|Australia            |  |                            | 3,791   |                          |   |        |  |      | 8,175   |  |   |       
|Sweden               |  |                            | 3,152   |                          |   | 3,651   |  |      | 7,535   |  |   | 6,350  
|Argentina            |  |                            | 4,387   |                          |   | 3,281   |  |      | 7,465   |  |   | 6,764  
|Mexico               |  |                            | 8,487   |                          |   | 2,094   |  |      | 6,266   |  |   | 4,718  
|Denmark              |  |                            | 2,797   |                          |   | 2,147   |  |      | 5,835   |  |   | 4,755  
|Republic of Korea    |  |                            | 4,509   |                          |   |        |  |      | 5,341   |  |   |       
|Austria              |  |                            |        |                          |   | 2,708   |  |      |        |  |   | 4,216  
|United Arab Emirates |  |                            |        |                          |   | 3,689   |  |      |        |  |   | 4,045  
|All other countries  |  |                            | 35,077  |                          |   | 24,604  |  |      | 56,283  |  |   | 43,294 
|                     |  |                            |         |                          |   |         |  |      |         |  |   |        
|                     |  | $                          | 345,369 |                          | $ | 294,896 |  | $    | 612,230 |  | $ | 541,722
|                     |  |                            |         |                          |   |         |  |      |         |  |   |        



|                    |  |              |         |                  |   |        
|------------------- |  | ------------ | ------- | ---------------- | - | -------
|                    |  | June 30,2008 |         | December 31,2007
|Long-lived assets:  |  |              |         |                  |   |        
|United States       |  | $            | 293,188 |                  | $ | 298,979
|Germany             |  |              | 44,803  |                  |   | 40,406 
|Japan               |  |              | 4,619   |                  |   | 3,743  
|France              |  |              | 118,697 |                  |   | 111,441
|The Netherlands     |  |              | 36,244  |                  |   | 34,454 
|Brazil              |  |              | 62,021  |                  |   | 56,721 
|China               |  |              | 2,272   |                  |   | 2,119  
|All other countries |  |              | 12,396  |                  |   | 12,050 
|                    |  |              |         |                  |   |        
|                    |  | $            | 574,240 |                  | $ | 559,913
|                    |  |              |         |                  |   |        



F-16



---

##### Table of Contents

(12) Supplemental Guarantor Information

Kraton and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 8.125% Notes. The Guarantor
Subsidiaries fully and unconditionally guarantee, on a joint and several basis, the Issuers obligations under the 8.125% Notes. Kratons remaining subsidiaries are not guarantors of the 8.125% Notes. We do not believe that separate
financial statements and other disclosures concerning the Guarantor Subsidiaries would provide any additional information that would be material to investors in making an investment decision.

Balance Sheets



|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|------------------------------------------------------------- |  | ------------------- | ----------- | - | --------------------- | - | ------------------------- |  | ------------ | ------- |  | ------------ | ---------- | - |  | - | ---------
|                                                              |  | As of June 30, 2008
|                                                              |  | Issuers (1)         |             |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Eliminations |         |  | Consolidated
|Assets                                                        |  |                     | (unaudited)
|Current assets:                                               |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Cash and cash equivalents                                     |  | $                   |            |   |                       | $ | 3,071                     |  | $            | 18,281  |  | $            |           |   |  | $ | 21,352   
|Receivables, net                                              |  |                     |            |   |                       |   | 62,558                    |  |              | 114,494 |  |              |           |   |  |   | 177,052  
|Due from related parties                                      |  |                     | 5,272       |   |                       |   | 18,200                    |  |              | 4,390   |  |              | (27,862    | ) |  |   |         
|Inventories of products, net                                  |  |                     |            |   |                       |   | 130,506                   |  |              | 153,342 |  |              | (6,434     | ) |  |   | 277,414  
|Inventories of materials and supplies                         |  |                     |            |   |                       |   | 7,018                     |  |              | 5,795   |  |              |           |   |  |   | 12,813   
|Other current assets                                          |  |                     | 5,169       |   |                       |   | 714                       |  |              | 6,226   |  |              |           |   |  |   | 12,109   
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total current assets                                          |  |                     | 10,441      |   |                       |   | 222,067                   |  |              | 302,528 |  |              | (34,296    | ) |  |   | 500,740  
|Property, plant and equipment, less accumulated depreciation  |  |                     | 98,637      |   |                       |   | 163,998                   |  |              | 135,638 |  |              |           |   |  |   | 398,273  
|Identifiable intangible assets, less accumulated amortization |  |                     | 25,936      |   |                       |   |                          |  |              | 46,938  |  |              |           |   |  |   | 72,874   
|Investment in consolidated subsidiaries                       |  |                     | 850,678     |   |                       |   |                          |  |              |        |  |              | (850,678   | ) |  |   |         
|Investment in unconsolidated joint venture                    |  |                     | 813         |   |                       |   |                          |  |              | 9,805   |  |              |           |   |  |   | 10,618   
|Deferred financing costs                                      |  |                     | 10,124      |   |                       |   |                          |  |              |        |  |              |           |   |  |   | 10,124   
|Other long-term assets                                        |  |                     | 119,428     |   |                       |   | 427,393                   |  |              | 12,686  |  |              | (540,637   | ) |  |   | 18,870   
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total assets                                                  |  | $                   | 1,116,057   |   |                       | $ | 813,458                   |  | $            | 507,595 |  | $            | (1,425,611 | ) |  | $ | 1,011,499
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Liabilities and Members Equity                               |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Current liabilities:                                          |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Current portion of long-term debt                             |  | $                   | 3,445       |   |                       | $ |                          |  | $            |        |  | $            |           |   |  | $ | 3,445    
|Accounts payable-trade                                        |  |                     | 2,700       |   |                       |   | 49,126                    |  |              | 55,747  |  |              |           |   |  |   | 107,573  
|Other payables and accruals                                   |  |                     | 12,139      |   |                       |   | 21,116                    |  |              | 27,362  |  |              |           |   |  |   | 60,617   
|Due to (from) related parties                                 |  |                     |            |   |                       |   | 4,390                     |  |              | 39,549  |  |              | (27,862    | ) |  |   | 16,077   
|Deferred income taxes                                         |  |                     | (812        | ) |                       |   |                          |  |              | 9,841   |  |              |           |   |  |   | 9,029    
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total current liabilities                                     |  |                     | 17,472      |   |                       |   | 74,632                    |  |              | 132,499 |  |              | (27,862    | ) |  |   | 196,741  
|Long-term debt, net of current portion                        |  |                     | 523,298     |   |                       |   |                          |  |              |        |  |              |           |   |  |   | 523,298  
|Deferred income taxes                                         |  |                     | (13,352     | ) |                       |   | 52,922                    |  |              | 1,591   |  |              |           |   |  |   | 41,161   
|Long-term liabilities                                         |  |                     | 424,592     |   |                       |   | 23,223                    |  |              | 124,040 |  |              | (540,637   | ) |  |   | 31,218   
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total liabilities                                             |  |                     | 952,010     |   |                       |   | 150,777                   |  |              | 258,130 |  |              | (568,499   | ) |  |   | 792,418  
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Commitments and contingencies (note 9)                        |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Members equity:                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Common equity                                                 |  |                     | 161,112     |   |                       |   | 657,471                   |  |              | 193,233 |  |              | (857,112   | ) |  |   | 154,704  
|Accumulated other comprehensive income                        |  |                     | 2,935       |   |                       |   | 5,210                     |  |              | 56,232  |  |              |           |   |  |   | 64,377   
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total members equity                                         |  |                     | 164,047     |   |                       |   | 662,681                   |  |              | 249,465 |  |              | (857,112   | ) |  |   | 219,081  
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          
|Total liabilities and members equity                         |  | $                   | 1,116,057   |   |                       | $ | 813,458                   |  | $            | 507,595 |  | $            | (1,425,611 | ) |  | $ | 1,011,499
|                                                              |  |                     |             |   |                       |   |                           |  |              |         |  |              |            |   |  |   |          



