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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2011



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

Commission File Number 001-34581





LOGO

KRATON PERFORMANCE POLYMERS, INC.

(Exact Name of Registrant as Specified in its Charter)







|                                                               |  |                                                     
|-------------------------------------------------------------- |  | ----------------------------------------------------
|Delaware                                                       |  | 20-0411521                                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)                
|                                                               | 
|15710 John F. Kennedy Blvd. Suite 300 Houston, TX 77032        |  | 281-504-4700                                        
|(Address of principal executive offices, including zip code)   |  | (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  x    NO   ̈

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                         |  |   |  |                            |  |  
|------------------------ |  | - |  | -------------------------- |  | -
|Large accelerated filer: |  |  ̈ |  | Accelerated filer:         |  | x
|                         |  |   | 
|Non-accelerated filer:   |  |  ̈ |  | 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  x

Number of shares of Kraton Performance Polymers, Inc. Common Stock, $0.01 par value, outstanding as of April 30, 2011: 31,892,284.









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Index to Quarterly Report

on Form 10-Q for

Quarter Ended March 31, 2011



|                              |  |                                                                                                    |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                    |  | Page |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                    |  |     
|                              |  |                                                                                                   
|Item 1.                       |  | Kraton Performance Polymers, Inc.                                                                  |  |      |    | 
|                              |  | Financial Statements (Unaudited)                                                                   |  |      | 5  | 
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010                   |  |      | 5  | 
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and
2010 |  |      | 6  | 
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and
2010 |  |      | 7  | 
|                              |  | Notes to Condensed Consolidated Financial Statements                                               |  |      | 8  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations              |  |      | 29 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  |      | 40 | 
|Item 4.                       |  | Controls and Procedures                                                                            |  |      | 41 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                    |  |     
|                              |  |                                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                                  |  |      | 42 | 
|Item 1A.                      |  | Risk Factors                                                                                       |  |      | 42 | 
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  |      | 42 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                                    |  |      | 42 | 
|Item 4.                       |  | (Removed and Reserved)                                                                             |  |      | 42 | 
|Item 5.                       |  | Other Information                                                                                  |  |      | 42 | 
|Item 6.                       |  | Exhibits                                                                                           |  |      | 43 | 
|                              |  | Signatures                                                                                         |  |      | 44 | 



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some of the statements in this Quarterly Report on Form 10-Q under the headings Condensed Consolidated Financial Statements
and Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make
written or oral forward-looking statements in our periodic reports on Forms 10-K, 10-Q and 8-K, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are
not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as believes, estimates,
expects, projects, may, intends, plans or anticipates, or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks,
uncertainties, assumptions and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements
expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Further description of
these risks and uncertainties and other important factors are set forth in our latest Annual Report on Form 10-K, including but not limited to Part 1, Item 1A. Risk Factors and Part 1, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations therein, and in our other filings with the Securities and Exchange Commission, and include, but are not limited to, risks related to:



| |  |  | conditions in the global economy and capital markets;
| | - |  | -----------------------------------------------------



| |  |  | our reliance on LyondellBasell Industries for the provision of significant operating and other services;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the failure of our raw materials suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these
agreements when they expire;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations in the availability of raw materials we need to produce our products in the amounts or at the prices necessary for us to effectively and
profitably operate our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition in our end-use markets, by other producers of styrenic block copolymers and by producers of products that can be substituted for our
products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to produce and commercialize technological innovations;
| | - |  | -------------------------------------------------------------------



| |  |  | our ability to protect our intellectual property, on which our business is substantially dependent;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | infringement of our products on the intellectual property rights of others;
| | - |  | ---------------------------------------------------------------------------



| |  |  | seasonality in our Paving and Roofing business;
| | - |  | -----------------------------------------------



| |  |  | financial and operating constraints related to our substantial level of indebtedness;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the inherently hazardous nature of chemical manufacturing;
| | - |  | ----------------------------------------------------------



| |  |  | product liability claims and other lawsuits arising from environmental damage or personal injuries associated with chemical manufacturing;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | political and economic risks in the various countries in which we operate;
| | - |  | --------------------------------------------------------------------------



| |  |  | health, safety and environmental laws, including laws that govern our employees exposure to chemicals deemed harmful to humans;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulation of our customers, which could affect the demand for our products or result in increased compliance costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | customs, international trade, export control, antitrust, zoning and occupancy and labor and employment laws that could require us to modify our current
business practices and incur increased costs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



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| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------



| |  |  | our relationship with our employees;
| | - |  | ------------------------------------



| |  |  | loss of key personnel or our inability to attract and retain new qualified personnel;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the fact that we do not enter into long-term contracts with our customers;
| | - |  | --------------------------------------------------------------------------



| |  |  | a decrease in the fair value of our pension assets, which could require us to materially increase future funding of the pension plan;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future sales of our shares could adversely affect the market price of our common stock; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Delaware law and some provisions of our organizational documents make a takeover of our company more difficult.
| | - |  | ---------------------------------------------------------------------------------------------------------------

There may be other factors of which we are currently unaware or that we deem immaterial that may cause our actual results to differ
materially from the expectations we express in our forward-looking statements. Although we believe the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking
statements based on these assumptions could themselves prove to be inaccurate.

Forward-looking statements are based on
current plans, estimates, assumptions 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.

Presentation of Financial Statements

The terms Kraton, our company, we, our, ours and us as used in
this report refer collectively to Kraton Performance Polymers, Inc. and its consolidated subsidiaries. This Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations
and cash flows of Kraton, and its subsidiaries. Kraton is a holding company whose only material asset is its investment in Kraton Polymers LLC, which is its wholly-owned subsidiary. Kraton Polymers LLC and its subsidiaries own all of our
consolidated operating assets.



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)



|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- |  | ---------------- | - | --------- | 
|                                                                                                                                                                            |  | March 31,2011 |           |  | December 31,2010 |  
|ASSETS                                                                                                                                                                      |  |               |           |  |                  |   |           | 
|Current Assets                                                                                                                                                              |  |               |           |  |                  |   |           | 
|Cash and cash equivalents                                                                                                                                                   |  | $             | 36,031    |  |                  | $ | 92,750    | 
|Receivables, net of allowances of $1,147 and $947                                                                                                                           |  |               | 177,760   |  |                  |   | 136,132   | 
|Inventories of products, net                                                                                                                                                |  |               | 364,257   |  |                  |   | 325,120   | 
|Inventories of materials and supplies, net                                                                                                                                  |  |               | 9,829     |  |                  |   | 9,631     | 
|Other current assets                                                                                                                                                        |  |               | 46,699    |  |                  |   | 38,749    | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total current assets                                                                                                                                                        |  |               | 634,576   |  |                  |   | 602,382   | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Property, plant and equipment, less accumulated depreciation of $270,908 and $252,387                                                                                       |  |               | 381,209   |  |                  |   | 365,366   | 
|Identifiable intangible assets, less accumulated amortization of $52,268 and $50,123                                                                                        |  |               | 68,449    |  |                  |   | 70,461    | 
|Investment in unconsolidated joint venture                                                                                                                                  |  |               | 13,204    |  |                  |   | 13,589    | 
|Deferred financing costs                                                                                                                                                    |  |               | 12,838    |  |                  |   | 3,172     | 
|Other long-term assets                                                                                                                                                      |  |               | 26,885    |  |                  |   | 25,753    | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total Assets                                                                                                                                                                |  | $             | 1,137,161 |  |                  | $ | 1,080,723 | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |               |           |  |                  |   |           | 
|Current Liabilities                                                                                                                                                         |  |               |           |  |                  |   |           | 
|Current portion of long-term debt                                                                                                                                           |  | $             | 9,375     |  |                  | $ | 2,304     | 
|Accounts payable-trade                                                                                                                                                      |  |               | 84,054    |  |                  |   | 86,699    | 
|Other payables and accruals                                                                                                                                                 |  |               | 43,970    |  |                  |   | 60,782    | 
|Deferred income taxes                                                                                                                                                       |  |               | 595       |  |                  |   | 595       | 
|Insurance note payable                                                                                                                                                      |  |               | 4,260     |  |                  |   |          | 
|Due to related party                                                                                                                                                        |  |               | 17,379    |  |                  |   | 19,264    | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total current liabilities                                                                                                                                                   |  |               | 159,633   |  |                  |   | 169,644   | 
|Long-term debt, net of current portion                                                                                                                                      |  |               | 390,625   |  |                  |   | 380,371   | 
|Deferred income taxes                                                                                                                                                       |  |               | 14,823    |  |                  |   | 14,089    | 
|Long-term liabilities                                                                                                                                                       |  |               | 72,987    |  |                  |   | 64,242    | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total liabilities                                                                                                                                                           |  |               | 638,068   |  |                  |   | 628,346   | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Commitments and contingencies (note 12)                                                                                                                                     |  |               |           |  |                  |   |           | 
|Stockholders Equity                                                                                                                                                        |  |               |           |  |                  |   |           | 
|Preferred stock, $0.01 par value; 100,000 shares authorized; none issued                                                                                                    |  |               |           |  |                  |   |           | 
|Common stock, $0.01 par value; 500,000 shares authorized; 31,881 shares issued and outstanding at March 31, 2011; 31,390
shares issued and outstanding at December 31, 2010 |  |               | 319       |  |                  |   | 314       | 
|Additional paid in capital                                                                                                                                                  |  |               | 340,913   |  |                  |   | 334,457   | 
|Retained earnings                                                                                                                                                           |  |               | 118,588   |  |                  |   | 96,711    | 
|Accumulated other comprehensive income                                                                                                                                      |  |               | 39,273    |  |                  |   | 20,895    | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total stockholders equity                                                                                                                                                  |  |               | 499,093   |  |                  |   | 452,377   | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 
|Total Liabilities and Stockholders Equity                                                                                                                                  |  | $             | 1,137,161 |  |                  | $ | 1,080,723 | 
|                                                                                                                                                                            |  |               |           |  |                  |   |           | 

See Notes to Condensed Consolidated Financial Statements



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KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



|                                                          |  |                             |         |  |      |   |         | 
|--------------------------------------------------------- |  | --------------------------- | ------- |  | ---- | - | ------- | 
|                                                          |  | Three months endedMarch 31, |        
|                                                          |  | 2011                        |         |  | 2010 |  
|Sales Revenue                                             |  | $                           | 344,828 |  |      | $ | 272,732 | 
|Cost of Goods Sold                                        |  |                             | 257,977 |  |      |   | 203,605 | 
|                                                          |  |                             |         |  |      |   |         | 
|Gross Profit                                              |  |                             | 86,851  |  |      |   | 69,127  | 
|                                                          |  |                             |         |  |      |   |         | 
|Operating Expenses                                        |  |                             |         |  |      |   |         | 
|Research and development                                  |  |                             | 6,602   |  |      |   | 5,984   | 
|Selling, general and administrative                       |  |                             | 27,171  |  |      |   | 22,062  | 
|Depreciation and amortization of identifiable intangibles |  |                             | 14,626  |  |      |   | 11,046  | 
|                                                          |  |                             |         |  |      |   |         | 
|Total operating expenses                                  |  |                             | 48,399  |  |      |   | 39,092  | 
|                                                          |  |                             |         |  |      |   |         | 
|Loss on Extinguishment of Debt                            |  |                             | 2,985   |  |      |   |        | 
|Earnings of Unconsolidated Joint Venture                  |  |                             | 141     |  |      |   | 74      | 
|Interest Expense, Net                                     |  |                             | 11,181  |  |      |   | 6,064   | 
|                                                          |  |                             |         |  |      |   |         | 
|Income Before Income Taxes                                |  |                             | 24,427  |  |      |   | 24,045  | 
|Income Tax Expense                                        |  |                             | 2,550   |  |      |   | 4,250   | 
|                                                          |  |                             |         |  |      |   |         | 
|Net Income                                                |  | $                           | 21,877  |  |      | $ | 19,795  | 
|                                                          |  |                             |         |  |      |   |         | 
|Earnings per common share (note 7)                        |  |                             |         |  |      |   |         | 
|Basic                                                     |  | $                           | 0.69    |  |      | $ | 0.64    | 
|Diluted                                                   |  | $                           | 0.68    |  |      | $ | 0.64    | 
|Weighted average common shares outstanding                |  |                             |         |  |      |   |         | 
|Basic                                                     |  |                             | 31,609  |  |      |   | 30,539  | 
|Diluted                                                   |  |                             | 32,197  |  |      |   | 30,728  | 

See Notes to
Condensed Consolidated Financial Statements



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KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                     |  |                             |          |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                     |  | Three months endedMarch 31, |         
|                                                                                     |  | 2011                        |          |   | 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                             |          |   |      |   |         |  
|Net income                                                                           |  | $                           | 21,877   |   |      | $ | 19,795  |  
|Adjustments to reconcile net income to net cash used in operating activities:        |  |                             |          |   |      |   |         |  
|Depreciation and amortization of identifiable intangibles                            |  |                             | 14,626   |   |      |   | 11,046  |  
|Amortization of deferred financing costs                                             |  |                             | 4,762    |   |      |   | 518     |  
|Loss on disposal of fixed assets                                                     |  |                             | 5        |   |      |   | 3       |  
|Loss on extinguishment of debt                                                       |  |                             | 2,985    |   |      |   |        |  
|Change in fair value of interest rate swaps                                          |  |                             |         |   |      |   | (450    | )
|Distributed earnings in unconsolidated joint venture                                 |  |                             | 374      |   |      |   | 328     |  
|Deferred income tax expense                                                          |  |                             | 735      |   |      |   | 909     |  
|Share-based compensation                                                             |  |                             | 1,294    |   |      |   | 1,332   |  
|Increase in                                                                          |  |                             |          |   |      |   |         |  
|Accounts receivable                                                                  |  |                             | (36,792  | ) |      |   | (38,811 | )
|Inventories of products, materials and supplies                                      |  |                             | (31,359  | ) |      |   | (26,949 | )
|Other assets                                                                         |  |                             | (12,626  | ) |      |   | (18,139 | )
|Decrease in                                                                          |  |                             |          |   |      |   |         |  
|Accounts payable-trade, other payables and accruals, and other long-term liabilities |  |                             | (8,150   | ) |      |   | (20,160 | )
|Due to related party                                                                 |  |                             | (1,868   | ) |      |   | (2,258  | )
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash used in operating activities                                                |  |                             | (44,137  | ) |      |   | (72,836 | )
|                                                                                     |  |                             |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                             |          |   |      |   |         |  
|Purchase of property, plant and equipment                                            |  |                             | (16,518  | ) |      |   | (6,466  | )
|Purchase of software                                                                 |  |                             | (132     | ) |      |   | (1,188  | )
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash used in investing activities                                                |  |                             | (16,650  | ) |      |   | (7,654  | )
|                                                                                     |  |                             |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                             |          |   |      |   |         |  
|Proceeds from debt                                                                   |  |                             | 400,000  |   |      |   | 25,000  |  
|Repayments of debt                                                                   |  |                             | (385,660 | ) |      |   | (25,576 | )
|Proceeds from issuance of common stock                                               |  |                             |         |   |      |   | 11,197  |  
|Costs associated with the issuance of common stock                                   |  |                             |         |   |      |   | (484    | )
|Proceeds from the exercise of stock options                                          |  |                             | 5,896    |   |      |   |        |  
|Proceeds from insurance note payable                                                 |  |                             | 4,734    |   |      |   | 3,201   |  
|Repayments of insurance note payable                                                 |  |                             | (474     | ) |      |   |        |  
|Debt issuance costs                                                                  |  |                             | (14,948  | ) |      |   |        |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash provided by financing activities                                            |  |                             | 9,548    |   |      |   | 13,338  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Effect of exchange rate differences on cash                                          |  |                             | (5,480   | ) |      |   | 9,911   |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Net decrease in cash and cash equivalents                                            |  |                             | (56,719  | ) |      |   | (57,241 | )
|Cash and cash equivalents, beginning of period                                       |  |                             | 92,750   |   |      |   | 69,291  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                             |  | $                           | 36,031   |   |      | $ | 12,050  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Supplemental Disclosures                                                             |  |                             |          |   |      |   |         |  
|Cash paid during the period for income taxes, net of refunds received                |  | $                           | 3,703    |   |      | $ | 894     |  
|Cash paid during the period for interest                                             |  | $                           | 10,647   |   |      | $ | 9,989   |  

See Notes to Condensed
Consolidated Financial Statements



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KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Description of our Business.We are a leading global producer of engineered polymers and one of the
worlds leading producers of styrenic block copolymers (SBCs). We market our products under the widely recognized KRATON® brand. SBCs are highly-engineered synthetic elastomers that we invented and commercialized almost 50 years ago, which enhance the performance of numerous end use
products, imparting greater flexibility, resilience, strength, durability and processability. Our SBC products are found in many everyday applications, including disposable baby diapers, the rubberized grips of toothbrushes, razor blades, power
tools and asphalt formulations used to pave roads. We also produce CariflexTMisoprene rubber latex (IRL), a highly-engineered, synthetic substitute for natural rubber latex. Our IRL products, which are used in applications such as surgical gloves, have not been found
to contain the proteins present in natural latex and are, therefore, not known to cause allergies. Our polymers are typically formulated or compounded with other products to achieve improved, customer specific performance characteristics in a
variety of applications. We manufacture our polymers at five manufacturing facilities globally, including our flagship plant in Belpre, Ohio, which we believe is the most diversified SBC plant in the world, as well as plants in Germany, France,
Brazil, and Japan. The plant in Japan is operated by an unconsolidated manufacturing joint venture.

Basis of
Presentation.The accompanying unaudited condensed consolidated financial statements we present in this report are for Kraton Performance Polymers, Inc. and its consolidated subsidiaries, each of which is a wholly-owned subsidiary. These
interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, and reflect all normal recurring adjustments that are, in the
opinion of management, necessary to fairly present our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual
periods, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into our Paving and Roofing end use market.

Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation, and Significant Accounting Policiesin our most recent Annual Report on Form 10-K.
There have been no changes to the policies disclosed therein. The accompanying unaudited condensed consolidated financial statements we present in this report have been prepared in accordance with those policies.

Use of Estimates. The preparation of condensed consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives
of fixed assets; allowances for doubtful accounts and sales returns; the valuation of derivatives, deferred tax assets, property, plant and equipment, inventory, investments and share-based compensation; and liabilities for employee benefit
obligations, asset retirement obligations, income tax uncertainties and other contingencies.

Income Tax in Interim
Periods.Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate
in those countries. We file our tax returns in accordance with our interpretations of each jurisdictions tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied
to the current period ordinary income or loss to



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determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent
items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be realized. In addition, the effects of unusual
and infrequent items are recognized in the impacted interim period as discrete items. The estimated annual effective tax rate may be significantly affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments
to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss
carry-forwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be
recoverable. Our ability to utilize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a
quarterly basis. Failure to achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our
net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense and lower stockholders equity and could have a significant impact on our earnings in future periods. The release of valuation
allowances in periods when these tax attributes become realizable would reduce our effective tax rate.

2. New Accounting Pronouncements

Adoption of Accounting Standards

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have
been issued that might have a material impact on our financial position or results of operations.

3. Share-Based Compensation

We account for share-based awards under the provisions of ASC 718, Share-Based Payment, which established the
accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. We
record non-cash compensation expense for the restricted stock awards, restricted stock units and option awards over the vesting period using the straight-line method. See Note 7 Earnings per Common Share for further discussion.

Polymer Holdings 2009 Equity Incentive Plan.On November 30, 2009, our board of directors and our stockholders
approved the Polymer Holdings LLC Equity Incentive Plan (the Equity Plan). The Equity Plan allows for the grant to key employees, independent contractors, and eligible non-employee directors of incentive stock options (ISOs,
non-qualified stock options (NSOs and together with the ISOs, Options), stock appreciation rights (SARs), restricted stock awards and restricted stock unit awards, in addition to other equity or equity-based
awards as our board of directors determines from time to time.

Under this plan, there was a total of 3,320,959 and 3,599,484
shares of common stock available for issuance at March 31, 2011 and December 31, 2010, respectively. In the first quarter of 2011, we awarded 67,569 shares of restricted stock, which are subject to a three-year cliff vesting. In addition,
in the first quarter of 2011, we awarded 17,298 shares of common stock to members of the board of directors and awarded 292,908 options to our employees. These options have a ten year term and vest in equal installments over three to five years.



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Stock Option Activity

Information pertaining to option activity for the three months ended March 31, 2011 is as follows:



|                                 |  |                |       |   |                               |   |       | 
|-------------------------------- |  | -------------- | ----- | - | ----------------------------- | - | ----- | 
|                                 |  | Options        |       |   | Weighted-AverageExercisePrice |  
|                                 |  | (in thousands) |       |   |                               |  
|Outstanding at December 31, 2010 |  |                | 1,559 |   |                               | $ | 14.31 | 
|Granted                          |  |                | 293   |   |                               |   | 36.64 | 
|Exercised                        |  |                | (392  | ) |                               |   | 13.56 | 
|Forfeited                        |  |                | (104  | ) |                               |   | 14.18 | 
|                                 |  |                |       |   |                               |   |       | 
|Outstanding at March 31, 2011    |  |                | 1,356 |   |                               | $ | 19.36 | 
|                                 |  |                |       |   |                               |   |       | 
|Exercisable at March 31, 2011    |  |                | 350   |   |                               | $ | 13.68 | 
|                                 |  |                |       |   |                               |   |       | 

4. Restructuring and Restructuring-related Costs

European Office Consolidation.In the third quarter of 2010, we consolidated our transactional functions as well as much of
our European management to a new European central office in Amsterdam, the Netherlands, which, we believe will result in greater operating efficiency and improved service to our global customers while ultimately lowering our operating costs. We
completed this consolidation during the first quarter of 2011 at an aggregate cost of $5.4 million.

For the three months
ended March 31, 2011, we incurred $0.9 million of restructuring charges, primarily comprised of severance and consulting expenses in connection with our European office consolidation, which are recorded in Selling, General and Administrative
expenses in our Condensed Consolidated Statements of Operations. The following is a summary of the activity associated with our European office consolidation:



|                                                                         |  |                     |        |  
|------------------------------------------------------------------------ |  | ------------------- | ------ | -
|                                                                         |  | EuropeRestructuring |       
|                                                                         |  | (in thousands)      |       
|Accrued European office consolidation restructuring at December 31, 2009 |  | $                   |       |  
|Restructuring costs                                                      |  |                     | 4,588  |  
|Payments                                                                 |  |                     | (3,199 | )
|                                                                         |  |                     |        |  
|Accrued European office consolidation restructuring at December 31, 2010 |  | $                   | 1,389  |  
|Restructuring costs                                                      |  |                     | 851    |  
|Payments                                                                 |  |                     | (1,628 | )
|                                                                         |  |                     |        |  
|Accrued European office consolidation restructuring at March 31, 2011    |  | $                   | 612    |  
|                                                                         |  |                     |        |  

Pernis Restructuring. We ceased production at our Pernis, the Netherlands, facility on
December 31, 2009, where, prior to the exit, we manufactured isoprene rubber. In connection with the exit, in 2009 we incurred $3.9 million in asset retirement obligations (ARO), $6.0 million in restructuring costs and a $1.1
million non-cash charge to write-down our inventory of spare parts. We recorded the ARO in Depreciation and Amortization of Identifiable Intangibles and the restructuring costs and write-down of inventory in Cost of Goods Sold in our Condensed
Consolidated Statements of Operations.





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5. Detail of Certain Balance Sheet Accounts

The components of inventories of products and other payables and accruals are as follows:



|                              |  |                |         |  |                  |   |         | 
|----------------------------- |  | -------------- | ------- |  | ---------------- | - | ------- | 
|                              |  | March 31,2011  |         |  | December 31,2010 |  
|                              |  | (in thousands) |        
|Inventories of products, net: |  |                |         |  |                  |   |         | 
|Finished products             |  | $              | 281,951 |  |                  | $ | 252,056 | 
|Work in progress              |  |                | 4,893   |  |                  |   | 4,319   | 
|Raw materials                 |  |                | 77,413  |  |                  |   | 68,745  | 
|                              |  |                |         |  |                  |   |         | 
|                              |  | $              | 364,257 |  |                  | $ | 325,120 | 
|                              |  |                |         |  |                  |   |         | 
|Other payables and accruals:  |  |                |         |  |                  |   |         | 
|Employee related              |  | $              | 13,604  |  |                  | $ | 17,807  | 
|Interest                      |  |                | 2,969   |  |                  |   | 6,548   | 
|Property and other taxes      |  |                | 848     |  |                  |   | 1,088   | 
|Customer rebates              |  |                | 3,893   |  |                  |   | 4,660   | 
|Income taxes payable          |  |                | 2,681   |  |                  |   | 7,258   | 
|Derivative liabilities        |  |                |        |  |                  |   | 1,435   | 
|Restructuring                 |  |                | 612     |  |                  |   | 1,389   | 
|Other                         |  |                | 19,363  |  |                  |   | 20,597  | 
|                              |  |                |         |  |                  |   |         | 
|                              |  | $              | 43,970  |  |                  | $ | 60,782  | 
|                              |  |                |         |  |                  |   |         | 

6. Comprehensive Income

Components of comprehensive income are as follows:



|                                                              |  |                             |        |  |      |   |        |  
|------------------------------------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | -
|                                                              |  | Three months endedMarch 31, |       
|                                                              |  | 2011                        |        |  | 2010 |  
|                                                              |  | (in thousands)              |       
|Net income                                                    |  | $                           | 21,877 |  |      | $ | 19,795 |  
|Other comprehensive income                                    |  |                             |        |  |      |   |        |  
|Foreign currency translation adjustments, net of tax          |  |                             | 17,305 |  |      |   | (2,562 | )
|Reclassification of gain on interest rate swaps into earnings |  |                             |       |  |      |   | (450   | )
|Change in fair value of interest rate swaps                   |  |                             | 1,073  |  |      |   | (141   | )
|                                                              |  |                             |        |  |      |   |        |  
|Total comprehensive income                                    |  | $                           | 40,255 |  |      | $ | 16,642 |  
|                                                              |  |                             |        |  |      |   |        |  



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Accumulated other comprehensive income consists of the following:



|                                             |  |                |         |   |                  |   |         |  
|-------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                             |  | March 31,2011  |         |   | December 31,2010 |  
|                                             |  | (in thousands) |        
|Foreign currency translation adjustments     |  | $              | 67,706  |   |                  | $ | 50,401  |  
|Net unrealized loss on interest rate swaps   |  |                |        |   |                  |   | (1,073  | )
|Net unrealized gain on net investment hedge  |  |                | 899     |   |                  |   | 899     |  
|Increase in pension liability                |  |                | (29,332 | ) |                  |   | (29,332 | )
|                                             |  |                |         |   |                  |   |         |  
|Total accumulated other comprehensive income |  | $              | 39,273  |   |                  | $ | 20,895  |  
|                                             |  |                |         |   |                  |   |         |  

7. Earnings per Common Share

Basic Earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

Diluted EPS is computed by dividing net income by the diluted weighted-average number of common shares outstanding during the period and,
accordingly, reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised, settled or converted into common stock and were dilutive. The diluted weighted-average
number of common shares used in the diluted EPS calculation is determined using the treasury stock method.

Unvested awards of
share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class
method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock.

The following table summarizes the effect of the share-based compensation awards on the diluted weighted- average number of shares outstanding used in calculating diluted EPS:



|                                                                       |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|---------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | -------------------------------- |  | ------ | ----------------- |  | - | ------ |  |  | --------------------------------- | ------ | - | ----------------- |  | ------ |  |  | - | ---- | 
|                                                                       |  | Three months endedMarch 31, 2011      |        |   | Three months endedMarch 31, 2010 | 
|                                                                       |  | Income                                |        |   | WeightedAverageSharesOutstanding |  |        | EarningsPer Share |  |   | Income |  |  | WeightedAverage SharesOutstanding |        |   | EarningsPer Share | 
|                                                                       |  | (In thousands, except per share data) |       
|Basic:                                                                 |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Net income as reported                                                 |  | $                                     | 21,877 |   |                                  |  |        |                   |  |   |        |  |  | $                                 | 19,795 |   |                   |  |        |  |  |   |      | 
|Less: income allocated to unvested restricted shares                   |  |                                       | (77    | ) |                                  |  |        |                   |  |   |        |  |  |                                   | (87    | ) |                   |  |        |  |  |   |      | 
|                                                                       |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Net income available to common stockholders                            |  | $                                     | 21,800 |   |                                  |  | 31,609 |                   |  | $ | 0.69   |  |  | $                                 | 19,708 |   |                   |  | 30,539 |  |  | $ | 0.64 | 
|                                                                       |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Diluted:                                                               |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Effect of dilutive securities:                                         |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Add: income allocated to unvested restricted shares                    |  |                                       | 77     |   |                                  |  |        |                   |  |   |        |  |  |                                   | 87     |   |                   |  |        |  |  |   |      | 
|Restricted sharesnon participating                                    |  |                                       |        |   |                                  |  | 35     |                   |  |   |        |  |  |                                   |        |   |                   |  | 35     |  |  |   |      | 
|Stock options added to the denominator under the treasury stock method |  |                                       |        |   |                                  |  | 553    |                   |  |   |        |  |  |                                   |        |   |                   |  | 154    |  |  |   |      | 
|Less: income reallocated to unvested restricted shares                 |  |                                       | (76    | ) |                                  |  |        |                   |  |   |        |  |  |                                   | (87    | ) |                   |  |        |  |  |   |      | 
|                                                                       |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 
|Net income available to common stockholders and assumed conversions    |  | $                                     | 21,801 |   |                                  |  | 32,197 |                   |  | $ | 0.68   |  |  | $                                 | 19,708 |   |                   |  | 30,728 |  |  | $ | 0.64 | 
|                                                                       |  |                                       |        |   |                                  |  |        |                   |  |   |        |  |  |                                   |        |   |                   |  |        |  |  |   |      | 



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Restricted common shares outstanding totaled 88,810 and 140,614 at March 31, 2011 and
2010, respectively, and are subject to time vesting and restrictions on transfer until vested and have identical voting, income and distribution rights to the unrestricted common shares outstanding. Restricted share units in the amount of 35,098 and
35,098 and stock options in the amount of 1,355,895 and 2,055,019 were outstanding at March 31, 2011 and 2010, respectively.