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-17



---

##### Table of Contents

|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|------------------------------------------------------------- |  | ----------------------- | --------- | - | --------------------- | - | ------- | ------------------------- |  | ------------ | ------- |  | ------------ | ---------- | - |  | - | -------
|                                                              |  | As of December 31, 2007
|                                                              |  | Issuers (1)             |           |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | Eliminations |         |  | Consolidated
|Assets                                                        |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |  
|Current assets:                                               |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Cash and cash equivalents                                     |  | $                       |          |   |                       | $ | 11,152  |                           |  | $            | 37,125  |  | $            |           |   |  | $ | 48,277 
|Receivables, net of allowances                                |  |                         |          |   |                       |   | 50,134  |                           |  |              | 90,187  |  |              |           |   |  |   | 140,321
|Due from related parties                                      |  |                         | 1,873     |   |                       |   | 19,856  |                           |  |              | 6,291   |  |              | (28,020    | ) |  |   |       
|Inventories of products, net                                  |  |                         |          |   |                       |   | 124,052 |                           |  |              | 138,772 |  |              | (6,501     | ) |  |   | 256,323
|Inventories of materials and supplies, net                    |  |                         |          |   |                       |   | 6,817   |                           |  |              | 5,353   |  |              |           |   |  |   | 12,170 
|Other current assets                                          |  |                         | 2,172     |   |                       |   | 1,671   |                           |  |              | 8,561   |  |              |           |   |  |   | 12,404 
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total current assets                                          |  |                         | 4,045     |   |                       |   | 213,682 |                           |  |              | 286,289 |  |              | (34,521    | ) |  |   | 469,495
|Property, plant and equipment, less accumulated depreciation  |  |                         | 104,945   |   |                       |   | 166,948 |                           |  |              | 130,377 |  |              |           |   |  |   | 402,270
|Identifiable intangible assets, less accumulated amortization |  |                         | 29,418    |   |                       |   |        |                           |  |              | 46,938  |  |              |           |   |  |   | 76,356 
|Investment in consolidated subsidiaries                       |  |                         | 807,543   |   |                       |   |        |                           |  |              |        |  |              | (807,543   | ) |  |   |       
|Investment in unconsolidated joint venture                    |  |                         | 813       |   |                       |   |        |                           |  |              | 9,513   |  |              |           |   |  |   | 10,326 
|Deferred financing costs                                      |  |                         | 10,323    |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 10,323 
|Other long-term assets                                        |  |                         | 97,301    |   |                       |   | 400,861 |                           |  |              | 16,997  |  |              | (499,035   | ) |  |   | 16,124 
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total assets                                                  |  | $                       | 1,054,388 |   |                       | $ | 781,491 |                           |  | $            | 490,114 |  | $            | (1,341,099 | ) |  | $ | 984,894
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Liabilities and Members Equity                               |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Current liabilities:                                          |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Current portion of long-term debt                             |  | $                       | 3,445     |   |                       | $ |        |                           |  | $            |        |  | $            |           |   |  | $ | 3,445  
|Accounts payable-trade                                        |  |                         | 2,700     |   |                       |   | 48,030  |                           |  |              | 52,222  |  |              |           |   |  |   | 102,952
|Other payables and accruals                                   |  |                         | 13,503    |   |                       |   | 17,988  |                           |  |              | 24,325  |  |              |           |   |  |   | 55,816 
|Due to related parties                                        |  |                         |          |   |                       |   | 6,291   |                           |  |              | 46,234  |  |              | (28,020    | ) |  |   | 24,505 
|Deferred income taxes                                         |  |                         |          |   |                       |   |        |                           |  |              | 9,827   |  |              |           |   |  |   | 9,827  
|Insurance note payable                                        |  |                         | 494       |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 494    
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total current liabilities                                     |  |                         | 20,142    |   |                       |   | 72,309  |                           |  |              | 132,608 |  |              | (28,020    | ) |  |   | 197,039
|Long-term debt, net of current portion                        |  |                         | 535,020   |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 535,020
|Deferred income taxes                                         |  |                         | (52,048   | ) |                       |   | 84,417  |                           |  |              | 7,074   |  |              |           |   |  |   | 39,443 
|Long-term liabilities                                         |  |                         | 405,552   |   |                       |   | 22,980  |                           |  |              | 101,185 |  |              | (499,035   | ) |  |   | 30,682 
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total liabilities                                             |  |                         | 908,666   |   |                       |   | 179,706 |                           |  |              | 240,867 |  |              | (527,055   | ) |  |   | 802,184
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Commitments and contingencies (note 9)                        |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Members equity:                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Common equity                                                 |  |                         | 145,722   |   |                       |   | 621,110 |                           |  |              | 190,361 |  |              | (814,044   | ) |  |   | 143,149
|Accumulated other comprehensive income                        |  |                         |          |   |                       |   | (19,325 | )                         |  |              | 58,886  |  |              |           |   |  |   | 39,561 
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total members equity                                         |  |                         | 145,722   |   |                       |   | 601,785 |                           |  |              | 249,247 |  |              | (814,044   | ) |  |   | 182,710
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        
|Total liabilities and members equity                         |  | $                       | 1,054,388 |   |                       | $ | 781,491 |                           |  | $            | 490,114 |  | $            | (1,341,099 | ) |  | $ | 984,894
|                                                              |  |                         |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |        



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-18



---

##### Table of Contents

Statements of Operations



|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | -------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Three Months Ended June 30, 2008 |        
|                                                          |  | Issuers (1)                      |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  |                                  |         |   |                       |   |         | (Unaudited)               |  |   |              |   |  |              |        
|Revenues:                                                 |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $                                |        |   |                       | $ | 173,152 |                           |  | $ | 201,984      |   |  | $            | (46,774 | ) |  | $ | 328,362 |  
|Other                                                     |  |                                  |        |   |                       |   |        |                           |  |   | 17,007       |   |  |              |         |   |  |   | 17,007  |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total revenues                                            |  |                                  |        |   |                       |   | 173,152 |                           |  |   | 218,991      |   |  |              | (46,774 | ) |  |   | 345,369 |  
|Cost of goods sold                                        |  |                                  | (1,457  | ) |                       |   | 139,801 |                           |  |   | 191,253      |   |  |              | (46,774 | ) |  |   | 282,823 |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |  |                                  | 1,457   |   |                       |   | 33,351  |                           |  |   | 27,738       |   |  |              |        |   |  |   | 62,546  |  
|Research and development expenses                         |  |                                  |        |   |                       |   | 4,186   |                           |  |   | 3,217        |   |  |              |        |   |  |   | 7,403   |  
|Selling, general, and administrative expenses             |  |                                  | 235     |   |                       |   | 8,643   |                           |  |   | 11,031       |   |  |              |        |   |  |   | 19,909  |  
|Depreciation and amortization of identifiable intangibles |  |                                  | 4,169   |   |                       |   | 5,379   |                           |  |   | 3,562        |   |  |              |        |   |  |   | 13,110  |  
|Earnings in consolidated subsidiaries                     |  |                                  | (21,902 | ) |                       |   |        |                           |  |   |             |   |  |              | 21,902  |   |  |   |        |  
|Earnings in unconsolidated joint venture                  |  |                                  |        |   |                       |   |        |                           |  |   | (159         | ) |  |              |        |   |  |   | (159    | )
|Interest expense, net                                     |  |                                  | 10,046  |   |                       |   | (2,489  | )                         |  |   | 1,861        |   |  |              |        |   |  |   | 9,418   |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |                                  | 8,909   |   |                       |   | 17,632  |                           |  |   | 8,226        |   |  |              | (21,902 | ) |  |   | 12,865  |  
|Income tax benefit (provision)                            |  |                                  | 1,307   |   |                       |   | (15     | )                         |  |   | (3,941       | ) |  |              |        |   |  |   | (2,649  | )
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |  | $                                | 10,216  |   |                       | $ | 17,617  |                           |  | $ | 4,285        |   |  | $            | (21,902 | ) |  | $ | 10,216  |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | -------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Three Months Ended June 30, 2007 |        
|                                                          |  | Issuers (1)                      |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  |                                  |         |   |                       |   |         | (Unaudited)               |  |   |              |   |  |              |        
|Revenues:                                                 |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $                                |        |   |                       | $ | 148,520 |                           |  | $ | 186,475      |   |  | $            | (47,669 | ) |  | $ | 287,326 |  
|Other                                                     |  |                                  |        |   |                       |   | 67      |                           |  |   | 7,503        |   |  |              |        |   |  |   | 7,570   |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total revenues                                            |  |                                  |        |   |                       |   | 148,587 |                           |  |   | 193,978      |   |  |              | (47,669 | ) |  |   | 294,896 |  
|Cost of goods sold                                        |  |                                  | (227    | ) |                       |   | 122,544 |                           |  |   | 168,812      |   |  |              | (47,669 | ) |  |   | 243,460 |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |  |                                  | 227     |   |                       |   | 26,043  |                           |  |   | 25,166       |   |  |              |        |   |  |   | 51,436  |  
|Research and development expenses                         |  |                                  |        |   |                       |   | (1,138  | )                         |  |   | 7,667        |   |  |              |        |   |  |   | 6,529   |  
|Selling, general, and administrative expenses             |  |                                  |        |   |                       |   | 9,120   |                           |  |   | 7,485        |   |  |              |        |   |  |   | 16,605  |  
|Depreciation and amortization of identifiable intangibles |  |                                  | 4,324   |   |                       |   | 4,838   |                           |  |   | 2,666        |   |  |              |        |   |  |   | 11,828  |  
|Earnings in consolidated subsidiaries                     |  |                                  | (24,087 | ) |                       |   |        |                           |  |   |             |   |  |              | 24,087  |   |  |   |        |  
|Earnings in unconsolidated joint venture                  |  |                                  |        |   |                       |   |        |                           |  |   | (95          | ) |  |              |        |   |  |   | (95     | )
|Interest expense (income), net                            |  |                                  | 9,814   |   |                       |   | (2,362  | )                         |  |   | 1,950        |   |  |              |        |   |  |   | 9,402   |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |                                  | 10,176  |   |                       |   | 15,585  |                           |  |   | 5,493        |   |  |              | (24,087 | ) |  |   | 7,167   |  
|Income tax benefit (provision)                            |  |                                  | (3,958  | ) |                       |   | 5,144   |                           |  |   | (2,135       | ) |  |              |        |   |  |   | (949    | )
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |  | $                                | 6,218   |   |                       | $ | 20,729  |                           |  | $ | 3,358        |   |  | $            | (24,087 | ) |  | $ | 6,218   |  
|                                                          |  |                                  |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-19