The computation of diluted earnings per share excludes the effect of the potential exercise of stock options that are anti-dilutive. Only the number of shares that would be issuable under the treasury
stock method of accounting for share dilution are included, which is based upon the amount by which the average stock price exceeds the conversion price. The number of stock options excluded from the computation was 262,908 and 0 for the three
months ended March 31, 2011 and 2010, respectively.

8. Long-Term Debt

On February 11, 2011, we refinanced our existing indebtedness by completing an offering of $250.0 million in aggregate principal
amount of 6.75% Senior Notes due 2019 through an institutional private placement and entering into a new $350.0 million senior secured credit agreement with a maturity date of February 11, 2016. The new credit agreement provides for senior
secured financing consisting of:



| |  |  | a $200.0 million senior secured revolving credit facility;
| | - |  | ----------------------------------------------------------



| |  |  | a $150.0 million senior secured term loan facility; and
| | - |  | -------------------------------------------------------



| |  |  | an option to raise up to $125.0 million of incremental term loans or incremental revolving credit commitments.
| | - |  | --------------------------------------------------------------------------------------------------------------

In connection with this refinancing we repaid in full all outstanding borrowings under our previously existing term and revolving loans.
In addition, we purchased $151.0 million principal amount of our outstanding 8.125% Senior Notes through a tender offer and redeemed the remaining $12.0 million principal amount of such notes. We also redeemed the remaining $0.3 million principal
amount of our outstanding 12% Discount Notes. In these notes to the condensed consolidated financial statements, the loans made under the revolving credit facility are referred to as the Revolving Loans, and the loans made under the term loan
facility are referred to as the Term Loans.

Long-term debt consists of the following:



|                                       |  |                |         |  |                  |   |         |  
|-------------------------------------- |  | -------------- | ------- |  | ---------------- | - | ------- | -
|                                       |  | March 31,2011  |         |  | December 31,2010 |  
|                                       |  | (in thousands) |        
|Term Loans                             |  | $              | 150,000 |  |                  | $ | 219,425 |  
|6.75% unsecured notes                  |  |                | 250,000 |  |                  |   |        |  
|12.0% discount notes                   |  |                |        |  |                  |   | 250     |  
|8.125% notes                           |  |                |        |  |                  |   | 170,000 |  
|8.125% notes held in treasury          |  |                |        |  |                  |   | (7,000  | )
|                                       |  |                |         |  |                  |   |         |  
|Total debt                             |  |                | 400,000 |  |                  |   | 382,675 |  
|Less current portion of long-term debt |  |                | 9,375   |  |                  |   | 2,304   |  
|                                       |  |                |         |  |                  |   |         |  
|Total long-term debt                   |  | $              | 390,625 |  |                  | $ | 380,371 |  
|                                       |  |                |         |  |                  |   |         |  

Senior Secured Credit Agreement.Kraton Polymers LLC is the borrower under our senior secured
credit agreement dated as of February 11, 2011, (the Credit Agreement), which is unconditionally guaranteed by Kraton Performance Polymers, Inc. and the wholly-owned domestic subsidiaries of Kraton Polymers LLC, and is required to
be guaranteed by all future direct and indirect material domestic subsidiaries. Borrowings under the Revolving Loans bear an interest rate equal to, at our option, either (a) a base rate determined by reference to the



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higher of (1) the federal funds rate plus 0.50% and, (2) the prime rate of Bank of America, N.A., in each case plus a margin of 2.00% through December 31, 2011 and thereafter 1.75%
to 2.25% depending on a consolidated net leverage ratio, or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs plus a
margin of 3.00% through December 31, 2011 and thereafter 2.75% to 3.25% depending on a consolidated net leverage ratio.

Borrowings under the Term Loans bear interest at a rate per annum equal to, at our option, either (a) a base rate determined by
reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America, N.A. in each case plus a margin of 2.00% per annum, or (b) a LIBOR rate determined by reference to the costs of funds for
U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs plus a margin of 3.00% per annum. The average effective interest rates on the Term Loans for the three months ended March 31,
2011 and 2010 were 5.6% and 3.3%, respectively.

In addition to paying interest on outstanding principal under the Revolving
Loans and Term Loans, we are required to pay a commitment fee ranging from 0.50% to 0.75%, depending on our consolidated net leverage ratio, related to the unutilized commitments under the Revolving Loans, as well as pay customary letter of credit
fees and agency fees.

6.75% Senior Notes due 2019. Kraton Polymers LLC and its wholly-owned financing
subsidiary Kraton Polymers Capital Corporation issued $250.0 million aggregate principal amount of 6.75% Senior Notes, which mature on March 1, 2019, pursuant to an indenture, dated as of February 11, 2011. The indenture provides that the
notes are general unsecured, senior obligations and will be unconditionally guaranteed on a senior unsecured basis. We will pay interest on the notes at 6.75% per annum, semi-annually in arrears on March 1 and September 1, commencing
on September 1, 2011.

Debt Maturities. The remaining principal payments on our outstanding total
debt as of March 31, 2011, are as follows:



|             |  |                   |         | 
|------------ |  | ----------------- | ------- | 
|             |  | PrincipalPayments |        
|             |  | (in thousands)    |        
|December 31: |  |                   |         | 
|2011         |  | $                 | 7,500   | 
|2012         |  | $                 | 7,500   | 
|2013         |  | $                 | 11,250  | 
|2014         |  | $                 | 15,000  | 
|2015         |  | $                 | 108,750 | 
|Thereafter   |  | $                 | 250,000 | 
|             |  |                   |         | 
|Total debt   |  | $                 | 400,000 | 
|             |  |                   |         | 

As of March 31, 2011, we were in compliance with the applicable financial ratios and the other
covenants for the senior secured credit facility and the indenture governing the 6.75% senior subordinated notes.

See Note 10
Financial Instruments and Credit Riskto the condensed consolidated financial statements accompanying this report for fair value information related to our long-term debt.



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9. Deferred Financing Costs

We capitalize the financing fees and other costs related to issuing long-term debt. We amortize these costs using the effective interest method, except for costs related to revolving debt,
which are amortized using the straight-line method. We had net deferred financing costs of $15.4 million and $5.2 million (of which, $2.6 million and $2.1 million were included in other current assets) as of March 31, 2011 and December 31,
2010, respectively. In connection with the refinancing of our indebtedness in the first quarter of 2011, we wrote-off approximately $4.2 million of deferred financing costs associated with our previously existing indebtedness and capitalized $14.9
million of deferred financing costs related to the new debt. The quarter ended March 31, 2011 consisted of the following activity:



|                                                      |  |                          |        |  
|----------------------------------------------------- |  | ------------------------ | ------ | -
|                                                      |  | Deferred Financing Costs |       
|                                                      |  | (in thousands)           |       
|Deferred financing costs balance at December 31, 2010 |  | $                        | 5,238  |  
|Write-off related to previously existing indebtedness |  |                          | (4,199 | )
|Addition related to new indebtedness                  |  |                          | 14,948 |  
|Amortization expense                                  |  |                          | (563   | )
|                                                      |  |                          |        |  
|Deferred financing costs balance at March 31, 2011    |  | $                        | 15,424 |  
|                                                      |  |                          |        |  

10. Financial Instruments and Credit Risk

Financial Instruments

Interest Rate Swap Agreements.
Periodically, we enter into interest rate swap agreements to hedge or otherwise protect against interest rate fluctuations on a portion of our variable rate debt. These interest rate swap agreements are designated as cash flow hedges on our exposure
to the variability of future cash flows.

In February 2008, we entered into a $325.0 million notional amount interest
rate swap agreement. The agreement had a fixed rate of 2.77%, therefore, including the 2.00% margin on our previously existing Term Loans, our hedged fixed rate was 4.77% through April 1, 2010. We settled the swap in June 2008 in advance of the
scheduled maturity, resulting in a gain on the sale of $4.6 million. The gain was deferred in accumulated other comprehensive income and was being reclassified as a reduction in interest expense through March 31, 2010 using the effective
interest method. We reclassified $0.5 million into interest expense for the three months ended March 31, 2010.

In May
2009, we entered into a $310.0 million notional amount interest rate swap agreement. This agreement, which was effective on January 4, 2010 and expired on January 3, 2011, had a fixed rate of 1.53%; therefore, including the 2.00% margin on
our previously existing Term Loans, our hedged fixed rate was 3.53%. In December 2009, we made a $100.0 million payment of outstanding indebtedness under the Term Loans, reducing the principal amount outstanding from approximately $323.0 million to
approximately $223.0 million. As a result, we were required to discontinue prospectively hedge accounting because the hedging relationship failed to meet all of the criteria set forth in ASC 815, Derivatives and Hedging,in that
specifically the notional amount of the swap and the principal amount of the debt were no longer equal and the forecasted transaction was no longer probable of occurring based on the original hedge documentation. We elected to re-designate the cash
flow hedge relationship for approximately $218.0 million notional amount out of the total $310.0 million notional amount interest rate swap agreement. We recorded a gain of $ 0.1 million in accumulated other comprehensive income related to the
effective portion and no gain in interest expense related to the ineffective portion of the hedge for the three months ended March 31, 2010.



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In June 2010, we entered into a $215.0 million notional amount interest rate swap agreement.
This agreement was effective on January 3, 2011 and was set to expire on January 3, 2012. However, on February 10, 2011, in connection with the refinancing of our existing indebtedness, we terminated and settled the interest rate swap
agreement, and as a result, recognized $1.0 million of interest expense.

Net Investment Hedges. In May 2010, we
entered into multiple non-deliverable forward contracts to reduce our exposure to fluctuations in the Brazilian Real to the U.S. dollar associated with the funding of the debottleneck and expansion of our isoprene rubber latex capacity at our
Paulina, Brazil, facility, for the notional amounts of R$2.7 million, R$7.1 million, and R$7.8 million with expiration dates of June 30, September 30, and December 31, 2010, respectively. The non-deliverable forward contracts
qualified for hedge accounting and were designated as net investment hedges in accordance with ASC 815-35 Net Investment Hedges.A gain of $0.9 million is included in accumulated other comprehensive income related to the effective
portion of the hedges as of March 31, 2011.

ASC 820, Fair Value Measurements and Disclosures defines
fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value.

ASC 820 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. In accordance with ASC 820, these two types of inputs have created the following fair value
hierarchy:



| |  |  | Level 1Quoted unadjusted prices for identical instruments in active markets.
| | - |  | -----------------------------------------------------------------------------



| |  |  | Level 2Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

The following table presents the carrying values and approximate fair values of our long-term debt at
March 31, 2011 and December 31, 2010:



|                                    |  |                |         |  |                   |   |         |               |  |   |           |  |  |   |         | 
|----------------------------------- |  | -------------- | ------- |  | ----------------- | - | ------- | ------------- |  | - | --------- |  |  | - | ------- | 
|                                    |  | March 31, 2011 |         |  | December 31, 2010 |  
|                                    |  | CarryingValue  |         |  | FairValue         |   |         | CarryingValue |  |   | FairValue | 
|                                    |  | (in thousands) |        
|Term Loans                          |  | $              | 150,000 |  |                   | $ | 150,000 |               |  | $ | 219,425   |  |  | $ | 219,425 | 
|6.75% unsecured notes               |  |                | 250,000 |  |                   |   | 255,470 |               |  |   |          |  |  |   |        | 
|12.00% discount notes               |  |                |        |  |                   |   |        |               |  |   | 250       |  |  |   | 324     | 
|8.125% notes                        |  |                |        |  |                   |   |        |               |  |   | 163,000   |  |  |   | 164,630 | 
|8.125% notes held as treasury bonds |  |                |        |  |                   |   |        |               |  |   | 7,000     |  |  |   | 7,070   | 

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



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We had no outstanding financial assets or liabilities as of March 31, 2011. The
financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are as follows:



|                                               |  |                             |  |                  |       |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|---------------------------------------------- |  | --------------------------- |  | ---------------- | ----- |  | ---------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | - | 
|                                               |  |                             |  |                  |       |  | Fair Value Measurements at Reporting Date Using            |  
|                                               |  | Balance Sheet Location      |  | December 31,2010 |       |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|                                               |  |                             |  | (in thousands)   |      
|Derivative liabilities2009 Interest rate swap |  | Other payables and accruals |  | $                | 362   |  |                                                            | $ |  |                                           |  | $ | 362                                    |  |  | $ |  | 
|Derivative liabilities2010 Interest rate swap |  | Other payables and accruals |  | $                | 1,073 |  |                                                            | $ |  |                                           |  | $ | 1,073                                  |  |  | $ |  | 
|                                               |  |                             |  |                  |       |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|Total2010                                     |  | Other payables and accruals |  | $                | 1,435 |  |                                                            | $ |  |                                           |  | $ | 1,435                                  |  |  | $ |  | 
|                                               |  |                             |  |                  |       |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized
in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring
positions with individual counterparties. In the event of a default by one of our counterparties, we may not receive payments provided for under the terms of our derivatives. We do not anticipate any defaults by our derivative instrument contract
counterparties.

Credit Risk. Our customers are diversified by industry and geography with more than 700
customers in over 60 countries. We do not have concentrations of receivables from these industry sectors throughout these countries. Where exposed to credit risk, we analyze the counterparties financial condition prior to entering into an
agreement, establishes credit limits and monitors the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate,
based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.

11. Income
Taxes

Income tax expense was $2.6 million and $4.3 million for the three months ended March 31, 2011 and 2010,
respectively. The effective tax rate was 10.4% and 17.7% for the three months ended March 31, 2011 and 2010, respectively. Our effective tax rate for the three months ended March 31, 2011 was lower than the statutory rate of 35.0%
primarily due to the mix of pre-tax income earned in foreign jurisdictions and the recognition of the tax benefit for certain net operating loss carryforwards.

We are required to provide a valuation allowance for certain deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax
assets ultimately will not be realized.

As of March 31, 2011, we had unrecognized tax benefits related to foreign tax
positions, all of which, if recognized, would impact the effective tax rate. We had no substantial change in uncertain tax positions and have recorded $4.2 million of unrecognized tax benefits, including interest and penalties, as a long-term
liability.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. For our
U.S. federal income tax returns, the statute of limitations has expired through the tax year December 31, 2003; as a result of operating loss carryforwards from 2004, the statute remains open for all years subsequent to 2003. In addition, open
tax years for state and foreign jurisdictions remain subject to examination.



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12. Commitments and Contingencies

Legal Proceedings.We and certain of our subsidiaries are parties to several legal proceedings that have arisen in the
ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters, individually or in the aggregate, to have a material adverse effect upon our financial position,
results of operations or cash flows.

Asset Retirement Obligations.We account for asset retirement obligations
pursuant to the provisions of ASC 410-20, Asset Retirement Obligations.The U.S. Environmental Protection Agency issued new standards for controlling hazardous air emissions from industrial boilers. These standards are required
under Sections 112 and 129 of the Clean Air Act. This new regulation applies to the coal-burning boilers at our Belpre, Ohio, facility. The ruling was published in the Federal Register on March 21, 2011 and officially becomes law 60 days later
on May 20, 2011, if it is not otherwise changed or delayed. As a result, our facilities would be required to be in full compliance by May 20, 2014. Therefore, we have recorded an asset retirement obligation of $5.0 million in the quarter
ending March 31, 2011 related to replacing these coal-burning boilers.

The following table shows changes in the
aggregate carrying amount of our asset retirement obligations:



|                                        |  |                       |        |  
|--------------------------------------- |  | --------------------- | ------ | -
|                                        |  | ARO Liability Balance |       
|                                        |  | (in thousands)        |       
|Asset Retirement Obligations Liability: |  |                       |        |  
|Balance at December 31, 2009            |  | $                     | 4,171  |  
|Additional accruals                     |  |                       | 3,024  |  
|Accretion expense                       |  |                       | 57     |  
|Obligations settled                     |  |                       | (2,583 | )
|Revisions in estimated cash flows       |  |                       | (1,291 | )
|                                        |  |                       |        |  
|Balance at December 31, 2010            |  | $                     | 3,378  |  
|                                        |  |                       |        |  
|Additional accruals                     |  |                       | 5,004  |  
|Accretion expense                       |  |                       | 55     |  
|Obligations settled                     |  |                       |       |  
|Revisions in estimated cash flows       |  |                       | (74    | )
|                                        |  |                       |        |  
|Balance at March 31, 2011               |  | $                     | 8,363  |  
|                                        |  |                       |        |  

There have been no other material changes to our Commitments and Contingencies disclosed in our most
recently filed Annual Report on Form 10-K.

13. Employee Benefits

Retirement Plans.The components of net periodic benefit cost related to U.S. pension benefits are as follows:



|                                         |  |                             |        |   |      |   |        |  
|---------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                         |  | Three months endedMarch 31, |       
|                                         |  | 2011                        |        |   | 2010 |  
|                                         |  | (in thousands)              |       
|Defined Benefit                          |  |                             |        |   |      |   |        |  
|Components of net periodic benefit cost: |  |                             |        |   |      |   |        |  
|Service cost                             |  | $                           | 698    |   |      | $ | 623    |  
|Interest cost                            |  |                             | 1,295  |   |      |   | 1,216  |  
|Expected return on plan assets           |  |                             | (1,313 | ) |      |   | (1,213 | )
|Amortization of prior service cost       |  |                             | 240    |   |      |   | 4      |  
|                                         |  |                             |        |   |      |   |        |  
|Net periodic benefit cost                |  | $                           | 920    |   |      | $ | 630    |  
|                                         |  |                             |        |   |      |   |        |  



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|                                         |  |                             |     |  |      |   |     | 
|---------------------------------------- |  | --------------------------- | --- |  | ---- | - | --- | 
|                                         |  | Three months endedMarch 31, |    
|                                         |  | 2011                        |     |  | 2010 |  
|                                         |  | (in thousands)              |    
|Other Post-retirement Benefits           |  |                             |     |  |      |   |     | 
|Components of net periodic benefit cost: |  |                             |     |  |      |   |     | 
|Service cost                             |  | $                           | 110 |  |      | $ | 98  | 
|Interest cost                            |  |                             | 307 |  |      |   | 280 | 
|Amortization of prior service cost       |  |                             | 99  |  |      |   | 39  | 
|                                         |  |                             |     |  |      |   |     | 
|Net periodic benefit cost                |  | $                           | 516 |  |      | $ | 417 | 
|                                         |  |                             |     |  |      |   |     | 

Contributions.We made contributions of $0.8 million to our pension plan in the quarter ended
March 31, 2011 and expect to contribute $7.4 million in total in 2011.



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14. Industry Segment and Foreign Operations

We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with the provisions of
ASC 280, Segment Reporting, our chief operating decision-maker has been identified as the President and Chief Executive Officer, who regularly reviews financial information 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 ASC 280 can be found in the condensed consolidated financial
statements.

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. Total sales revenue and long-lived assets by geographic region were as follows:



|                     |  |                             |         |  |      |   |         | 
|-------------------- |  | --------------------------- | ------- |  | ---- | - | ------- | 
|                     |  | Three months endedMarch 31, |        
|                     |  | 2011                        |         |  | 2010 |  
|                     |  | (in thousands)              |        
|Total Sales Revenue: |  |                             |         |  |      |   |         | 
|United States        |  | $                           | 116,308 |  |      | $ | 109,845 | 
|Germany              |  |                             | 49,125  |  |      |   | 30,606  | 
|Japan                |  |                             | 19,220  |  |      |   | 15,918  | 
|China                |  |                             | 15,829  |  |      |   | 12,180  | 
|Italy                |  |                             | 15,118  |  |      |   | 10,826  | 
|Belgium              |  |                             | 12,147  |  |      |   | 2,007   | 
|Brazil               |  |                             | 11,586  |  |      |   | 11,263  | 
|France               |  |                             | 10,553  |  |      |   | 7,494   | 
|Thailand             |  |                             | 9,145   |  |      |   | 7,445   | 
|United Kingdom       |  |                             | 8,803   |  |      |   | 6,210   | 
|The Netherlands      |  |                             | 7,876   |  |      |   | 7,723   | 
|Canada               |  |                             | 6,327   |  |      |   | 4,954   | 
|Taiwan               |  |                             | 5,813   |  |      |   | 5,748   | 
|Austria              |  |                             | 5,086   |  |      |   | 2,271   | 
|Turkey               |  |                             | 4,706   |  |      |   | 4,173   | 
|Sweden               |  |                             | 4,655   |  |      |   | 3,088   | 
|South Korea          |  |                             | 4,419   |  |      |   | 3,433   | 
|Russian Federation   |  |                             | 4,198   |  |      |   | 146     | 
|Malaysia             |  |                             | 3,307   |  |      |   | 2,042   | 
|Argentina            |  |                             | 3,197   |  |      |   | 2,603   | 
|Australia            |  |                             | 2,930   |  |      |   | 3,230   | 
|Mexico               |  |                             | 2,641   |  |      |   | 2,256   | 
|India                |  |                             | 2,372   |  |      |   | 1,341   | 
|Denmark              |  |                             | 2,169   |  |      |   | 1,703   | 
|Czech Republic       |  |                             | 1,898   |  |      |   | 1,199   | 
|Switzerland          |  |                             | 1,436   |  |      |   | 1,448   | 
|Hong Kong            |  |                             | 1,206   |  |      |   | 1,038   | 
|Portugal             |  |                             | 1,108   |  |      |   | 763     | 
|All other countries  |  |                             | 11,650  |  |      |   | 9,779   | 
|                     |  |                             |         |  |      |   |         | 
|                     |  | $                           | 344,828 |  |      | $ | 272,732 | 
|                     |  |                             |         |  |      |   |         | 



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|                           |  |                |         |  |                  |   |         | 
|-------------------------- |  | -------------- | ------- |  | ---------------- | - | ------- | 
|                           |  | March 31,2011  |         |  | December 31,2010 |  
|                           |  | (in thousands) |        
|Long-Lived Assets, at cost |  |                |         | 
|United States              |  | $              | 350,438 |  |                  | $ | 334,081 | 
|France                     |  |                | 142,505 |  |                  |   | 136,449 | 
|Brazil                     |  |                | 85,160  |  |                  |   | 78,260  | 
|Germany                    |  |                | 50,626  |  |                  |   | 47,059  | 
|The Netherlands            |  |                | 13,658  |  |                  |   | 12,539  | 
|China                      |  |                | 3,296   |  |                  |   | 3,190   | 
|Japan                      |  |                | 1,553   |  |                  |   | 1,582   | 
|All other countries        |  |                | 4,881   |  |                  |   | 4,593   | 
|                           |  |                |         |  |                  |   |         | 
|                           |  | $              | 652,117 |  |                  | $ | 617,753 | 
|                           |  |                |         |  |                  |   |         | 

15. Related Party Transactions

We own a 50% equity investment in a manufacturing joint venture with JSR Corporation (JSR) in Kashima, Japan under the name of Kraton JSR Elastomers K.K. (KJE). We and JSR
separately, but with equal rights, participate as distributors in the sales of the thermoplastic rubber produced by KJE.

The
aggregate amounts of related-party transactions were as follows:



|                             |  |                             |        |  |      |   |       | 
|---------------------------- |  | --------------------------- | ------ |  | ---- | - | ----- | 
|                             |  | Three months endedMarch 31, |       
|                             |  | 2011                        |        |  | 2010 |  
|                             |  | (in thousands)              |       
|Purchases from related party |  | $                           | 10,233 |  |      | $ | 9,654 | 

16. Supplemental Guarantor
Information

Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the
Issuers, are co-issuers of the 6.75% Senior Notes due March 1, 2019. Kraton Performance Polymers, Inc. and Elastomers Holdings LLC, a U.S. holding company, collectively, the Guarantors, fully and unconditionally guarantee on a joint and several
basis, the Issuers obligations under the 6.75% Senior Notes. Our remaining subsidiaries are not guarantors of the 6.75% Senior 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.



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KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2011

(Unaudited)

(In thousands, except par value)



|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|---------------------------------------------------------------------------------------------- |  | ------ | ------- |  | -------------------- | - | --------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- |  | ------------ | - | ---------- | - |  | - | --------- | 
|                                                                                               |  | Kraton |         |  | KratonPolymersLLC(1) |   |           | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |  | Consolidated |  
|ASSETS                                                                                         |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current Assets                                                                                 |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Cash and cash equivalents                                                                      |  | $      |        |  |                      | $ |          |                       |  | $ | 6,266                     |   |  | $            | 29,765  |  |              | $ |           |   |  | $ | 36,031    | 
|Receivables, net of allowance                                                                  |  |        |        |  |                      |   |          |                       |  |   | 72,000                    |   |  |              | 105,760 |  |              |   |           |   |  |   | 177,760   | 
|Inventories of products, net                                                                   |  |        |        |  |                      |   |          |                       |  |   | 199,362                   |   |  |              | 164,895 |  |              |   |           |   |  |   | 364,257   | 
|Inventories of materials and supplies, net                                                     |  |        |        |  |                      |   |          |                       |  |   | 7,260                     |   |  |              | 2,569   |  |              |   |           |   |  |   | 9,829     | 
|Other current assets                                                                           |  |        |        |  |                      |   | 6,841     |                       |  |   | 2,301                     |   |  |              | 37,557  |  |              |   |           |   |  |   | 46,699    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total current assets                                                                           |  |        |        |  |                      |   | 6,841     |                       |  |   | 287,189                   |   |  |              | 340,546 |  |              |   |           |   |  |   | 634,576   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Property, plant and equipment, less accumulated depreciation                                   |  |        |        |  |                      |   | 73,197    |                       |  |   | 196,620                   |   |  |              | 111,392 |  |              |   |           |   |  |   | 381,209   | 
|Identifiable intangible assets, less accumulated amortization                                  |  |        |        |  |                      |   | 52,821    |                       |  |   | 15,628                    |   |  |              |        |  |              |   |           |   |  |   | 68,449    | 
|Investment in consolidated subsidiaries                                                        |  |        | 459,820 |  |                      |   | 1,109,230 |                       |  |   |                          |   |  |              |        |  |              |   | (1,569,050 | ) |  |   |          | 
|Investment in unconsolidated joint venture                                                     |  |        |        |  |                      |   | 813       |                       |  |   |                          |   |  |              | 12,391  |  |              |   |           |   |  |   | 13,204    | 
|Deferred financing costs                                                                       |  |        |        |  |                      |   | 12,838    |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 12,838    | 
|Deferred income taxes                                                                          |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 1,596   |  |              |   | (1,596     | ) |  |   |          | 
|Other long-term assets                                                                         |  |        |        |  |                      |   | 1,054     |                       |  |   | 517,103                   |   |  |              | 88,235  |  |              |   | (579,507   | ) |  |   | 26,885    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total Assets                                                                                   |  | $      | 459,820 |  |                      | $ | 1,256,794 |                       |  | $ | 1,016,540                 |   |  | $            | 554,160 |  |              | $ | (2,150,153 | ) |  | $ | 1,137,161 | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|LIABILITIES AND STOCKHOLDERS AND MEMBERS EQUITY                                              |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current Liabilities                                                                            |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current portion of long-term debt                                                              |  | $      |        |  |                      | $ | 9,375     |                       |  | $ |                          |   |  | $            |        |  |              | $ |           |   |  | $ | 9,375     | 
|Accounts payable-trade                                                                         |  |        |        |  |                      |   |          |                       |  |   | 40,778                    |   |  |              | 43,276  |  |              |   |           |   |  |   | 84,054    | 
|Other payables and accruals                                                                    |  |        |        |  |                      |   | 3,279     |                       |  |   | 19,965                    |   |  |              | 20,726  |  |              |   |           |   |  |   | 43,970    | 
|Deferred income taxescurrent                                                                  |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 595     |  |              |   |           |   |  |   | 595       | 
|Insurance note payable                                                                         |  |        |        |  |                      |   | 4,260     |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 4,260     | 
|Due to related party                                                                           |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 17,379  |  |              |   |           |   |  |   | 17,379    | 
|Total current liabilities                                                                      |  |        |        |  |                      |   | 16,914    |                       |  |   | 60,743                    |   |  |              | 81,976  |  |              |   |           |   |  |   | 159,633   | 
|Long-term debt, net of current portion                                                         |  |        |        |  |                      |   | 390,625   |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 390,625   | 
|Deferred income taxes                                                                          |  |        |        |  |                      |   | 16,419    |                       |  |   |                          |   |  |              |        |  |              |   | (1,596     | ) |  |   | 14,823    | 
|Long-term liabilities                                                                          |  |        |        |  |                      |   | 371,221   |                       |  |   | 81,715                    |   |  |              | 199,558 |  |              |   | (579,507   | ) |  |   | 72,987    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total liabilities                                                                              |  |        |        |  |                      |   | 795,179   |                       |  |   | 142,458                   |   |  |              | 281,534 |  |              |   | (581,103   | ) |  |   | 638,068   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Commitments and contingencies (note 12)                                                        |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Stockholders and Members equity                                                              |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Preferred stock, $0.01 par value; 100,000 shares authorized; none issued                       |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Common stock, $0.01 par value; 500,000 shares authorized; 31,881 shares issued and outstanding |  |        | 319     |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 319       | 
|Additional paid in capital                                                                     |  |        | 340,913 |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 340,913   | 
|Members equity                                                                                |  |        |        |  |                      |   | 459,820   |                       |  |   | 895,638                   |   |  |              | 213,592 |  |              |   | (1,569,050 | ) |  |   |          | 
|Retained Earnings                                                                              |  |        | 118,588 |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 118,588   | 
|Accumulated other comprehensive income                                                         |  |        |        |  |                      |   | 1,795     |                       |  |   | (21,556                   | ) |  |              | 59,034  |  |              |   |           |   |  |   | 39,273    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total stockholders and members equity                                                        |  |        | 459,820 |  |                      |   | 461,615   |                       |  |   | 874,082                   |   |  |              | 272,626 |  |              |   | (1,569,050 | ) |  |   | 499,093   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total Liabilities and Stockholders and Members Equity                                        |  | $      | 459,820 |  |                      | $ | 1,256,794 |                       |  | $ | 1,016,540                 |   |  | $            | 554,160 |  |              | $ | (2,150,153 | ) |  | $ | 1,137,161 | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2010