---

##### Table of Contents

|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Six Months Ended June 30, 2008 |        
|                                                          |  | Issuers (1)                    |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  |                                |         |   |                       |   |         | (Unaudited)               |  |   |              |   |  |              |        
|Revenues:                                                 |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $                              |        |   |                       | $ | 304,120 |                           |  | $ | 370,187      |   |  | $            | (89,657 | ) |  | $ | 584,650 |  
|Other                                                     |  |                                |        |   |                       |   |        |                           |  |   | 27,580       |   |  |              |        |   |  |   | 27,580  |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total revenues                                            |  |                                |        |   |                       |   | 304,120 |                           |  |   | 397,767      |   |  |              | (89,657 | ) |  |   | 612,230 |  
|Cost of goods sold                                        |  |                                | (67     | ) |                       |   | 238,315 |                           |  |   | 352,308      |   |  |              | (89,657 | ) |  |   | 500,899 |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |  |                                | 67      |   |                       |   | 65,805  |                           |  |   | 45,459       |   |  |              |        |   |  |   | 111,331 |  
|Research and development expenses                         |  |                                |        |   |                       |   | 9,630   |                           |  |   | 5,691        |   |  |              |        |   |  |   | 15,321  |  
|Selling, general, and administrative expenses             |  |                                | 252     |   |                       |   | 24,190  |                           |  |   | 20,922       |   |  |              |        |   |  |   | 45,364  |  
|Depreciation and amortization of identifiable intangibles |  |                                | 9,790   |   |                       |   | 10,761  |                           |  |   | 7,211        |   |  |              |        |   |  |   | 27,762  |  
|Earnings in consolidated subsidiaries                     |  |                                | (29,565 | ) |                       |   |        |                           |  |   |             |   |  |              | 29,565  |   |  |   |        |  
|Earnings in unconsolidated joint venture                  |  |                                |        |   |                       |   |        |                           |  |   | (220         | ) |  |              |        |   |  |   | (220    | )
|Interest expense (income), net                            |  |                                | 21,020  |   |                       |   | (5,065  | )                         |  |   | 3,848        |   |  |              |        |   |  |   | 19,803  |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |                                | (1,430  | ) |                       |   | 26,289  |                           |  |   | 8,007        |   |  |              | (29,565 | ) |  |   | 3,301   |  
|Income tax benefit (provision)                            |  |                                | 2,236   |   |                       |   | (15     | )                         |  |   | (4,716       | ) |  |              |        |   |  |   | (2,495  | )
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |  | $                              | 806     |   |                       | $ | 26,274  |                           |  | $ | 3,291        |   |  | $            | (29,565 | ) |  | $ | 806     |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Six Months Ended June 30, 2007 |        
|                                                          |  | Issuers (1)                    |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  |                                |         |   |                       |   |         | (Unaudited)               |  |   |              |   |  |              |        
|Revenues:                                                 |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $                              |        |   |                       | $ | 275,053 |                           |  | $ | 336,171      |   |  | $            | (83,396 | ) |  | $ | 527,828 |  
|Other                                                     |  |                                |        |   |                       |   | 108     |                           |  |   | 13,786       |   |  |              |        |   |  |   | 13,894  |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total revenues                                            |  |                                |        |   |                       |   | 275,161 |                           |  |   | 349,957      |   |  |              | (83,396 | ) |  |   | 541,722 |  
|Cost of goods sold                                        |  |                                | 12      |   |                       |   | 231,484 |                           |  |   | 309,861      |   |  |              | (83,396 | ) |  |   | 457,961 |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |  |                                | (12     | ) |                       |   | 43,677  |                           |  |   | 40,096       |   |  |              |        |   |  |   | 83,761  |  
|Research and development expenses                         |  |                                |        |   |                       |   | 2,731   |                           |  |   | 10,321       |   |  |              |        |   |  |   | 13,052  |  
|Selling, general, and administrative expenses             |  |                                |        |   |                       |   | 19,048  |                           |  |   | 14,566       |   |  |              |        |   |  |   | 33,614  |  
|Depreciation and amortization of identifiable intangibles |  |                                | 8,648   |   |                       |   | 9,987   |                           |  |   | 5,243        |   |  |              |        |   |  |   | 23,878  |  
|Earnings in consolidated subsidiaries                     |  |                                | (21,563 | ) |                       |   |        |                           |  |   |             |   |  |              | 21,563  |   |  |   |        |  
|Earnings in unconsolidated joint venture                  |  |                                |        |   |                       |   |        |                           |  |   | (325         | ) |  |              |        |   |  |   | (325    | )
|Interest expense (income), net                            |  |                                | 21,067  |   |                       |   | (4,643  | )                         |  |   | 3,708        |   |  |              |        |   |  |   | 20,132  |  
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |                                | (8,164  | ) |                       |   | 16,554  |                           |  |   | 6,583        |   |  |              | (21,563 | ) |  |   | (6,590  | )
|Income tax benefit (provision)                            |  |                                | 1,186   |   |                       |   |        |                           |  |   | (1,574       | ) |  |              |        |   |  |   | (388    | )
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |  | $                              | (6,978  | ) |                       | $ | 16,554  |                           |  | $ | 5,009        |   |  | $            | (21,563 | ) |  | $ | (6,978  | )
|                                                          |  |                                |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-20



---

##### Table of Contents

Statements of Cash Flows



|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|--------------------------------------------------------------- |  | ------------------------------ | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | -------- | -
|                                                                |  | Six Months Ended June 30, 2008 |         
|                                                                |  | Issuers (1)                    |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                |  |                                |          |   |                       |   |         | (Unaudited)               |  |   |              |   |              |  
|Cash flows provided by (used in) operating activities           |  | $                              | (15,370  | ) |                       | $ | 18,770  |                           |  | $ | (17,263      | ) |              | $ |  |  | $ | (13,863  | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Cash flows used in investing activities:                        |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Purchase of business, including transaction costs               |  |                                |         |   |                       |   | 1,858   |                           |  |   | (1,858       | ) |              |   |   |  |   |          |  
|Proceeds from sale of plant and equipment                       |  |                                |         |   |                       |   | 17      |                           |  |   |             |   |              |   |  |  |   | 17       |  
|Purchase of plant and equipment                                 |  |                                |         |   |                       |   | (9,686  | )                         |  |   |             |   |              |   |  |  |   | (9,686   | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in investing activities                           |  |                                |         |   |                       |   | (7,811  | )                         |  |   | (1,858       | ) |              |   |  |  |   | (9,669   | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Cash flows provided by (used in) financing activities:          |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Borrowings under debt obligations                               |  |                                | 154,750  |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 154,750  |  
|Repayment of debt obligations                                   |  |                                | (166,472 | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (166,472 | )
|Proceeds from cash contribution from member                     |  |                                | 10,000   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 10,000   |  
|Proceeds from (payments on) intercompany loans                  |  |                                | 17,586   |   |                       |   | (19,040 | )                         |  |   | 1,454        |   |              |   |  |  |   |         |  
|Net payment of insurance note payable                           |  |                                | (494     | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (494     | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities             |  |                                | 15,370   |   |                       |   | (19,040 | )                         |  |   | 1,454        |   |              |   |  |  |   | (2,216   | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Effect of exchange rate difference on cash and cash equivalents |  |                                |         |   |                       |   |        |                           |  |   | (1,177       | ) |              |   |  |  |   | (1,177   | )
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net decrease in cash and cash equivalents                       |  |                                |         |   |                       |   | (8,081  | )                         |  |   | (18,844      | ) |              |   |  |  |   | (26,925  | )
|Cash and cash equivalents at beginning of period                |  |                                |         |   |                       |   | 11,152  |                           |  |   | 37,125       |   |              |   |  |  |   | 48,277   |  
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of period                      |  |                                |         |   |                       | $ | 3,071   |                           |  | $ | 18,281       |   |              |   |  |  | $ | 21,352   |  
|                                                                |  |                                |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-21