(In thousands, except par value)



|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|---------------------------------------------------------------------------------------------- |  | ------ | ------- |  | -------------------- | - | --------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- |  | ------------ | - | ---------- | - |  | - | --------- | 
|                                                                                               |  | Kraton |         |  | KratonPolymersLLC(1) |   |           | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |  | Consolidated |  
|ASSETS                                                                                         |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current Assets                                                                                 |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Cash and cash equivalents                                                                      |  | $      |        |  |                      | $ |          |                       |  | $ | 31,421                    |   |  | $            | 61,329  |  |              | $ |           |   |  | $ | 92,750    | 
|Receivables, net of allowance                                                                  |  |        | 731     |  |                      |   | 161       |                       |  |   | 48,623                    |   |  |              | 86,617  |  |              |   |           |   |  |   | 136,132   | 
|Inventories of products, net                                                                   |  |        |        |  |                      |   |          |                       |  |   | 171,989                   |   |  |              | 153,131 |  |              |   |           |   |  |   | 325,120   | 
|Inventories of materials and supplies, net                                                     |  |        |        |  |                      |   |          |                       |  |   | 6,988                     |   |  |              | 2,643   |  |              |   |           |   |  |   | 9,631     | 
|Other current assets                                                                           |  |        |        |  |                      |   | 2,933     |                       |  |   | 728                       |   |  |              | 35,088  |  |              |   |           |   |  |   | 38,749    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total current assets                                                                           |  |        | 731     |  |                      |   | 3,094     |                       |  |   | 259,749                   |   |  |              | 338,808 |  |              |   |           |   |  |   | 602,382   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Property, plant and equipment, less accumulated depreciation                                   |  |        |        |  |                      |   | 75,632    |                       |  |   | 186,611                   |   |  |              | 103,123 |  |              |   |           |   |  |   | 365,366   | 
|Identifiable intangible assets, less accumulated amortization                                  |  |        |        |  |                      |   | 54,528    |                       |  |   | 15,933                    |   |  |              |        |  |              |   |           |   |  |   | 70,461    | 
|Investment in consolidated subsidiaries                                                        |  |        | 431,001 |  |                      |   | 1,064,238 |                       |  |   |                          |   |  |              |        |  |              |   | (1,495,239 | ) |  |   |          | 
|Investment in unconsolidated joint venture                                                     |  |        |        |  |                      |   | 813       |                       |  |   |                          |   |  |              | 12,776  |  |              |   |           |   |  |   | 13,589    | 
|Deferred financing costs                                                                       |  |        |        |  |                      |   | 3,172     |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 3,172     | 
|Deferred income taxes                                                                          |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 2,376   |  |              |   | (2,376     | ) |  |   |          | 
|Other long-term assets                                                                         |  |        |        |  |                      |   | 439       |                       |  |   | 514,860                   |   |  |              | 196,866 |  |              |   | (686,412   | ) |  |   | 25,753    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total Assets                                                                                   |  | $      | 431,732 |  |                      | $ | 1,201,916 |                       |  | $ | 977,153                   |   |  | $            | 653,949 |  |              | $ | (2,184,027 | ) |  | $ | 1,080,723 | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|LIABILITIES AND STOCKHOLDERS AND MEMBERS EQUITY                                              |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current Liabilities                                                                            |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Current portion of long-term debt                                                              |  | $      |        |  |                      | $ | 2,304     |                       |  | $ |                          |   |  | $            |        |  |              | $ |           |   |  | $ | 2,304     | 
|Accounts payable-trade                                                                         |  |        |        |  |                      |   |          |                       |  |   | 51,653                    |   |  |              | 35,046  |  |              |   |           |   |  |   | 86,699    | 
|Other payables and accruals                                                                    |  |        |        |  |                      |   | 7,967     |                       |  |   | 27,864                    |   |  |              | 24,951  |  |              |   |           |   |  |   | 60,782    | 
|Deferred income taxes                                                                          |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 595     |  |              |   |           |   |  |   | 595       | 
|Due to related party                                                                           |  |        |        |  |                      |   |          |                       |  |   |                          |   |  |              | 19,264  |  |              |   |           |   |  |   | 19,264    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total current liabilities                                                                      |  |        |        |  |                      |   | 10,271    |                       |  |   | 79,517                    |   |  |              | 79,856  |  |              |   |           |   |  |   | 169,644   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Long-term debt, net of current portion                                                         |  |        | 250     |  |                      |   | 380,121   |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 380,371   | 
|Deferred income taxes                                                                          |  |        |        |  |                      |   | 16,465    |                       |  |   |                          |   |  |              |        |  |              |   | (2,376     | ) |  |   | 14,089    | 
|Long-term liabilities                                                                          |  |        |        |  |                      |   | 363,333   |                       |  |   | 69,784                    |   |  |              | 317,537 |  |              |   | (686,412   | ) |  |   | 64,242    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total liabilities                                                                              |  |        | 250     |  |                      |   | 770,190   |                       |  |   | 149,301                   |   |  |              | 397,393 |  |              |   | (688,788   | ) |  |   | 628,346   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Commitments and contingencies (note 12)                                                        |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Stockholders and Members equity                                                              |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Preferred stock, $0.01 par value; 100,000 shares authorized; none issued                       |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Common stock, $0.01 par value; 500,000 shares authorized; 31,390 shares issued and outstanding |  |        | 314     |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 314       | 
|Additional paid in capital                                                                     |  |        | 334,457 |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 334,457   | 
|Members equity                                                                                |  |        |        |  |                      |   | 431,001   |                       |  |   | 855,209                   |   |  |              | 209,029 |  |              |   | (1,495,239 | ) |  |   |          | 
|Retained Earnings                                                                              |  |        | 96,711  |  |                      |   |          |                       |  |   |                          |   |  |              |        |  |              |   |           |   |  |   | 96,711    | 
|Accumulated other comprehensive income                                                         |  |        |        |  |                      |   | 725       |                       |  |   | (27,357                   | ) |  |              | 47,527  |  |              |   |           |   |  |   | 20,895    | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total stockholders and members equity                                                        |  |        | 431,482 |  |                      |   | 431,726   |                       |  |   | 827,852                   |   |  |              | 256,556 |  |              |   | (1,495,239 | ) |  |   | 452,377   | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 
|Total Liabilities and Stockholders and Members Equity                                        |  | $      | 431,732 |  |                      | $ | 1,201,916 |                       |  | $ | 977,153                   |   |  | $            | 653,949 |  |              | $ | (2,184,027 | ) |  | $ | 1,080,723 | 
|                                                                                               |  |        |         |  |                      |   |           |                       |  |   |                           |   |  |              |         |  |              |   |            |   |  |   |           | 



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended March 31, 2011

(Unaudited)

(In thousands)



|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ------ | ------ |  | --------------------- | - | ------ | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- |  | ------------ | - | ------- | - |  | - | ------- | 
|                                                          |  | Kraton |        |  | KratonPolymersLLC (1) |   |        | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |  | Consolidated |  
|Sales Revenue                                             |  | $      |       |  |                       | $ |       |                       |  | $ | 174,156                   |   |  | $            | 206,077 |  |              | $ | (35,405 | ) |  | $ | 344,828 | 
|Cost of Goods Sold                                        |  |        |       |  |                       |   | (120   | )                     |  |   | 121,959                   |   |  |              | 171,543 |  |              |   | (35,405 | ) |  |   | 257,977 | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Gross Profit                                              |  |        |       |  |                       |   | 120    |                       |  |   | 52,197                    |   |  |              | 34,534  |  |              |   |        |   |  |   | 86,851  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Operating Expenses                                        |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Research and development expenses                         |  |        |       |  |                       |   |       |                       |  |   | 4,138                     |   |  |              | 2,464   |  |              |   |        |   |  |   | 6,602   | 
|Selling, general and administrative expenses              |  |        |       |  |                       |   | 174    |                       |  |   | 18,505                    |   |  |              | 8,492   |  |              |   |        |   |  |   | 27,171  | 
|Depreciation and amortization of identifiable intangibles |  |        |       |  |                       |   | 4,153  |                       |  |   | 7,280                     |   |  |              | 3,193   |  |              |   |        |   |  |   | 14,626  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Total operating expenses                                  |  |        |       |  |                       |   | 4,327  |                       |  |   | 29,923                    |   |  |              | 14,149  |  |              |   |        |   |  |   | 48,399  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Loss on Extinguishment of Debt                            |  |        |       |  |                       |   | 2,985  |                       |  |   |                          |   |  |              |        |  |              |   |        |   |  |   | 2,985   | 
|Earnings in Consolidated Subsidiaries                     |  |        | 21,877 |  |                       |   | 43,306 |                       |  |   |                          |   |  |              |        |  |              |   | (65,183 | ) |  |   |        | 
|Earnings of Unconsolidated Joint Venture                  |  |        |       |  |                       |   |       |                       |  |   |                          |   |  |              | 141     |  |              |   |        |   |  |   | 141     | 
|Interest Expense (Income), Net                            |  |        |       |  |                       |   | 14,153 |                       |  |   | (3,795                    | ) |  |              | 823     |  |              |   |        |   |  |   | 11,181  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Income Before Income Taxes                                |  |        | 21,877 |  |                       |   | 21,961 |                       |  |   | 26,069                    |   |  |              | 19,703  |  |              |   | (65,183 | ) |  |   | 24,427  | 
|Income Tax Expense                                        |  |        |       |  |                       |   | 84     |                       |  |   |                          |   |  |              | 2,466   |  |              |   |        |   |  |   | 2,550   | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Net Income                                                |  | $      | 21,877 |  |                       | $ | 21,877 |                       |  | $ | 26,069                    |   |  | $            | 17,237  |  |              | $ | (65,183 | ) |  | $ | 21,877  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended March 31, 2010

(Unaudited)

(In thousands)



|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ------ | ------ |  | --------------------- | - | ------ | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- |  | ------------ | - | ------- | - |  | - | ------- | 
|                                                          |  | Kraton |        |  | KratonPolymersLLC (1) |   |        | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |  | Consolidated |  
|Sales Revenue                                             |  | $      |       |  |                       | $ |       |                       |  | $ | 164,498                   |   |  | $            | 142,684 |  |              | $ | (34,450 | ) |  | $ | 272,732 | 
|Cost of Goods Sold                                        |  |        |       |  |                       |   |       |                       |  |   | 120,062                   |   |  |              | 117,993 |  |              |   | (34,450 | ) |  |   | 203,605 | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Gross Profit                                              |  |        |       |  |                       |   |       |                       |  |   | 44,436                    |   |  |              | 24,691  |  |              |   |        |   |  |   | 69,127  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Operating Expenses                                        |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Research and development expenses                         |  |        |       |  |                       |   |       |                       |  |   | 3,554                     |   |  |              | 2,430   |  |              |   |        |   |  |   | 5,984   | 
|Selling, general and administrative expenses              |  |        |       |  |                       |   | (95    | )                     |  |   | 16,527                    |   |  |              | 5,630   |  |              |   |        |   |  |   | 22,062  | 
|Depreciation and amortization of identifiable intangibles |  |        |       |  |                       |   | 3,909  |                       |  |   | 5,825                     |   |  |              | 1,312   |  |              |   |        |   |  |   | 11,046  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Total operating expenses                                  |  |        |       |  |                       |   | 3,814  |                       |  |   | 25,906                    |   |  |              | 9,372   |  |              |   |        |   |  |   | 39,092  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Earnings in Consolidated Subsidiaries                     |  |        | 19,795 |  |                       |   | 31,823 |                       |  |   |                          |   |  |              |        |  |              |   | (51,618 | ) |  |   |        | 
|Earnings of Unconsolidated Joint Venture                  |  |        |       |  |                       |   |       |                       |  |   |                          |   |  |              | 74      |  |              |   |        |   |  |   | 74      | 
|Interest Expense (Income), Net                            |  |        |       |  |                       |   | 8,307  |                       |  |   | (2,783                    | ) |  |              | 540     |  |              |   |        |   |  |   | 6,064   | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Income Before Income Taxes                                |  |        | 19,795 |  |                       |   | 19,702 |                       |  |   | 21,313                    |   |  |              | 14,853  |  |              |   | (51,618 | ) |  |   | 24,045  | 
|Income Tax Expense (Benefit)                              |  |        |       |  |                       |   | (93    | )                     |  |   |                          |   |  |              | 4,343   |  |              |   |        |   |  |   | 4,250   | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 
|Net Income                                                |  | $      | 19,795 |  |                       | $ | 19,795 |                       |  | $ | 21,313                    |   |  | $            | 10,510  |  |              | $ | (51,618 | ) |  | $ | 19,795  | 
|                                                          |  |        |        |  |                       |   |        |                       |  |   |                           |   |  |              |         |  |              |   |         |   |  |   |         | 



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Three months ended March 31, 2011

(Unaudited)

(In thousands)



|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|------------------------------------------------------------------------ |  | ------ | ------ | - | --------------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- | - | ------------ | - | ------ | - |  | - | -------- | -
|                                                                         |  | Kraton |        |   | KratonPolymersLLC (1) |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Cash flows used in operating activities                                  |  | $      |       |   |                       | $ | (14,296  | )                     |  | $ | (10,424                   | ) |  | $            | (19,417 | ) |              | $ |       |   |  | $ | (44,137  | )
|Cash flows provided by (used in) investing activities                    |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Proceeds from (payments on) intercompany loans                           |  |        |       |   |                       |   | 4,748    |                       |  |   |                          |   |  |              |        |   |              |   | (4,748 | ) |  |   |         |  
|Purchase of plant and equipment, net of proceeds from sales of equipment |  |        |       |   |                       |   |         |                       |  |   | (11,851                   | ) |  |              | (4,667  | ) |              |   |       |   |  |   | (16,518  | )
|Purchase of software                                                     |  |        |       |   |                       |   |         |                       |  |   | (132                      | ) |  |              |        |   |              |   |       |   |  |   | (132     | )
|Net cash provided by (used in) investing activities                      |  |        |       |   |                       |   | 4,748    |                       |  |   | (11,983                   | ) |  |              | (4,667  | ) |              |   | (4,748 | ) |  |   | (16,650  | )
|Cash flows provided by (used in) financing activities                    |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Proceeds from debt                                                       |  |        |       |   |                       |   | 400,000  |                       |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | 400,000  |  
|Repayments of debt                                                       |  |        |       |   |                       |   | (385,660 | )                     |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | (385,660 | )
|Cash contributions from member                                           |  |        |       |   |                       |   | 5,896    |                       |  |   |                          |   |  |              |        |   |              |   | (5,896 | ) |  |   |         |  
|Cash distributions to member                                             |  |        | (5,896 | ) |                       |   |         |                       |  |   |                          |   |  |              |        |   |              |   | 5,896  |   |  |   |         |  
|Proceeds from the exercise of stock options                              |  |        | 5,896  |   |                       |   |         |                       |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | 5,896    |  
|Proceeds from insurance note payable                                     |  |        |       |   |                       |   | 4,734    |                       |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | 4,734    |  
|Repayments of insurance note payable                                     |  |        |       |   |                       |   | (474     | )                     |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | (474     | )
|Debt issuance costs                                                      |  |        |       |   |                       |   | (14,948  | )                     |  |   |                          |   |  |              |        |   |              |   |       |   |  |   | (14,948  | )
|Proceeds from (payments on) intercompany loans                           |  |        |       |   |                       |   |         |                       |  |   | (2,748                    | ) |  |              | (2,000  | ) |              |   | 4,748  |   |  |   |         |  
|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Net cash provided by (used in) financing activities                      |  |        |       |   |                       |   | 9,548    |                       |  |   | (2,748                    | ) |  |              | (2,000  | ) |              |   | 4,748  |   |  |   | 9,548    |  
|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Effect of exchange rate differences on cash                              |  |        |       |   |                       |   |         |                       |  |   |                          |   |  |              | (5,480  | ) |              |   |       |   |  |   | (5,480   | )
|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Net decrease in cash and cash equivalents                                |  |        |       |   |                       |   |         |                       |  |   | (25,155                   | ) |  |              | (31,564 | ) |              |   |       |   |  |   | (56,719  | )
|Cash and cash equivalents at beginning of period                         |  |        |       |   |                       |   |         |                       |  |   | 31,421                    |   |  |              | 61,329  |   |              |   |       |   |  |   | 92,750   |  
|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  
|Cash and cash equivalents at end of period                               |  | $      |       |   |                       | $ |         |                       |  | $ | 6,266                     |   |  | $            | 29,765  |   |              | $ |       |   |  | $ | 36,031   |  
|                                                                         |  |        |        |   |                       |   |          |                       |  |   |                           |   |  |              |         |   |              |   |        |   |  |   |          |  



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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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KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Three months ended March 31, 2010

(Unaudited)

(In thousands)



|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------- | - | ------------ | - | ------- | - |  | - | ------- | -
|                                                                         |  | Kraton |         |   | KratonPolymersLLC (1) |   |         | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Cash flows used in operating activities                                  |  | $      |        |   |                       | $ | (29,013 | )                     |  | $ | (20,336                   | ) |  | $            | (23,487 | ) |              | $ |        |   |  | $ | (72,836 | )
|Cash flows provided by (used in) investing activities                    |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Proceeds from (payments on) intercompany loans                           |  |        |        |   |                       |   | 15,675  |                       |  |   |                          |   |  |              |        |   |              |   | (15,675 | ) |  |   |        |  
|Purchase of plant and equipment, net of proceeds from sales of equipment |  |        |        |   |                       |   |        |                       |  |   | (4,892                    | ) |  |              | (1,574  | ) |              |   |        |   |  |   | (6,466  | )
|Purchase of software                                                     |  |        |        |   |                       |   |        |                       |  |   | (1,188                    | ) |  |              |        |   |              |   |        |   |  |   | (1,188  | )
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Net cash provided by (used in) investing activities                      |  |        |        |   |                       |   | 15,675  |                       |  |   | (6,080                    | ) |  |              | (1,574  | ) |              |   | (15,675 | ) |  |   | (7,654  | )
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Cash flows provided by (used in) financing activities                    |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Proceeds from debt                                                       |  |        |        |   |                       |   | 25,000  |                       |  |   |                          |   |  |              |        |   |              |   |        |   |  |   | 25,000  |  
|Repayments of debt                                                       |  |        |        |   |                       |   | (25,576 | )                     |  |   |                          |   |  |              |        |   |              |   |        |   |  |   | (25,576 | )
|Cash contributions from member                                           |  |        |        |   |                       |   | 10,713  |                       |  |   |                          |   |  |              |        |   |              |   | (10,713 | ) |  |   |        |  
|Cash distributions to member                                             |  |        | (10,713 | ) |                       |   |        |                       |  |   |                          |   |  |              |        |   |              |   | 10,713  |   |  |   |        |  
|Proceeds from issuance of common stock                                   |  |        | 11,197  |   |                       |   |        |                       |  |   |                          |   |  |              |        |   |              |   |        |   |  |   | 11,197  |  
|Costs associated with the issuance of common stock                       |  |        | (484    | ) |                       |   |        |                       |  |   |                          |   |  |              |        |   |              |   |        |   |  |   | (484    | )
|Proceeds from insurance note payable                                     |  |        |        |   |                       |   | 3,201   |                       |  |   |                          |   |  |              |        |   |              |   |        |   |  |   | 3,201   |  
|Proceeds from (payments on) intercompany loans                           |  |        |        |   |                       |   |        |                       |  |   | (7,143                    | ) |  |              | (8,532  | ) |              |   | 15,675  |   |  |   |        |  
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Net cash provided by (used in) financing activities                      |  |        |        |   |                       |   | 13,338  |                       |  |   | (7,143                    | ) |  |              | (8,532  | ) |              |   | 15,675  |   |  |   | 13,338  |  
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Effect of exchange rate differences on cash                              |  |        |        |   |                       |   |        |                       |  |   |                          |   |  |              | 9,911   |   |              |   |        |   |  |   | 9,911   |  
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Net decrease in cash and cash equivalents                                |  |        |        |   |                       |   |        |                       |  |   | (33,559                   | ) |  |              | (23,682 | ) |              |   |        |   |  |   | (57,241 | )
|Cash and cash equivalents at beginning of period                         |  |        |        |   |                       |   |        |                       |  |   | 36,567                    |   |  |              | 32,724  |   |              |   |        |   |  |   | 69,291  |  
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  
|Cash and cash equivalents at end of period                               |  | $      |        |   |                       | $ |        |                       |  | $ | 3,008                     |   |  | $            | 9,042   |   |              | $ |        |   |  | $ | 12,050  |  
|                                                                         |  |        |         |   |                       |   |         |                       |  |   |                           |   |  |              |         |   |              |   |         |   |  |   |         |  



|(1) | Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% Senior Notes due
March 1, 2019. 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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17. Subsequent Events

On April 6, 2011, entities affiliated with TPG Capital, L.P. (collectively, TPG) and J.P. Morgan Partners, LLC (collectively, JPMP) sold all of their common stock of Kraton
Performance Polymers, Inc. in a public offering. Prior to the sale, TPG owned approximately 18.80% of our outstanding common stock, and JPMP owned approximately 12.53%.

On April 29, 2011, Kraton Polymers LLC and Kraton Polymers Capital Corporation initiated an offer to exchange any and all of our outstanding 6.75% Senior Notes due 2019 that were issued on
February 11, 2011 (the Old Notes) for an equal amount of new 6.75% Senior Notes 2019 (the New Notes, and together with the Old Notes, the Notes). We will not receive any proceeds from the exchange offer. The
terms of the New Notes issued in the exchange offer are substantially the same as the terms of the Old Notes, except that the offer of the New Notes is registered under the Securities Act of 1933, as amended, and the New Notes have no transfer
restrictions, rights to additional interest or registration rights. The New Notes will not be listed on any securities exchange. A public market for the New Notes may not develop, which could make selling the New Notes difficult.

We have evaluated significant events and transactions that have occurred after the balance sheet date and have determined that there were
no events or transactions other than those disclosed above that would require recognition or disclosure in our condensed consolidated financial statements for the period ended March 31, 2011.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

INTRODUCTION

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 our Annual Report on Form 10-K, as of and for the year ended
December 31, 2010. 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 are a leading global producer of engineered polymers and one of the worlds leading producers of styrenic block copolymers (SBCs). We market our products under the widely recognized
KRATON® brand. SBCs are highly-engineered synthetic elastomers that we invented and commercialized almost
50 years ago, which enhance the performance of numerous end use products, imparting greater flexibility, resilience, strength, durability and processability. Our SBC products are found in many everyday applications, including disposable baby
diapers, the rubberized grips of toothbrushes, razor blades, power tools and asphalt formulations used to pave roads. We also produce CariflexTMisoprene rubber latex (IRL), a highly-engineered, synthetic substitute for natural rubber latex. Our IRL
products, which are used in applications such as surgical gloves, have not been found to contain the proteins present in natural latex and are, therefore, not known to cause allergies. Our polymers are typically formulated or compounded with
other products to achieve improved, customer specific performance characteristics in a variety of applications.

We offer our
customers a broad portfolio of products that includes 252 core commercial grades of SBCs. We manufacture our products along five primary product lines based upon polymer chemistry and process technologies:



| |  |  | unhydrogenated SBCs (USBCs;)
| | - |  | ------------------------------



| |  |  | hydrogenated SBCs (HSBCs;)
| | - |  | ----------------------------



| |  |  | isoprene rubber (IR;)
| | - |  | -----------------------



| |  |  | isoprene rubber latex (IRL;) and
| | - |  | ----------------------------------



| |  |  | compounds.
| | - |  | ----------

We include IR and IRL in our USBC product line. USBCs and HSBCs represented approximately 65.6% and 34.4% of sales revenue for the three
months ended March 31, 2011, respectively, and 62.1% and 37.9% for the three months ended March 31, 2010, respectively. The majority of worldwide SBC capacity is dedicated to the production of USBCs, which are primarily used in paving and
roofing, adhesives, sealants and coatings and footwear applications. HSBCs, which are significantly more complex and capital-intensive to manufacture than USBCs, are primarily used in higher value-added applications, including soft touch and
flexible materials, personal hygiene products, medical products, automotive components and certain adhesives and sealant applications.

We believe that the diversity and depth of our product portfolio is unmatched in the industry, serving the widest set of applications within each of our four end use markets:



| |  |  | Advanced Materials, which represented 32.3% of sales revenue for the three months ended March 31, 2011;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Adhesives, Sealants and Coatings, which represented 31.9% of sales revenue for the three months ended March 31, 2011;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | Paving and Roofing, which represented 27.3% of sales revenue for the three months ended March 31, 2011; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Emerging Businesses, which includes our IRL activity, represented 5.8% of sales revenue for the three months ended March 31, 2011.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

2011 First Quarter Financial Highlights



| |  |  | Sales revenue increased by 26.4% from the first quarter of 2010 due to increases in global product sales prices, primarily in response to higher raw
material costs, and increased sales volumes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross profit amounted to 25.2% of operating revenue in first quarter of 2011 compared to 25.3% in the first quarter of 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Net income improved by $2.1 million to $21.9 million, or $0.68 per diluted share, compared to net income of $19.8 million, or $0.64 per diluted share,
in the first quarter of 2010.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adjusted EBITDA improved by $13.4 million to $56.0 million compared to the first quarter of 2010, reflecting a margin of 16.2% of revenues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

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
53% and 52% of our total cost of goods sold for the three months ended March 31, 2011 and 2010, respectively, and 56% of our total cost of goods sold for the twelve months ended December 31, 2010. The cost of these monomers has generally
correlated with changes in crude oil prices. Prices of these monomers have fluctuated significantly due to global supply and demand and global economic conditions. During 2010, styrene pricing was volatile with prices up in the first half of 2010,
declining in the third quarter, then increasing in both the fourth quarter of 2010 and the first quarter of 2011. During 2010, butadiene pricing increased into the third quarter before declining in the fourth quarter and then rising again in the
first quarter of 2011. Spot isoprene pricing increased through the first half of 2010 before declining in the second half due to improved supply/demand. Spot isoprene pricing stabilized during the fourth quarter of 2010 through the first quarter of
2011. Overall, monomer pricing in the first quarter of 2011 was higher than the fourth quarter of 2010.

Styrene, butadiene
and isoprene used by our U.S. and European facilities are predominantly supplied by a portfolio of suppliers under long-term supply contracts and arrangements with various expiration dates. For our U.S. facilities, we also procure a substantial
amount of isoprene from a variety of suppliers from Russia, China and Japan. These purchases include both spot and contract arrangements. We generally contract with these suppliers on a short-term basis and have increased the number of these
contracts since 2008 to ensure the availability of our isoprene supply.

In Japan, butadiene and isoprene are supplied under
our joint venture agreement by our joint venture partner. 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.

We believe our contractual and other arrangements with suppliers of styrene, butadiene and isoprene provide an adequate supply of raw
materials at competitive, market-based prices. We can provide no assurances that contract suppliers will not terminate these contracts at the expiration of their contract terms, that we will be able to obtain substitute arrangements on comparable
terms, or that we generally will be able to source raw materials on an economic basis in the future.



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International Operations and Currency Fluctuations.We operate a geographically
diverse business, serving customers in approximately 60 countries from five manufacturing facilities on four continents. For the three months ended March 31, 2011, approximately 41% of total sales revenue was generated from customers located in
the Americas, approximately 39% in Europe and approximately 20% in the Asia Pacific region. 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. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations.

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 United States 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 accumulated other comprehensive income in stockholders equity on the Condensed Consolidated Balance Sheets. 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.

The estimated impact from currency fluctuations, including the cost of hedging strategies, amounted to a pre-tax
loss of $0.8 million in both the three months ended March 31, 2011 and 2010 respectively.

Seasonality.Seasonal
changes and weather conditions, although difficult to predict, typically affect the Paving and Roofing end use market resulting in higher sales volumes into this end use market in the second and third quarters of the calendar year versus the first
and fourth quarters of the calendar year. Our other end use markets tend to show relatively little seasonality.

Recent
Developments

Pricing.We have implemented a series of global price increases in 2011, which have been generally
broad-based across our end use markets in response to higher raw material costs and other factors.