---

##### Table of Contents

|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                                         |  | Six Months Ended June 30, 2007 |        
|                                                                         |  | Issuers (1)                    |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                         |  |                                |         |   |                       |   |         | (Unaudited)               |  |   |              |   |              |  
|Cash flows provided by (used in) operating activities                    |  | $                              | (14,516 | ) |                       | $ | 31,567  |                           |  | $ | 6,063        |   |              | $ |  |  | $ | 23,114  |  
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows used in investing activities:                                 |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Purchase of plant and equipment, net of proceeds from sales of equipment |  |                                |        |   |                       |   | (5,866  | )                         |  |   | (5,147       | ) |              |   |  |  |   | (11,013 | )
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                                    |  |                                |        |   |                       |   | (5,866  | )                         |  |   | (5,147       | ) |              |   |  |  |   | (11,013 | )
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows provided by (used in) financing activities:                   |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Repayment of debt obligations                                            |  |                                | (963    | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (963    | )
|Proceeds from (payments on) intercompany loans                           |  |                                | 12,264  |   |                       |   | (12,264 | )                         |  |   |             |   |              |   |  |  |   |        |  
|Net proceeds from insurance note payable                                 |  |                                | 3,215   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 3,215   |  
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities                      |  |                                | 14,516  |   |                       |   | (12,264 | )                         |  |   |             |   |              |   |  |  |   | 2,252   |  
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Effect of exchange rate difference on cash and cash equivalents          |  |                                |        |   |                       |   |        |                           |  |   | (1,002       | ) |              |   |  |  |   | (1,002  | )
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                     |  |                                |        |   |                       |   | 13,437  |                           |  |   | (86          | ) |              |   |  |  |   | 13,351  |  
|Cash and cash equivalents at beginning of period                         |  |                                |        |   |                       |   | 13,850  |                           |  |   | 29,751       |   |              |   |  |  |   | 43,601  |  
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period                               |  | $                              |        |   |                       | $ | 27,287  |                           |  | $ | 29,665       |   |              | $ |  |  | $ | 56,952  |  
|                                                                         |  |                                |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  



|(1) | Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information
that would be useful.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

You should read the following discussion of our financial condition and results of operations with our audited consolidated financial statements and
related notes thereto, included in Kratons Annual Report on Form 10-K as of and for the year ended December 31, 2007. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not
limited to, the risk factors discussed in the Risk Factors section of our most recent Form 10-K and in Factors Affecting Our Results of Operations and elsewhere in this Form 10-Q. Actual results may differ materially from
those contained in any forward-looking statements.

Overview

We believe we are the worlds leading producer of styrenic block copolymers
(SBCs), a family of specialty chemical products whose chemistry we pioneered over 40 years ago. SBCs are highly engineered synthetic elastomers which enhance the performance of numerous products by delivering a variety of performance
characteristics, including greater flexibility, resilience, strength, durability and processability, and are a fast growing subset of the elastomers industry. Our specialty polymers are typically processed with other products to achieve customer
specific performance characteristics in a variety of applications. Each polymer is highly customized to each application and is usually a critical component to the performance of our customers product, yet represents a small fraction of the
overall cost of the customers finished product. The versatility of our portfolio of polymers is due to a wide range of distinctive molecular structures, which can be precisely controlled and tailored to unique design and performance
characteristics. Each polymer requires a significant amount of testing and certification, which, combined with our proprietary chemistry encourages strong customer loyalty. We believe that our global scale, broad product offerings, superior
technical expertise, strong customer relationships and well-recognized KRATON® brand name have allowed us to maintain our leading global position in SBCs.

We currently offer over 800 products to over 700 customers in over 60 countries worldwide. We are the only SBC producer with manufacturing and service
capabilities on four continents enabling our multinational customers to meet their global needs. We operate six plants globally, including our flagship Belpre, Ohio plant in the United States, the largest SBC plant in the world, as well as plants in
Germany, France, The Netherlands, and Brazil. The plant in Japan is operated by a manufacturing joint venture. We serve a large number of customers across a diverse set of end-use markets in many regions of the world. As a result, we believe our
sales are less sensitive to conditions in any one particular end-use market or region.

We have aligned our commercial activities to serve
three core end-uses with what we believe to be the highest growth and value potential: (i) Advanced Materials (32% of 2007 sales), which includes applications in compounding channels, packaging and films and personal care end-markets;
(ii) Adhesives, Sealants & Coatings (31% of 2007 sales); and (iii) Paving & Roofing (30% of 2007 sales). Each of our end-uses constitutes a global profit center, and each has its own dedicated management, sales force and
market development. In addition, each end-use is linked directly to the Research, Development and Technical Services (RTS) function and, via this link, sponsors the creation and commercialization of new products in addition to servicing
its customers technical needs. We believe we hold the number one market position, based on 2007 sales, in each of our core end-use markets.

Recent Developments

Pricing

During 2008, we implemented a series of global price increases which were generally broad-based across our end-use markets and in response to the continuing increase in raw material and energy costs. Most recently, we
have announced additional global price increases to be effective on July 1, August 1, and September 1.



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Raw Materials

As of June 2008, we have been unable to obtain the supply of butadiene to which we are entitled under our supply agreements. The significant factors causing the shortfall are the continued run-up in the cost of crude
oil and planned and unplanned outages by certain producers of butadiene. We are currently on allocation from our supplies of butadiene, and, as a result, we are unable to produce all products necessary to meet customer demand and, in turn, have had
to allocate certain available product supplies among our customers. We believe that butadiene supply shortages are affecting our industry generally, and we cannot predict if or when the current situation will change or improve.

Customer Event

One of our
major asphalt customers, SemMaterials L.P. (SEM), filed a petition for relief under Chapter 11 of Title 11 of the United States Code on July 22, 2008, along with several of SEMs affiliated companies. The Company has outstanding
pre-petition receivables of approximately $0.4 million due from SEM, but does not believe that SEMs bankruptcy case will have a material effect on the Companys ongoing operations.

Belpre Plant Instrumentation Upgrade

In May, the Company entered into a contract with Invensys Systems Inc. pursuant to which certain systems and operating controls at the Belpre, Ohio facility will be upgraded in stages over the next several years. Pursuant to the
contract, Invensys will provide detailed engineering design necessary to implement the new systems, as well as supply hardware and software for such systems. This project should significantly improve the effectiveness, competitiveness and
operating efficiency of the Belpre plant. The project will begin in the second-half of 2008 and will be completed in distinct phases extending into 2012, with the total spending currently estimated at $40.0 million.

Execution of Building Lease

In August 2008 we signed a new building lease that will house our Houston-based Research and Technology Service organization. The new facility will be occupied in early 2009, and it will yield cost savings as compared to our current leased
facilities. The new facility will be ideally suited for Kraton, designed specifically to enhance the effectiveness of our research and Technology Service team.

Sale of Interest Rate Swap Agreement

In June 2008, we settled early our interest in an
interest rate swap agreement that was entered into in February 2008, realizing cash proceeds of $4.6 million. The gain is deferred in accumulated other comprehensive income at June 30, 2008 and will be reclassified as a reduction in interest expense
through March 31, 2010 using the effective interest method, unless we determine that the forecasted interest payments under the Term Facility are probably not to occur in which the gain would then be reclassified immediately to interest expense. The
Company will evaluate the need for variable interest-rate protection agreements based on prevailing and expected future market conditions.

Critical
Accounting Policies

Our significant accounting policies are more fully described in the notes to the December 31, 2007
consolidated financial statements included in Kratons Annual Report on Form 10-K. The process of preparing financial statements, in accordance with generally accepted accounting principles in the United States requires management to make
estimates and judgments regarding certain items and transactions. These judgments are based on historical experience, current economic and industry trends, information provided by outside sources, and management estimates. It is possible that
materially different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and judgments. We consider the following to be our most significant critical accounting policies which
involve the judgment of management.



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Revenue Recognition

We recognize revenue from sales when title transfers. We classify amounts billed to customers for shipping and handling as revenues, with the related
shipping and handling costs included in cost of goods sold.

We have entered into agreements with some of our customers, whereby they earn
rebates from us when the volume of their purchases of our products reach certain agreed upon levels. We recognize the rebate obligation under these agreements as a reduction of revenue based on an allocation of the cost of honoring the rebates that
are earned to each of the underlying revenue transactions that result in progress by the customer toward earning the rebate.

Inventories

Consolidated inventories are stated at the lower of cost or market as determined on a first-in,
first-out basis. On a quarterly basis, we evaluate the carrying cost of our inventory to ensure that it is stated at the lower of cost or market. Our products are typically not subject to spoiling or obsolescence and consequently our reserves for
slow moving and obsolete inventory have historically not been significant. Cash flows from the sale of inventory are reported in cash flows from operations in the consolidated statement of cash flows.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized. Repair and maintenance expenses are charged to operations as incurred. The Company utilizes the
expense as incurred method of accounting for planned major maintenance. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. We capitalize interest costs which are incurred as
part of the cost of constructing major facilities and equipment. We did not record any capitalized interest in any periods presented. Depreciation is provided using the straight-line method over the following estimated useful lives:



|                                      |  |         
|------------------------------------- |  | --------
|Machinery and equipment               |  | 20 years
|Building and land improvements        |  | 20 years
|Computer hardware/information systems |  | 3 years 
|Office equipment                      |  | 5 years 
|Research equipment and facilities     |  | 5 years 
|Vehicles                              |  | 5 years 

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying
amount of the asset exceeds the fair value of the asset, calculated using discounted cash flows.

Benefit Plans

We sponsor a noncontributory defined benefit pension plan, a non-qualified defined benefit pension plan (restoration plan), and other
postretirement benefit plans. The actuarial determination of the projected benefit obligations and related benefit expense requires that certain assumptions be made regarding such variables as expected return on plan assets, discount rates, rates of
future compensation increases, estimated future employee



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turnover rates and retirement dates, distribution election rates, mortality rates, retiree utilization rates for health care services and health care cost
trend rates. The selection of assumptions requires considerable judgment concerning future events and has a significant impact on the amount of the obligations recorded in the consolidated balance sheets and on the amount of expense included in the
consolidated statements of operations.

Income Taxes

We conduct operations in separate legal entities; as a result, income tax amounts are reflected in these consolidated financial statements for each of
those jurisdictions.

Net operating losses and credit carryforwards are recorded in the event such benefits are expected to be realized.
Deferred taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.

In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation
allowances.

Factors Affecting Our Results of Operations

Raw Materials

Our results of operations are directly affected by the cost of raw materials.
We use three monomers as our primary raw materials in the manufacture of our products: styrene; butadiene; and isoprene. These monomers together represented approximately 49%,49 % and 54% of our total cost of goods sold for the twelve months
ended December 31, 2007, and the six months ended June 20, 2008 and 2007, respectively. The cost of these monomers has generally been correlated to crude oil prices. In addition to changes in crude oil prices, global supply and demand and
economic conditions have resulted in increased costs for these monomers in 2008. Styrene, butadiene and isoprene used by our U.S. and European facilities are primarily supplied by Shell Chemicals or its affiliates, LyondellBasell, and other
suppliers under long-term supply contracts with various expiration dates.

We have received Shell Chemicals termination notice for
isoprene supply to Pernis, The Netherlands, effective December 31, 2009, and are in the process of reviewing the strategic and economic options for our Pernis assets. Upon termination of the isoprene supply agreement with Shell Chemicals on
December 31, 2009, we may not be able to obtain the isoprene required for our operations at our Pernis, The Netherlands, facility on terms favorable to us or at all. On April 24, 2008, we received a notice of termination from Shell
Chemicals for our U.S. butadiene supply contract effective April 30, 2009. We source butadiene in the United States pursuant to this contract. We currently expect to negotiate and enter into one or more replacement agreements with Shell
Chemicals and/or other suppliers, although no assurances can be provided that any such replacement agreement will be entered into or as to the volumes or terms of any such replacement agreement(s). As of June 2008, we have been unable to obtain the
supply of butadiene to which we are entitled under all supply agreements. The significant factors causing the shortfall are the continued run-up in the cost of crude oil and planned and unplanned outages by certain producers of butadiene. We are
currently on allocation from our supplies of butadiene, and, as a result, we are unable to produce all products necessary to meet customer demand and, in turn, have had to allocate certain available product supplies among our customers. We believe
that butadiene supply shortages are affecting our industry generally, and we cannot predict if or when the current situation will change or improve.



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Prices under these contracts are typically determined by contractual formulas that reference both the
suppliers cost of production as well as market prices. In Japan, butadiene and isoprene supplies for our joint venture plant are supplied under our joint venture agreement, where our partner supplies our necessary requirements. Styrene in
Japan is sourced from local third-party suppliers. Our facility in Paulinia, Brazil, generally purchases all of its raw materials from local third-party suppliers. Styrene is used in the production of substantially all our products. Styrene is made
from ethylene and benzene. Benzene is a derivative of crude oil and ethylene is a derivative of either crude oil or natural gas. Styrene prices are primarily driven by worldwide supply and demand, the cost of ethylene and benzene, and are also
influenced by prevailing crude oil and natural gas prices.

Butadiene is used in the production of certain grades of both USBC and HSBC
products. The price for butadiene is volatile and is determined by worldwide supply and demand and prevailing crude of oil and ethylene prices. Butadiene is a by-product of the production of other petrochemicals and worldwide supply may be less
responsive to increased demand for butadiene as compared to other petrochemicals. Isoprene is used in the production of certain grades of USBC, HSBC and IR. Isoprene is primarily produced and consumed captively for the production of isoprene rubber,
which is primarily used in the manufacture of rubber tires. As a result, there is limited non-captive isoprene produced in the market in which we operate and as such the market for isoprene is tight. Since there are a limited number of isoprene
producers, the price for isoprene can also be driven by the operating efficiency of some key producers.

Changes in price for and
availability of raw materials will have an effect on our results of operations. In response to raw material feedstock cost increases, we have increased prices for many of our products. We are continuing to evaluate the prices for all of our products
as market conditions change.

Seasonality

Seasonal changes, including rainfall amounts, normally affect our sales in the Paving and Roofing end-use market. Historically, we generally build inventory in the first half of the year to meet higher paving and
roofing demand beginning in the second and third quarters because weather conditions are more conducive to road and building construction in these warmer periods. Other than this seasonal trend, our other end-use markets tend to show relatively
little seasonality.

Economic and Market Conditions

Downturns in general economic conditions can cause fluctuations in demand for our products, product prices, volumes and margins. For example, our results
of operations were negatively affected during 2007 in the North American Paving and Roofing end-use market due to poor weather conditions, limited government paving budgets and high asphalt prices, resulting in a decline in demand for our products.
However, a number of our products are sold into certain commercial and consumer end-use markets, such as compounding and personal care products that are generally considered to be less affected by general economic conditions. Changes in inflation
may increase the costs of raw materials and other costs, and we may not be able to pass such cost increases on to the consumers of our products.

International Operations and Currency Fluctuations

We operate a geographically diverse business, with 41% of net
product sales generated from customers located in the Americas, 44% in Europe and 15% in the Asia Pacific region during the six months ended June 30, 2008. Our products are sold to customers in more than 60 countries. We serve our customer base
from 6 manufacturing plants in 6 countries.

Although we sell and manufacture our products in many countries, our sales and production
costs are mainly denominated in U.S. dollars, Euros, Japanese Yen and Brazilian Real.



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Our financial results are subject to gains and losses on currency transactions denominated in currencies
other than the functional currency of the relevant operations. Any gains and losses are included in operating income, but have historically not been material. In 2008, we entered into foreign currency hedges to reduce our exposure to fluctuations in
the Euro to U.S. dollar exchange rate. The first option contract was entered into on April 3, 2008 and expired on June 26, 2008. The second option contract with 20,000,000 notional amount was entered into on July 1, 2008 and is
scheduled to expire on December 29, 2008.

Our financial results are subject to gains and losses on currency translations, which occur
when the financial statements of foreign operations are translated into U.S. dollars. The financial statements of operations outside the U.S. where the local currency is considered to be the functional currency are translated into U.S. dollars using
the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each period for revenues, expenses, gains and losses and cash flows. The effect of translating the balance sheet into U.S. dollars is included
as a component of other comprehensive income (loss) in members equity. Any appreciation of the functional currencies against the U.S. dollar will increase the U.S. dollar equivalent of amounts of revenues, expenses, gains and losses and cash
flows, and any depreciation of the functional currencies will decrease the U.S. dollar amounts reported.

Restructuring and
restructuring-related costs

In the six and three months ended June 30, 2008, we incurred approximately $7.9 million and $1.9
million respectively, of costs associated with the previously announced senior executive and other management changes and the realignment of our research and technical service organizations. The costs were largely severance, retention, and other
staffing-related costs. In the first quarter and through June 30, 2007, the Company incurred $0.3 million of similar charges associated with 2007 initiatives.

Results of Operations

Three Months Ended June 30, 2008, Compared to Three Months Ended June 30, 2007

Total Revenues

Total revenues
increased $50.5 million or 17.1% to $345.4 million for the three months ended June 30, 2008, as compared to $294.9 million for the three months ended June 30, 2007.

Sales. Sales increased $41.0 million or 14.3% to $328.4 million for the three months ended June 30, 2008, as compared to $287.3
million for the three months ended June 30, 2007. The increase in sales was the result of $23.9 million from changes in foreign currency exchange rates and $28.7 million due to changes in product sales price and mix partially offset by $11.4
million due to a 4.8 kt, or 4.9% decline in sales volume.