Secondary Public
Offering.On April 6, 2011, entities affiliated with TPG Capital, L.P. (collectively, TPG) and J.P. Morgan Partners, LLC (collectively, JPMP) sold all of their common stock of Kraton Performance Polymers, Inc. in a
public offering. Prior to the sale, TPG owned approximately 18.80% of the Parents outstanding common stock, and JPMP owned approximately 12.53%. We did not receive any proceeds from the secondary offering.

Refinancing of Our Existing Indebtedness.On February 11, 2011, we refinanced our existing indebtedness by completing an
offering of $250.0 million in aggregate principal amount of 6.75% Senior Notes due 2019 through an institutional private placement and entering into a new $350.0 million senior secured credit agreement with a maturity date of February 11, 2016.
The new credit agreement provides for senior secured financing consisting of:



| |  |  | a $200.0 million senior secured revolving credit facility;
| | - |  | ----------------------------------------------------------



| |  |  | a $150.0 million senior secured term loan facility; and
| | - |  | -------------------------------------------------------



| |  |  | an option to raise up to $125.0 million of incremental term loans or incremental revolving credit commitments.
| | - |  | --------------------------------------------------------------------------------------------------------------

In connection with this refinancing we repaid in full all outstanding borrowings under our previously existing term and revolving loans.
In addition, we purchased $151.0 million principal amount of our outstanding 8.125% Senior Notes through a tender offer and redeemed the remaining $12.0 million principal amount of such notes. We also redeemed the remaining $0.3 million principal
amount of our outstanding 12% Discount Notes.





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Project Assessment Under Way for Additional HSBC Capacity in Asia. As a result of
growth in Kratons differentiated grades of HSBCs globally, we anticipate the need for additional manufacturing capacity. We are continuing to expand and strengthen our presence in Asia, and thus, we believe Kratons regional, and
global, business would benefit from such increased manufacturing capacity in the Asia Pacific region. We believe expansion of HSBC capacity is the next step to grow our position in the Asia Pacific region, supporting application and technology
developments for Kratons leading, proprietary, styrenic block copolymer formulations. Therefore, we are exploring options to build a 30 kiloton HSBC manufacturing facility that would employ Kratons latest state-of-the-art technology for
producing HSBCs and, we believe, would set a new global standard for manufacturing cost and product quality, demonstrating further our commitment to growing our business and to the region. Our site-selection team is continuing to evaluate
options for the 30 kiloton HSBC manufacturing facility. As this process includes an in-depth review of significant project variables such as proposed transaction structure, commercial terms, operating agreements and feedstock availability as well as
an analysis of the impact these criteria have on overall project economics, we now expect to be in a position to communicate site location in the second half of 2011. While it is too early to estimate the expected cost of the new facility, we
anticipate that construction could commence in the first half of 2012 with start-up occurring as early as the second half of 2013. Although no firm commitments have been made, we have reserved approximately $13.0 million in our 2011 capital
expenditure plan for engineering related to this potential new capacity.

Operations of our USBC facility at the Kashima
Petrochemical Complex, Japan.We own a 50% equity investment in a manufacturing joint venture with JSR Corporation in Kashima Japan. Production capacity at the facility is approximately 42 kilotons of USBC products, and we are generally entitled
to 50% of this production pursuant to our joint venture agreement. Our earnings from this unconsolidated joint venture were $0.1 million for both the three months ended March 31, 2011 and 2010, respectively. Operations of this USBC facility at
the Kashima Petrochemical Complex were shut down on March 11, 2011, as part of a complex wide emergency procedure in response to the recent earthquake and tsunami. Although the USBC facility was not damaged, it has been confirmed that there has
been damage to the broader infrastructure at the Kashima Petrochemical Complex as a result of the earthquake and tsunami. Loading berths, roads and infrastructure around the facility have been damaged. Operations at the facility remain suspended due
to a lack of monomers and utilities. Currently, it is impossible for us to give an accurate estimate of when the facility will be back in operation. We continue to monitor the situation closely and are working with JSR and other business
counterparties to expedite returning the facility to normal operations. At the present time, we are able to meet our customers forecasted demand from our existing inventories and we have initiated contingency plans to provide our customers
with products from our other global manufacturing sites to mitigate any supply disruptions.

Outlook

During the first quarter of 2011, prices for our key raw materials increased and we currently expect this trend to continue as evidenced
by the cumulative April and May North American butadiene contract price increase of $0.38 per pound or 36%. We believe there was approximately 9 kilotons of first quarter 2011 sales volume attributable to advanced purchases, particularly in our
Paving and Roofing end use, as customers pulled volume, primarily from the second quarter, into the first quarter. As such, we currently anticipate that our second quarter 2011 sales volume will be between 84 and 87 kilotons within the range of
historical volume progression from the first quarter to the second quarter, taking into account the 9 kilotons of advanced purchasing in the first quarter 2011.



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The following table summarizes certain information relating to our operating results that
has been derived from our condensed consolidated financial statements.



|                                                          |  |                                       |         |  |      |   |         | 
|--------------------------------------------------------- |  | ------------------------------------- | ------- |  | ---- | - | ------- | 
|                                                          |  | Three months endedMarch 31,           |        
|                                                          |  | 2011                                  |         |  | 2010 |  
|                                                          |  | (in thousands, except per share data) |        
|Condensed Consolidated Statements of Operations Data:     |  |                                       |         |  |      |   |         | 
|Sales Revenue                                             |  | $                                     | 344,828 |  |      | $ | 272,732 | 
|Cost of Goods Sold                                        |  |                                       | 257,977 |  |      |   | 203,605 | 
|                                                          |  |                                       |         |  |      |   |         | 
|Gross Profit                                              |  |                                       | 86,851  |  |      |   | 69,127  | 
|                                                          |  |                                       |         |  |      |   |         | 
|Operating Expenses                                        |  |                                       |         |  |      |   |         | 
|Research and development                                  |  |                                       | 6,602   |  |      |   | 5,984   | 
|Selling, general and administrative                       |  |                                       | 27,171  |  |      |   | 22,062  | 
|Depreciation and amortization of identifiable intangibles |  |                                       | 14,626  |  |      |   | 11,046  | 
|                                                          |  |                                       |         |  |      |   |         | 
|Total operating expenses                                  |  |                                       | 48,399  |  |      |   | 39,092  | 
|                                                          |  |                                       |         |  |      |   |         | 
|Loss on Extinguishment of Debt                            |  |                                       | 2,985   |  |      |   |        | 
|Earnings of Unconsolidated Joint Venture                  |  |                                       | 141     |  |      |   | 74      | 
|Interest Expense, Net                                     |  |                                       | 11,181  |  |      |   | 6,064   | 
|                                                          |  |                                       |         |  |      |   |         | 
|Income Before Income Taxes                                |  |                                       | 24,427  |  |      |   | 24,045  | 
|Income Tax Expense                                        |  |                                       | 2,550   |  |      |   | 4,250   | 
|                                                          |  |                                       |         |  |      |   |         | 
|Net Income                                                |  | $                                     | 21,877  |  |      | $ | 19,795  | 
|                                                          |  |                                       |         |  |      |   |         | 
|Earnings per common share (Note 7)                        |  |                                       |         |  |      |   |         | 
|Basic                                                     |  | $                                     | 0.69    |  |      | $ | 0.64    | 
|Diluted                                                   |  | $                                     | 0.68    |  |      | $ | 0.64    | 
|Weighted average common shares outstanding                |  |                                       |         |  |      |   |         | 
|Basic                                                     |  |                                       | 31,609  |  |      |   | 30,539  | 
|Diluted                                                   |  |                                       | 32,197  |  |      |   | 30,728  | 

Three Months Ended
March 31, 2011 Compared to Three Months Ended March 31, 2010

Sales Revenue

For the three months ended March 31, 2011, total sales revenue increased $72.1 million or 26.4% compared to the same period in 2010
largely due to increases in global product sales prices primarily in response to higher raw material costs of $41.7 million, increased sales volumes, primarily related to the positive worldwide economic climate of $28.3 million, and changes in
foreign currency exchange rates of $2.1 million. Sales volumes amounted to 81.3 kilotons and 72.9 kilotons in the first quarter of 2011 and 2010, respectively.

In addition to the aforementioned increase in global product sales prices and volumes, which was evidenced in each of the end-uses, the following factors also influenced our sales revenue in each of our
end use markets:



| |  |  | Advanced Materials.Sales revenue amounted to $111.3 million for the first quarter 2011, an increase of $18.9 million or 20.5% compared to first
quarter 2010 sales revenue of $92.4 million. Sales revenue increased in all markets, including HSBC-led growth in emerging markets. We continued to see positive momentum for innovation product sales, which include personal care application such as
diapers and adult incontinence products, and in PVC-free alternatives for wire and cable applications such as computer data and power cords and for medical applications such as IV bags and tubing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adhesives, Sealants and Coatings.Sales revenue amounted to $110.1 million for the first quarter 2011, an increase of $17.8 million or 19.3%
compared to first quarter 2010 sales revenue of $92.3 million. Sales revenue growth was led by Europe and North America, and was primarily due to higher pricing.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | European sales revenue increases were driven by the non-woven and industrial applications, as well as by innovation sales in health and beauty applications. North American sales revenue was
driven by specialty tape and printing plate applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paving and Roofing.Sales revenue amounted to $94.2 million for the first quarter 2011, an increase of $32.6 million or 52.9% compared to first
quarter 2010 sales revenue of $61.6 million. Sales revenue growth was led by Europe, and was primarily driven by increased global product sales prices and volumes in both the paving and roofing markets. In North America, sales revenue growth was
driven by higher pricing in both the paving and roofing markets, and by higher volume in the paving market. We also increased our sales into emerging markets such as India and Russia.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Emerging Businesses.Sales revenue amounted to $20.0 million for the first quarter 2011, an increase of $6.3 million or 46.0% compared to first
quarter 2010 sales of $13.7 million. The increase reflects the continued volume growth of our CariflexTMIR Latex business in applications such as surgical gloves and condoms, as well as CariflexTMsolid IR in medical and coatings applications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Goods Sold

Cost of goods sold for three months ended March 31, 2011 increased $54.4 million or 26.7% compared to the same period in 2010. The increase was driven primarily by a $33.2 million increase in monomer
and other production costs, a $19.4 million increase in volume, and a $1.8 million increase from changes in foreign currency exchange rates.

Cost of goods sold was 74.8% of sales revenue for the three months ended March 31, 2011 compared to 74.7% for the same period in 2010. The spread between the first-in, first-out (FIFO) basis of
accounting and the last-in, first-out (LIFO) basis of accounting, resulted in a decrease in cost of goods sold of approximately $21.0 million and $7.3 million for the three months ended March 31, 2011 and 2010, respectively.

Gross Profit

Gross profit for the three months ended March 31, 2011 increased $17.7 million, a 25.6% increase compared to the same period in 2010. Gross profit was 25.2% of sales revenue for the three months
ended March 31, 2011 compared to 25.3% for the same period in 2010.

Operating Expenses



| |  |  | Research and Development. Research and development expense increased $0.6 million or 10.3% largely due to higher employment related costs.
Research and development expense was 1.9% and 2.2% of sales revenue in the first quarters of 2011 and 2010, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling, General and Administrative. Selling, general and administrative expenses increased $5.1 million or 23.2% primarily due to an increase
in employee related costs of $2.6 million and an increase in restructuring related charges of $1.4 million. Selling, general and administrative expenses were 7.9% of sales revenue for the three months ended March 31, 2011 compared to 8.1% for
the same period in 2010.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and Amortization. Depreciation and amortization increased $3.6 million or 32.4% largely due to higher levels of capital
expenditures on expansion and improvement projects.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest expense, net

Interest expense, net for the three months ended March 31, 2011 increased $5.1 million or 84.4% to $11.2 million compared to $6.1
million during the same period in 2010, primarily due to the $4.2 million write-off of deferred financing costs and the $1.0 million payment to exit the interest rate swap agreement related to the debt



34



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refinancing that occurred in the first quarter of 2011. The average debt balances outstanding were $399.3 million at an average effective interest rate of 11.2% (6.1% excluding the above
mentioned write-off of deferred financing costs and interest rate swap settlement associated with the refinancing) and $394.1 million at an average effective interest rate of 6.4% for the three months ended March 31, 2011 and 2010,
respectively.

Income tax expense

Income tax expense was $2.6 million for the three months ended March 31, 2011 compared to an income tax expense of $4.3 million for the three months ended March 31, 2010. The effective tax rate
was 10.4% for the three months ended March 31, 2011 compared to 17.7% for the three months ended March 31, 2010. Our effective tax rate for the three months ended March 31, 2011 was lower than the statutory rate of 35.0%
primarily due to the mix of pre-tax income earned in foreign jurisdictions and the recognition of the tax benefit for certain net operating loss carry forwards. Additionally, for the three months ended March 31, 2011, we earned $21.8 million of
pre-tax income in tax jurisdictions with an expected full year effective tax rate of 8.5%.

Net income

Net income was $21.9 million or $0.68 per diluted share for the three months ended March 31, 2011, an increase of $2.1 million
compared to net income of $19.8 million or $0.64 per diluted share in the same period in 2010.



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EBITDA and Adjusted EBITDA

We consider EBITDA and Adjusted EBITDA as important supplemental measures of our performance and believe they are frequently used by
investors and other interested parties in the evaluation of companies in our industry. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results
under generally accepted accounting principles (GAAP) in the United States.



|                      |  |                             |        |  |      |   |        | 
|--------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                      |  | Three months endedMarch 31, |       
|                      |  | 2011                        |        |  | 2010 |  
|                      |  | (in thousands)              |       
|Other Data            |  |                             |        |  |      |   |        | 
|EBITDA(1)(3)          |  | $                           | 50,234 |  |      | $ | 41,155 | 
|Adjusted EBITDA(2)(3) |  | $                           | 56,018 |  |      | $ | 42,622 | 



|(1) | EBITDA represents net income before interest, taxes, depreciation and amortization. We present EBITDA because it is used by management to evaluate operating
performance. We consider EBITDA an important supplemental measure of our performance and believe it is frequently used by investors and other interested parties in the evaluation of companies in our industry.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also use EBITDA for the following purposes: our executive compensation plan bases incentive compensation payments on our EBITDA
performance; and our long-term debt agreements use EBITDA (with additional adjustments) to measure our compliance with covenants such as leverage and interest coverage.

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:



| |  |  | EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,
and EBITDA does not reflect any cash requirements for such replacements; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

|(2) | We present Adjusted EBITDA as a further supplemental measure of our performance and because we believe these additional adjustments provide helpful information to
securities analysts, investors and other interested parties evaluating our performance. We prepare Adjusted EBITDA by adjusting EBITDA to eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance.
We explain how each adjustment is derived and why we believe it is helpful and appropriate in the subsequent footnote. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. As an
analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our
presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for



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these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as supplemental measures. See the Consolidated Statements of Cash Flows included in our
financial statements included elsewhere in this Form 10-Q.