We implemented a series of global price increases in the first half of 2008,
which were generally broad-based across our end-use markets and in response to the continuing increase in raw material and energy costs. We have announced additional global price increases to be effective on July 1, August 1, and
September 1, 2008. With respect to volume, we experienced growth in our Adhesives, Sealants and Coatings end-use market which was more than offset by lower volume for our Paving and Roofing end-use market, largely due to constrained
availability of butadiene. We continue to see lower sales volume in non-core end uses, such as footwear.

Other
revenue. Other revenue primarily consists of the sales of small quantities of residual products that are a by-product of the manufacturing process of isoprene rubber.

Cost of Goods Sold

Cost of goods
sold increased $39.4 million or 16.2% to $282.8 million for the three months ended June 30, 2008, as compared to $243.5 million for the three months ended June 30, 2007. The increase in cost of goods



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sold was the result of $20.0 million from changes in foreign currency exchange rates, a $19.3 million increase in monomer and other production costs, and
$9.4 million increase in by-product cost. Partially offsetting these increases was a $9.3 million decline in cost of goods sold directly related to the decline in sales volume in the quarter versus the second quarter of 2007. As a percentage of
total revenues, cost of goods sold decreased from 82.6% in the three months ended June 30, 2007 to 81.9% in the three months ended June 30, 2008.

Gross Profit

Gross profit increased $11.1 million or 21.6% to $62.6 million for the three months
ended June 30, 2008, as compared to $51.4 million for the three months ended June 30, 2007. Gross profit as a percentage of total revenues increased from 17.4% in the three months ended June 30, 2007 to 18.1% in the three months ended
June 30, 2008.

Operating Expenses

Research and development expenses.Research and development expenses increased $0.9 million or 13.4% to $7.4 million for the three months ended June 30, 2008, as compared to $6.5 million for
the three months ended June 30, 2007. The increase was largely due to the costs associated with the realignment of our research and technical service organizations. As a percentage of total revenues, research and development expenses were 2.2%
in the three months ended June 30, 2007 compared to 2.1% in the three months ended June 30, 2008.

Selling, general
and administrative expenses.Selling, general and administrative expenses increased $3.3 million or 19.9% to $19.9 million for the three months ended June 30, 2008, as compared to $16.6 million for the three months ended
June 30, 2007. The increase was primarily due to $1.6 million from changes in foreign currency exchange rates, $1.6 million associated with the Companys incentive compensation plan and $1.2 million associated with the previously announced
senior executive and other management changes. As a percentage of total revenues, selling, general and administrative expenses were 5.6% in the three months ended June 30, 2007 compared to 5.8% in the three months ended June 30, 2008.

Depreciation and amortization of identifiable intangibles.Depreciation and amortization expense
increased $1.3 million or 10.8% to $13.1 million for the three months ended June 30, 2008 as compared to $11.8 million for the three months ended June 30, 2007. The increase in depreciation and amortization expense reflects
assets that were under construction in prior periods that were completed and placed in service, including our new polyisoprene latex plant at our Paulinia, Brazil facility and changes in foreign currency exchange rates.

Earnings in unconsolidated joint venture

The Kashima plant is operated by a manufacturing joint venture with JSR Corporation under the name Kraton JSR Elastomers K.K. Earnings in the joint venture are accounted for using the equity method and amounted to $0.2 million for the three
months ended June 30, 2008 and $0.1 million for the three months ended June 30, 2007.

Interest expense, net

Interest expense, net was $9.4 million in each of the three months ended June 30, 2008 and 2007. Interest expense, net decreased primarily
due to lower debt balances and lower interest rates, and the impact of the interest rate swap agreement during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. However, the decrease was offset by an
adjustment to interest expense, net related to the accounting for interest rate swaps that resulted in a decrease in interest expense and therefore an increase in pre-tax income of approximately $1.6 million for the three months ended
June 30, 2007. During the three months ended June 30, 2008, and June 30, 2007, the average debt balances outstanding were $534.9 million and $581.2 million, respectively. The effective interest rates on our debt during the
same periods were 6.0% and 7.4%, respectively.



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Income tax provision

Income tax provision was $2.6 million for the three months ended June 30, 2008, as compared to $0.9 million for the three months ended June 30, 2007. The effective tax rate for the three months ended
June 30, 2008 was approximately 20.6% as compared to a rate of 13.3% in the three months ended June 30, 2007. Our effective tax rate for the three months ended June 30, 2008 was less than our statutory rate primarily due to not
recording a tax benefit for certain net operating loss carryforwards generated during that period and due to a different income mix between foreign and domestic tax jurisdictions.

Net income

Net income was
$10.2 million for the three months ended June 30, 2008, as compared to net income of $6.2 million for the three months ended June 30, 2007, for the reasons discussed above.

Six Months Ended June 30, 2008, Compared to Six Months Ended June 30, 2007

Total Revenues

Total revenues increased by $70.5 million or 13.0% to $612.2 million for the six
months ended June 30, 2008, as compared to $541.7 million for the six months ended June 30, 2007.

Sales. Sales increased $56.8 million or 10.8% to $584.7 million for the six months ended June 30, 2008, as compared to $527.8 million for the six months ended June 30, 2007. The increase in sales was
the result of changes in foreign currency exchange rates of $41.1 million and changes in product sales prices and mix of $35.3 million, partially offset by $19.5 million due to a 8.6 kt, or 4.9% decline in sales volume.

We experienced volume growth in our Adhesives, Sealants and Coatings end-use market which was offset by lower volume for our Paving and Roofing end-use
market, and to a lesser extent, reduced volume in our Advanced Materials end use market. Our volume in the Paving and Roofing end-use market was constrained due to butadiene availability. We continue to see lower sales volume in non-core end uses,
such as footwear.

Other revenue. Other revenue primarily consists of the sales of small quantities of residual
products that are a by-product of the manufacturing process of isoprene rubber.

Cost of Goods Sold

Costs of goods sold increased $42.9 million or 9.4% to $500.9 million for the six months ended June 30, 2008, as compared to $458.0 million
for the six months ended June 30, 2007. The increase in cost of goods sold was the result of $32.3 million from changes in foreign currency exchange rates, $13.7 million increase in by-product cost, and $12.5 million from increased monomer and
other production costs. Partially offsetting these increases was a $15.6 million decline in cost of goods sold directly related to the year-over-year decline in sales volume. As a percentage of total revenues, cost of goods sold decreased from 84.5%
in 2007 to 81.8% in 2008.

Gross Profit

Gross profit increased $27.6 million or 32.9% to $111.3 million for the six months ended June 30, 2008, as compared to $83.8 million for the six months ended June 30, 2007. Gross profit as a
percentage of total revenues increased 270 basis points from 15.5% in the six months ended June 30, 2007 to 18.2% in the six months ended June 30, 2008.



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Operating Expenses

Research and development expenses.Research and development expenses increased $2.3 million or 17.4% to $15.3 million for the six months ended June 30, 2008, as compared to $13.1 million
for the six months ended June 30, 2007 largely due to the costs associated with the realignment of our research and technical service organizations. As a percentage of total revenues, research and development expenses were 2.4% in the six
months ended June 30, 2007 compared to 2.5% in the six months ended June 30, 2008.

Selling, general and administrative
expenses.Selling, general and administrative expenses increased $11.8 million or 35.0% to $45.4 million for the six months ended June 30, 2008, as compared to $33.6 million for the six months ended June 30, 2007. The
increase was largely the result of $5.5 million associated with the previously announced senior executive and other management changes, $3.5 million from changes in foreign currency exchange rates, and $1.6 million associated with the Companys
incentive compensation plan. As a percentage of total revenues, selling, general and administrative expenses increased from 6.2% in the six months ended June 30, 2007 to 7.4% in the six months ended June 30, 2008.

Depreciation and amortization of identifiable intangibles.Depreciation and amortization expense increased by 16.3% to $27.8 million
for the six months ended June 30, 2008 as compared to $23.9 million for the six months ended June 30, 2007. The increase in depreciation and amortization expense was due to timing of capital expenditures, including our new
polyisoprene latex plant at our Paulinia, Brazil facility, accelerated depreciation on the SIS plant assets at our Pernis facility beginning in September 2007, and changes in foreign currency exchange rates.

Earnings in unconsolidated joint venture

The Kashima plant is operated by a manufacturing joint venture with JSR Corporation under the name Kraton JSR Elastomers K.K. Earnings in the joint venture venture are accounted for using the equity method and amounted to $0.2 million for
the six months ended June 30, 2008 and $0.3 million for the six months ended June 30, 2007.

Interest expense, net.

Interest expense, net was $19.8 million for the six months ended June 30, 2008, as compared to $20.1 million for the six months
ended June 30, 2007. Interest expense, net decreased primarily due to lower debt balances and lower interest rates, and the impact of the interest rate swap agreement during the six months ended June 30, 2008 compared to the six months
ended June 30, 2007. However, the decrease was offset by an adjustment to interest expense, net related to the accounting for the interest rate swap that resulted in a decrease in interest expense and therefore an increase in pre-tax income of
approximately $1.6 million in June 2007. During the six months ended June 30, 2008, and June 30, 2007, the average debt balances outstanding were $536.4 million and $581.6 million, respectively. The effective interest rates on
our debt during the same periods were 6.6% and 7.4% for the six months ended June 30, 2008 and 2007, respectively.

Income tax
provision

Income tax provision was $2.5 million for the six months ended June 30, 2008, as compared to $0.4 million for the six
months ended June 30, 2007. The effective tax rate for the six months ended June 30, 2008 was approximately 75.6% as compared to a rate of (5.9%) in the six months ended June 30, 2007. Our effective tax rate for the six months
ended June 30, 2008 was higher than our statutory rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period and due to the mix of pre-tax income between foreign and domestic tax
jurisdictions. Our effective tax rate for the six months ended June 30, 2007 was less than our statutory rate because we did not record a tax benefit for certain net operating loss carryforwards generated during that period.



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Net (loss) income

Net income was $0.9 million for the six months ended June 30, 2008, as compared to net loss of $7.0 million for the six months ended
June 30, 2007, for the reasons discussed above.

Liquidity and Capital Resources

Sources of liquidity.We are a holding company without any operations or assets other than the operations of our subsidiaries. Our liquidity
depends on distributions from our subsidiaries and we expect to continue to fund our liquidity requirements principally with cash derived from operations and existing cash balances. We believe that, based on current and anticipated levels of
operations, cash flow from operations of our subsidiaries and borrowings available to us will be adequate for the foreseeable future for us to fund our working capital and capital expenditure requirements and to make required payments of principal
of and interest on our 8.125% Notes and senior secured credit facility. Going forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured
credit facility to fund liquidity needs in an amount sufficient to enable us to service our indebtedness. As of June 30, 2008, we had $21.4 million of cash and cash equivalents. We have available to us, upon compliance with customary
conditions, the $75.5 million revolving portion of the senior secured credit facility, which was undrawn at June 30, 2008. The ability for us to pay principal and interest on our indebtedness, fund working capital and make anticipated capital
expenditures depends on our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control.

Under the terms of our senior secured credit facility, as amended May 12, 2006, we are subject to certain financial covenants, including maintenance of a minimum interest rate coverage ratio and a maximum
leverage ratio. We are required to maintain a fiscal quarter end interest coverage ratio of 2.50:1.00 through December 31,2008, 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 beginning March 31, 2010 and thereafter. In addition, we
are required to maintain a fiscal quarter end coverage ratio not to exceed 4.95 through December 31,2008 and 4.00 beginning December 31, 2009 and thereafter. Our failure to comply with any of these financial covenants would give rise to a
default under the senior secured credit facility.

At June 30, 2008, we were in compliance with the applicable financial ratios in the
senior secured credit facility and the other covenants contained in the senior secured credit facility and the indentures governing the notes.

Operating activities.Net cash used in operating activities was $13.9 million for the six months ended June 30, 2008, as compared to $23.1 million of cash provided by operating activities for the six months
ended June 30, 2007. The change in cash from operating activities during the six months ended June 30, 2008 was largely due to increased accounts receivable and inventory principally related to the increased cost of raw materials, and the
timing on certain cash disbursements related to accounts payable and other liabilities.

Investing activities.Net
cash used in investing activities was $9.7 million for the six months ended June 30, 2008, as compared to $11.0 million used in investing for the six months ended June 30, 2007. This decrease was primarily driven by a lower rate
of capital expenditures during the six months ended June 30, 2008 as compared to the same period in 2007.

Financing activities.Net cash used in financing activities was $2.2 million for the six months ended June 30, 2008, as compared to $2.3 million provided by financing activities for the six months ended June 30, 2007. The change in net cash
provided by financing activities for 2008 includes a $10 million equity investment we received on January 14, 2008, a voluntary prepayment of $10.0 million applied against the Term Loans, and the payment of our insurance note payable.



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Capital Expenditures.Capital expenditures are expected to be between $30.0 million and
$40.0 million in 2008. These capital expenditures will be for maintenance, infrastructure, expansion and cost reduction projects. Our minimum annual capital expenditure levels to maintain and achieve incremental improvements in our facilities in
each of the next three to five years are expected to be approximately $12 million to $16 million.

Description of Our Indebtedness

(a) Senior Secured Credit Facility

We entered into a senior secured credit agreement dated as of December 23, 2003. The agreement and subsequent amendments to the agreement are defined herein as the Credit Agreement.

The Credit Agreement provides for a term facility, or Term Facility, of $385.0 million, and a revolving facility, or Revolving Facility, of up to $75.5
million (after entering into a Joinder Agreement on June 7, 2006). We refer to the loans made under the Revolving Facility collectively as the Revolving Loans, and the loans made under the Term Facility collectively as the Term Loans.

Three of our wholly-owned subsidiaries, Kraton Polymers U.S. LLC, Elastomers Holdings LLC, and Kraton Polymers Capital Corporation
(collectively, the Guarantor Subsidiaries), along with Polymer Holdings, have guaranteed the Credit Agreement and we refer to these guarantors, together with Kraton, as the Loan Parties. The Credit Agreement is secured by a perfected
first priority security interest in all of each Loan Partys tangible and intangible assets, including intellectual property, real property, all of our capital stock and the capital stock of our domestic subsidiaries and 65% of the capital
stock of the direct foreign subsidiaries of each Loan Party. As of June 30, 2008, we had no outstanding Revolving Loans. in July 2008, We made a $10.0 million voluntary repayment of outstanding indebtedness under the Term Loans. The following
is a summary of the material terms of the Credit Agreement.

Maturity

The Revolving Loans are payable in a single maturity on May 12, 2011. The Term Loans are payable in 24 consecutive equal quarterly installments, in
an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loans. The remaining balance is payable in four equal quarterly installments commencing on September 30, 2012 and ending on May 12, 2013.

Interest

The Term Loans bear
interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus 1.00% per annum. In general, interest is payable quarterly, subject to the interest period selected by us, per the Credit
Agreement. The average effective interest rate on the Term Loans for the six months ended June 30, 2008 was 4.9 % compared to 6.6% for the six months ended June 30, 2007. The Revolving Loans bear interest at a rate equal to the
adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum, depending on our leverage ratio, or at our option, the base rate plus a margin of between 1.00% and 1.50% per annum, depending on our leverage ratio. A commitment
fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears. In February 2008, we entered into a $325 million notional amount interest rate swap agreement to
protect against Eurodollar interest rate fluctuations, which we sold in June 2008. See footnote 7(a) for a description of the swap agreement.

Mandatory Prepayments

The Term Facility is subject to mandatory prepayment with, in general: (1) 100% of the
net cash proceeds of certain asset sales, subject to certain reinvestment rights; (2) 100% of the net cash proceeds of certain insurance



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and condemnation payments, subject to certain reinvestment rights; (3) 50% of the net cash proceeds of equity offerings (declining to 25%, if a leverage
ratio is met); (4) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the Credit Agreement); and (5) 50% of our excess cash flow, as defined in the Credit Agreement (declining to 25%, if a
leverage ratio is met and to 0% if a further leverage ratio is met). Any such prepayment is applied first to the Term Facility and thereafter to the Revolving Facility.

Covenants

The Credit Agreement contains certain affirmative covenants including, among
others, covenants to furnish the Lenders with financial statements and other financial information and to provide the Lenders notice of material events and information regarding collateral.

The Credit Agreement contains certain negative covenants that, among other things, restrict our ability, subject to certain exceptions, to incur
additional indebtedness, grant liens on our assets, undergo fundamental changes, make investments, sell assets, make acquisitions, engage in sale and leaseback transactions, make restricted payments, engage in transactions with our affiliates, amend
or modify certain agreements and charter documents and change our fiscal year. We are required to maintain a fiscal quarter end interest coverage ratio of 2.50:1.00 through December 31, 2008, 2.75:1.00 beginning March 31, 2009 and
3.00:1.00 beginning March 31, 2010 and thereafter. In addition, we are required to maintain a fiscal quarter end leverage ratio not to exceed 4.95 through December 31, 2008, 4.45 beginning March 31, 2009 and 4.00 beginning
December 31, 2009 and thereafter.

On January 14, 2008, we received an equity investment of $10.0 million, of which
$9.6 million was included in the financial covenant calculation for the twelve-month period ending December 31, 2007 and will continue to be included in the fiscal quarter covenant calculations through the fiscal quarter ending
September 30, 2008 pursuant to the equity cure provisions included in the Credit Agreement. As of June 30, 2008, we were in compliance with all covenants under the Credit Agreement.