We reconcile Net Income to EBITDA and Adjusted EBITDA as follows:



|                                       |  |                             |        |  |      |   |        | 
|-------------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                       |  | Three months endedMarch 31, |       
|                                       |  | 2011                        |        |  | 2010 |  
|                                       |  | (in thousands)              |       
|Net Income                             |  | $                           | 21,877 |  |      | $ | 19,795 | 
|Plus                                   |  |                             |        |  |      |   |        | 
|Interest expense, net                  |  |                             | 11,181 |  |      |   | 6,064  | 
|Income tax expense                     |  |                             | 2,550  |  |      |   | 4,250  | 
|Depreciation and amortization expenses |  |                             | 14,626 |  |      |   | 11,046 | 
|                                       |  |                             |        |  |      |   |        | 
|EBITDA
(a)                             |  | $                           | 50,234 |  |      | $ | 41,155 | 
|                                       |  |                             |        |  |      |   |        | 
|Add                                    |  |                             |        |  |      |   |        | 
|Restructuring and related costs(b)     |  |                             | 1,505  |  |      |   | 135    | 
|Other non-cash expense(c)              |  |                             | 1,294  |  |      |   | 1,332  | 
|Loss on extinguishment of debt(d)      |  |                             | 2,985  |  |      |   |       | 
|                                       |  |                             |        |  |      |   |        | 
|Adjusted EBITDA (a)                    |  | $                           | 56,018 |  |      | $ | 42,622 | 
|                                       |  |                             |        |  |      |   |        | 



| | (a) | EBITDA and Adjusted EBITDA are impacted by the spread between the FIFO basis of accounting and the LIFO basis of accounting. The spread between the LIFO and FIFO basis
resulted in a positive impact to EBITDA and Adjusted EBITDA of approximately $21.0 million and $7.3 million for the three months ended March 31, 2011 and 2010, respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | 2011 restructuring and related charges consisted primarily of consulting fees, severance expenses, and other charges associated with the restructuring of our European
organization, expenses associated with the March 2011 secondary public offering, and charges associated with evaluating acquisition transactions. 2010 charges consisted of consulting fees associated with the restructuring of our European
organization.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | For both periods, consists of non-cash compensation.
| | --- | ----------------------------------------------------

| | (d) | In 2011, reflects the loss on extinguishment of debt related to the refinancing of Kratons debt in February 2011.
| | --- | ------------------------------------------------------------------------------------------------------------------

Restructuring and related charges discussed above were recorded in our Condensed Consolidated Statements of Operations, as follows.



|                                    |  |                             |       |  |      |   |     | 
|----------------------------------- |  | --------------------------- | ----- |  | ---- | - | --- | 
|                                    |  | Three months endedMarch 31, |      
|                                    |  | 2011                        |       |  | 2010 |  
|                                    |  | (in thousands)              |      
|Selling, general and administrative |  | $                           | 1,505 |  |      | $ | 135 | 



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LIQUIDITY AND CAPITAL RESOURCES

Known Trends and Uncertainties

Kraton Performance Polymers, Inc. is a
holding company without any operations or assets other than the operations of its subsidiaries.

Based upon current and
anticipated levels of operations, we believe that 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 and interest on the notes and the senior secured credit facility. However, these cash flows are subject to a number of factors, including, but not limited to, earnings, sensitivities to the cost of raw materials,
seasonality, currency transactions and currency translation. Because feedstock costs generally represent over 50% of our cost of goods sold, in periods of rising feedstock costs, we consume cash in operating activities due to increases in accounts
receivable and inventory costs, partially offset by increased value of accounts payable. Conversely, during periods in which feedstock costs are declining, we generate cash flow from decreases in working capital.

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 the senior secured credit facility to fund liquidity needs in an amount sufficient to enable us to service our indebtedness. At March 31, 2011, we had $36.0 million of cash and cash equivalents. Our available cash and
cash equivalents are held in accounts managed by third-party financial institutions and consist of cash invested in interest bearing funds and cash in our operating accounts. To date, we have experienced no loss or lack of access to our invested
cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

Under the terms of our senior secured credit facility, we are subject to certain financial covenants, including maintenance of a maximum
consolidated net total leverage ratio, a minimum consolidated net interest coverage ratio and maximum capital expenditures. Our failure to comply with any of these financial covenants would give rise to a default under the senior secured credit
facility. The maintenance of these financial ratios is based on our level of profitability. If factors arise that negatively impact our profitability, we may not be able to satisfy our covenants. If we are unable to satisfy such covenants or other
provisions at any future time we would need to seek an amendment or waiver of such financial covenants or other provisions. The respective lenders under the senior secured credit facility may not consent to any amendment or waiver requests that we
may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. In the event that we were unable to obtain any such waiver or amendment and we were not able to refinance or repay our debt instruments, our
inability to meet the financial covenants or other provisions of the senior secured credit facility would constitute an event of default under our debt instruments, including the senior secured credit facility, which would permit the bank lenders to
accelerate the senior secured credit facility.

As of the date hereof, we have available to us, upon compliance with customary
conditions, $200.0 million under the revolving portion of the senior secured credit facility and have no drawings under the revolving portion. While we expect to meet the conditions required to provide us full access to the revolving portion of the
senior secured credit facility, we cannot guarantee that all of the counterparties contractually committed to fund a revolving credit draw request will actually fund future requests, although, based upon our present analysis, we currently believe
that each of the counterparties would meet their funding requirements.

We expect to make contributions of $7.4 million to our
employee benefit plans in 2011 versus $3.3 million in 2010. If the market value of these assets does not improve during 2011, higher levels of contributions could be required in 2012 and beyond.

As of March 31, 2011, we had $29.8 million of cash and short-term investments related to foreign operations that management asserts
are permanently reinvested. As a result of certain net operating loss carryforwards, management estimates approximately $0.6 million of additional tax expense if repatriated.



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Turbulence in the U.S. and international markets and economies may adversely affect our
liquidity and financial condition, and the liquidity and financial condition of our customers, and our ability to timely replace maturing liabilities and access the capital markets to meet liquidity needs, resulting in adverse effects on our
financial condition and results of operations. However, to date we have been able to access borrowings available to us in amounts sufficient to fund liquidity needs.

Our ability 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. See Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 7, 2011 for further
discussion.

Operating Cash Flows

Net cash used in operating activities totaled $44.1 million for the three months ended March 31, 2011 compared to $72.8 million net cash used in operating activities during the same period in 2010.
This represents a decline in net cash used of $28.7 million or 39.4% largely due to higher net earnings and changes in working capital. Net income for the three months ended March 31, 2011 was $2.1 million higher than the same period in 2010.
After adjusting net income for certain items including depreciation and amortization, the loss on extinguishment of debt and deferred taxes that are necessary to reconcile net income to cash used by operating activities, we generated $13.2 million
more cash in first quarter of 2011 compared to the first quarter of 2010. Furthermore, changes in working capital consumed $90.8 million of cash in the three months ended March 31, 2011 compared to consuming $106.3 million of cash for the same
period in 2010. This $15.5 million increase in operating cash flows period over period was primarily driven by:



| |  |  | a $12.0 million increase in trade accounts payable primarily related to the increase in inventory;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | a $5.5 million decrease in other assets related to the timing of payments for prepaid expenses; partially offset by
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | a $4.4 million increase in inventories of products, materials and supplies, largely due to increases in the cost of raw materials and inventory
quantity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents decreased to $36.0 million at March 31, 2011 from $92.8 million at
December 31, 2010. Amounts undrawn on our revolving loans amounted to $200.0 million and $80.0 million at March 31, 2011 and December 31, 2010, respectively. Therefore, liquidity, defined as cash and cash equivalents plus the undrawn
amount of our revolving loans, amounted to $236.0 million and $172.8 million at March 31, 2011 and December 31, 2010, respectively.

Investing Cash Flows

Net cash used in investing activities totaled $16.7
million and $7.7 million for the three months ended March 31, 2011 and 2010.

Expected Capital Expenditures.
We expect 2011 capital expenditures will be approximately $80.0 to $85.0 million. Our minimum annual capital expenditure levels to maintain and achieve required improvements in our facilities in each of the next three to five years are expected to
be approximately $16.0 million to $22.0 million. Included in our 2011 capital expenditure estimate is approximately $13.0 million for engineering related to our ongoing assessment of a possible HSBC manufacturing facility in Asia,
approximately $12.4 million to replace IR production from the closure of our Pernis facility, approximately $3.2 million for IRL expansion at our Paulinia facility, approximately $4.8 million for the multi-year systems and control upgrades,
approximately $4.2 million for a new semi-works facility in support of our innovation pipeline and growth portfolio, and approximately $2.1 million to upgrade or replace our coal-burning boilers at our Belpre facility. For the quarter ended
March 31, 2011, capital expenditures were $16.7 million.



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##### Table of Contents

Financing Cash Flows and Liquidity

Our consolidated capital structure as of March 31, 2011 was approximately 56% equity and 44% debt compared to approximately 50%
equity and 50% debt as of March 31, 2010.

Net cash provided by financing activities totaled $9.5 million for the three
months ended March 31, 2011 compared to $13.3 million net cash provided by financing activities during the same period in 2010. The $3.8 million decrease was driven primarily by:



| |  |  | $14.9 million paid for deferred financing costs related the debt refinancing in February 2011
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | $10.7 million in net proceeds from the exercise of the underwriters over-allotment option, in January 2010; partially offset by
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $5.9 million increase in proceeds from the exercise of employee stock options; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a net $14.9 million increase in proceeds from and repayments of debt
| | - |  | --------------------------------------------------------------------

Description of Certain Indebtedness

On February 11, 2011, we refinanced our existing indebtedness by completing an offering of $250.0 million in aggregate principal amount of 6.75% Senior Notes due 2019 through an institutional private
placement and entering into a new $350.0 million senior secured credit agreement with a maturity date of February 11, 2016. See Note 8 Long-Term Debt to the condensed consolidated financial statements accompanying this report, for
further discussion.

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 Annual Report on Form 10-K for the period
ended December 31, 2010. See Note 8 Long-Term Debt to the condensed consolidated financial statements accompanying this report for the new debt maturity schedule. Other than the refinancing of our debt, there have been no other material
changes to the contractual obligation amounts disclosed in our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 7, 2011.

Off-Balance Sheet Arrangements

We are not involved in any material off-balance sheet arrangements as of March 31, 2011.

OTHER ISSUES

Adoption of Accounting Standards

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have
been issued that might have a material impact on our financial position or results of operations.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk.
|------- | -----------------------------------------------------------

For quantitative and qualitative disclosures about market risk, see Part II, Item 7(A), Quantitative and Qualitative Disclosures About Market Risk, in our 2010 Annual Report on Form 10-K.
Our exposure to market risk has not changed materially since December 31, 2010.



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|Item 4. | Controls and Procedures.
|------- | ------------------------

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011 to provide reasonable assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is 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 has been no change in our internal control over
financial reporting that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

For
information regarding legal proceedings, see Commitments and Contingencies, Note 12 to our condensed consolidated financial statements.



|Item 1A. | Risk Factors.
|-------- | -------------

Readers of
this 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
our 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 7, 2011, 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. | (Removed and Reserved).
|------- | -----------------------



|Item 5. | Other Information.
|------- | ------------------

Not
Applicable.



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|Item 6. | Exhibits.
|------- | ---------



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|4.1           |  | Indenture, dated as of February 11, 2011, among Kraton Polymers LLC, Kraton Polymers Capital Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as
trustee, relating to the 6.75% Senior Notes due 2019 (incorporated by reference to exhibit 4.1 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15, 2011).                                                                                                                                                                      
|              | 
|4.2           |  | Registration Rights Agreement dated as of February 11, 2011 by and among Kraton Polymers LLC, Kraton Polymers Capital Corporation, Kraton Performance Polymers, Inc., Elastomers
Holdings LLC and Kraton Polymers U.S. LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and Macquarie Capital (USA) Inc. (incorporated
by reference to exhibit 4.2 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15, 2011).
|              | 
|4.3           |  | First Supplemental Indenture, dated as of February 10, 2011 among Kraton Polymers LLC, Kraton Polymers Capital Corporation, the Guarantors named therein and Wells Fargo Bank,
National Association, as trustee, relating to the 8.125% Senior Subordinated Notes due 2014 (incorporated by reference to exhibit 4.3 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15,
2011).                                                                                                                                      
|              | 
|10.1+         |  | Credit Agreement dated as of February 11, 2011 among Kraton Performance Polymers, Inc., as a Guarantor, Kraton Polymers LLC, as Borrower, the other Guarantors named therein, the
Lenders named therein and Bank of America, N.A., as Administrative Agent (incorporated by reference to exhibit 10.1 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15, 2011).                                                                                                                                                     
|              | 
|10.2+         |  | Pledge Agreement dated as of February 11, 2011 among Kraton Polymers LLC, as Borrower, Kraton Performance Polymers, Inc. and other parties, as Pledgors, and Bank of America, N.A.,
as Collateral Agent for the holders of the Secured Obligations (incorporated by reference to exhibit 10.2 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15, 2011).                                                                                                                                                             
|              | 
|10.3+         |  | Security Agreement dated as of February 11, 2011 among Kraton Polymers LLC, as Borrower, Kraton Performance Polymers, Inc. and other parties, as Grantors, and Bank of America N.A.
as Collateral Agent for the holders of the Secured Obligations (incorporated by reference to exhibit 10.3 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed with the SEC on February 15, 2011).                                                                                                                                                             
|              | 
|10.4+         |  | First Amendment to Employment Agreement (Kevin M. Fogarty) (incorporated by reference to exhibit 99.1 to Kraton Performance Polymers, Inc.s Current Report on Form 8-K filed
with the SEC on February 1, 2011).                                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.5+         |  | Employment Agreement (Lee) dated effective as of January 1, 2011 (incorporated by reference to Kraton Performance Polymers, Inc.s Annual Report on Form 10-K filed with the SEC
on March 7, 2011).                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|+ | Denotes management contract or compensatory plan or arrangement.
|- | ----------------------------------------------------------------

|* | Filed herewith.
|- | ---------------



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##### Table of Contents

SIGNATURES

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



|                  |  |  |  |                                           
|----------------- |  |  |  | ------------------------------------------
|                  |  |  |  | KRATON PERFORMANCE POLYMERS, INC.         
|                  |  | 
|Date: May 5, 2011 |  |  |  | /s/     KEVIN M.
FOGARTY                  
|                  |  |  |  | Kevin M. Fogarty                          
|                  |  |  |  | President and Chief Executive Officer     
|                  |  | 
|Date: May 5, 2011 |  |  |  | /s/    STEPHEN E.
TREMBLAY                
|                  |  |  |  | Stephen E. Tremblay                       
|                  |  |  |  | Vice President and Chief Financial Officer



44