(b) Senior Subordinated Notes Due January 15, 2014

On December 23, 2003, we issued $200.0 million aggregate principal amount of Senior Subordinated Notes. The following is a summary of the material terms of the 8.125% Notes.

Maturity Date.The 8.125% Notes mature on January 15, 2014.

Interest Payment Dates.Interest on the 8.125% Notes is payable semi-annually on January 15 and July 15 each year, commencing
July 15, 2004.

Guarantees.The 8.125% Notes are guaranteed on a senior subordinated basis by all of our existing and
future subsidiaries that guarantee the indebtedness under our senior secured credit facility described above.

Security and Ranking.The 8.125% Notes and the guarantees are general unsecured obligations and are subordinated to Kratons and its guarantor subsidiaries existing and future senior indebtedness, including indebtedness under the senior secured credit
facility, and rank equally with Kratons and its guarantor subsidiaries future senior subordinated indebtedness. The 8.125% Notes and the guarantees effectively rank junior to our secured indebtedness and to the secured indebtedness of
all of our guarantor subsidiaries to the extent of the value of the assets securing the indebtedness and are structurally subordinated to all liabilities of Kratons subsidiaries that are not guarantors of the 8.125% Notes.

Optional Redemption.Generally, we cannot elect to redeem the 8.125% Notes until January 15, 2009. After such date, we may elect to
redeem the 8.125% Notes at certain predetermined redemption prices, plus accrued and unpaid interest.



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Covenants.The 8.125% Notes contain certain affirmative covenants including requirements to
furnish the holders of 8.125% Notes with financial statements and other financial information and to provide the holders of 8.125% Notes notice of material events. The 8.125% Notes contain certain negative covenants including limitations on
indebtedness, limitations on restricted payments, limitations on restrictions on distributions from certain subsidiaries, and limitations on lines of business and merger and consolidations. As of June 30, 2008, we were in compliance with all
covenants under the 8.125% Notes.

Other Contingencies

As a chemicals manufacturer, our operations in the United States and abroad are subject to a wide range of environmental laws and regulations at both the national and local levels. These laws and regulations govern,
among other things, air emissions, wastewater discharges, solid and hazardous waste management, site remediation programs and chemical use and management.

Pursuant to these laws and regulations, our facilities are required to obtain and comply with a wide variety of environmental permits for different aspects of their operations. Generally, many of these environmental
laws and regulations are becoming increasingly stringent, and the cost of compliance with these various requirements can be expected to increase over time.

Management believes that we are in material compliance with all current environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with these requirements will not materially
affect our results of operations or cause us to exceed our level of anticipated capital expenditures. However, we cannot give assurances that regulatory requirements or permit conditions will not change, and we cannot predict the aggregate costs of
additional measures that may be required to maintain compliance as a result of such changes or expenses.

In the context of the separation
in February 2001, Shell Chemicals agreed to indemnify us for specific categories of environmental claims brought with respect to matters occurring before the separation. However, the indemnity from Shell Chemicals is subject to dollar and time
limitations. Coverage under the indemnity also varies depending upon the nature of the environmental claim, the location giving rise to the claim and the manner in which the claim is triggered. Therefore, if claims arise in the future related to
past operations, we cannot give assurances that those claims will be covered by the Shell Chemicals indemnity and also cannot be certain that any amounts recoverable will be sufficient to satisfy claims against us.

In addition, we may in the future be subject to claims that arise solely from events or circumstances occurring after February 2001, which would
not, in any event, be covered by the Shell Chemicals indemnity. While we recognize that we may in the future be held liable with respect for remediation activities beyond those identified to date, at present we are not aware of any
circumstances that are reasonably expected to give rise to remediation claims that would have a material adverse effect on our results of operations or cause us to exceed our projected level of anticipated capital expenditures.

We had no material operating expenditures for environmental fines, penalties, government imposed remedial or corrective actions in the presented periods
of 2008 and 2007.

Contractual Commitments

We have contractual obligations for long-term debt, operating leases and purchase obligations that were summarized in a table of contractual commitments in our 2007 Annual Report on Form 10-K. There has been no material change since that
date.

Off-Balance Sheet Transactions

We are not involved in any material off-balance sheet transactions as of June 30, 2008.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed to market risk from changes in interest rates, foreign currency exchange rates, and commodity prices.

Interest rate risk.We have $326.7 million of variable rate debt outstanding under our senior secured credit facility as of June 30, 2008. The debt bears interest at the adjusted Eurodollar plus 2.00% per annum
or at our option, the base rate plus 1.00% per annum. In February 2008, we entered into a $325.0 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of
our variable debt. The agreement had a fixed rate of 2.77%, which resulted in a total cost of 4.77% and was scheduled to expire on April 1, 2010. We settled the swap early in June, 2008 and realized cash proceeds of $4.6 million resulting in a
gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income at June 30, 2008 and will be reclassified as a reduction in interest expense through March 31, 2010 using the effective interest method, unless we
determine that the forecasted interest payments under the Term Facility are probable not to occur, in which the gain would then be reclassified immediately to interest expense.

Foreign currency risk.We conduct operations in many countries around the world. Our results of operations are subject to both
currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to
currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our historical combined financial statements. In recent
years, exchange rates between these currencies and U.S. dollars have fluctuated significantly and may do so in the future. Approximately, one-half of our revenue and costs are denominated in U.S. dollars. Euro-related currencies are also
significant. In April and July, 2008 we entered into foreign currency option contracts to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for notional amounts of 10 million and 20 million, respectively. The
April 3, 2008 option contract expired on June 26, 2008, and the impact on our statement of position, results of operations and cash flows was not material. The July, 2008 option contract is scheduled to expire on December 29, 2008.

Commodity price risk.We are subject to commodity price risk under agreements for the supply of our raw materials and
energy. We have not hedged our commodity price exposure. We do not currently intend to hedge our commodity price exposure.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

We have evaluated, with
the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of June 30, 2008. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the circumvention of overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving
their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that they are
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control reporting.



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Pursuant to the sale agreements
between us and Shell Chemicals relating to the separation from Shell Chemicals in 2001, Shell Chemicals has agreed to indemnify us for certain liabilities and obligations to third parties or claims against us by a third party relating to matters
arising prior to the closing of the acquisition by Ripplewood Chemical, subject to certain time limitations. Shell Chemicals has been named in several lawsuits relating to the elastomers business that we have acquired. In particular, claims have
been filed against Shell Chemicals alleging workplace asbestos exposure at the Belpre, Ohio facility. We are indemnified by Shell Chemicals with respect to these claims, subject to certain time limitations. In addition, we and Shell Chemicals have
entered into a consent order relating to certain environmental remediation at the Belpre, Ohio facility.

While we are involved from time
to time in litigation and governmental actions arising in the ordinary course of business, we are not aware of any actions which we believe would materially adversely affect our business, financial condition or results of operations.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Readers of the Quarterly Report on
Form 10-Q should carefully consider the risks described in our other reports filed with or furnished to the SEC, including our prior and subsequent reports on Forms 10-K, 10-Q, and 8-K, in connection with any evaluation of the Companys
financial position, results of operations and cash flows.

The risks and uncertainties described in our most recent Annual Report on Form
10-K, filed with the SEC on March 31, 2008, are not the only ones facing us. Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect our operations. Any of the risks, uncertainties,
events or circumstances described therein could cause our future financial condition, results of operations or cash flows to be adversely affected.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Not Applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not Applicable.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
|------- | --------------------------------------------------

Not Applicable.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer under Section 302 of SarbanesOxley Act of 2002
|     | 
|31.2 |  | Certification of Chief Financial Officer under Section 302 of SarbanesOxley Act of 2002
|     | 
|32.1 |  | Certification Pursuant to Section 906 of SarbanesOxley Act of 2002                     



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                      |  |  |  |                                                       
|--------------------- |  |  |  | ------------------------------------------------------
|                      |  |  |  | Kraton Polymers LLC                                   
|                      |  | 
|Date: August 12, 2008 |  |  |  | /s/    KEVIN M. FOGARTY                               
|                      |  |  |  | Kevin M. Fogarty President and Chief Executive Officer



| |  |  |  |                                                               
| |  |  |  | --------------------------------------------------------------
| |  | 
| |  |  |  | /s/    STEPHEN E.
TREMBLAY                                    
| |  |  |  | Stephen E. Tremblay Vice President and Chief Financial Officer



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EXHIBIT INDEX



|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Chief Executive Officer under Section 302 of SarbanesOxley Act of 2002
|     | 
|31.2 |  | Certification of Chief Financial Officer under Section 302 of SarbanesOxley Act of 2002
|     | 
|32.1 |  | Certification Pursuant to Section 906 of SarbanesOxley Act of 2002                     



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