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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 September 30, 2008



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

For the transition period
from                    
to

Commission
File Number 333-123747





KRATON POLYMERS LLC

(Exact name of
Register as specified in its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2805249                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

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

(Address of principal executive offices, including zip code)

281-504-4700

(Registrants telephone number, including area code)





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

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

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









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KRATON POLYMERS LLC

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2008

TABLE OF CONTENTS



|                              |  |                                                                                                                 |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                 |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                |  | 4   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                            |  | 4   
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 |  | 5   
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and
2007           |  | 6   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 7   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 28  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 38  
|Item 4.                       |  | Controls and Procedures                                                                                         |  | 38  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                                               |  | 39  
|Item 1A.                      |  | Risk Factors                                                                                                    |  | 39  
|Item 2.                       |  | Unregistered Sales Of Equity Securities and Use of Proceeds                                                     |  | 39  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                 |  | 39  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 39  
|Item 5.                       |  | Other Information                                                                                               |  | 39  
|Item 6.                       |  | Exhibits                                                                                                        |  | 40  
|                              |  | Signatures                                                                                                      |  | 41  



2



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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



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



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



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



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



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



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



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



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

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



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PART I. FINANCIAL INFORMATION



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

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)



|                                                                                      |  |                   |           |                  |   |        
|------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | - | -------
|                                                                                      |  | September 30,2008 |           | December 31,2007
|ASSETS                                                                                |  |                   |           |                  |   |        
|                                                                                      |  |                  
|Current assets                                                                        |  |                   |           |                  |   |        
|Cash and cash equivalents                                                             |  | $                 | 84,239    |                  | $ | 48,277 
|Receivables, net of allowances of $ 1,737 and $1,542                                  |  |                   | 183,922   |                  |   | 140,321
|Inventories of products, net                                                          |  |                   | 285,974   |                  |   | 256,323
|Inventories of materials and supplies, net                                            |  |                   | 11,888    |                  |   | 12,170 
|Other current assets                                                                  |  |                   | 10,251    |                  |   | 12,404 
|                                                                                      |  |                   |           |                  |   |        
|Total current assets                                                                  |  |                   | 576,274   |                  |   | 469,495
|Property, plant and equipment, less accumulated depreciation of $176,578 and $157,643 |  |                   | 379,393   |                  |   | 402,270
|Identifiable intangible assets, less accumulated amortization of $34,428 and $29,205  |  |                   | 71,133    |                  |   | 76,356 
|Investment in unconsolidated joint venture                                            |  |                   | 10,896    |                  |   | 10,326 
|Deferred financing costs                                                              |  |                   | 8,675     |                  |   | 10,323 
|Other long-term assets                                                                |  |                   | 17,803    |                  |   | 16,124 
|                                                                                      |  |                   |           |                  |   |        
|Total assets                                                                          |  | $                 | 1,064,174 |                  | $ | 984,894
|                                                                                      |  |                   |           |                  |   |        
|LIABILITIES AND MEMBERS EQUITY                                                       |  |                   |           |                  |   |        
|                                                                                      |  |                  
|Current liabilities                                                                   |  |                   |           |                  |   |        
|Current portion of long-term debt                                                     |  | $                 | 3,445     |                  | $ | 3,445  
|Accounts payable-trade                                                                |  |                   | 107,665   |                  |   | 102,952
|Other payables and accruals                                                           |  |                   | 58,740    |                  |   | 55,816 
|Due to related party                                                                  |  |                   | 21,046    |                  |   | 24,505 
|Deferred income taxes                                                                 |  |                   | 9,015     |                  |   | 9,827  
|Insurance note payable                                                                |  |                   |          |                  |   | 494    
|                                                                                      |  |                   |           |                  |   |        
|Total current liabilities                                                             |  |                   | 199,911   |                  |   | 197,039
|Long-term debt, net of current portion                                                |  |                   | 572,462   |                  |   | 535,020
|Deferred income taxes                                                                 |  |                   | 38,696    |                  |   | 39,443 
|Long-term liabilities                                                                 |  |                   | 25,996    |                  |   | 30,682 
|                                                                                      |  |                   |           |                  |   |        
|Total liabilities                                                                     |  |                   | 837,065   |                  |   | 802,184
|                                                                                      |  |                   |           |                  |   |        
|Commitments and contingencies                                                         |  |                   |           |                  |   |        
|Members equity                                                                       |  |                   |           |                  |   |        
|Common equity                                                                         |  |                   | 189,350   |                  |   | 143,149
|Accumulated other comprehensive income                                                |  |                   | 37,759    |                  |   | 39,561 
|                                                                                      |  |                   |           |                  |   |        
|Total members equity                                                                 |  |                   | 227,109   |                  |   | 182,710
|                                                                                      |  |                   |           |                  |   |        
|Total liabilities and members equity                                                 |  | $                 | 1,064,174 |                  | $ | 984,894
|                                                                                      |  |                   |           |                  |   |        

See Notes to Condensed Consolidated Financial Statements



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KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands)



|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------- | ---- | ------------------------------- | ------- | ---- | ------------------------------ | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                          |      | Three Months EndedSeptember 30, |         |      | Nine Months EndedSeptember 30, |  
|                                                          | 2008 |                                 |         | 2007 |                                |   | 2008    |   |  | 2007 |        
|Operating Revenues                                        |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Sales                                                     |      | $                               | 363,275 |      |                                | $ | 284,498 |   |  | $    | 947,925 |   |  | $ | 812,326 |  
|Other                                                     |      |                                 | 18,892  |      |                                |   | 5,652   |   |  |      | 46,472  |   |  |   | 19,546  |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Total operating revenues                                  |      |                                 | 382,167 |      |                                |   | 290,150 |   |  |      | 994,397 |   |  |   | 831,872 |  
|Cost of goods sold                                        |      |                                 | 287,719 |      |                                |   | 243,699 |   |  |      | 788,618 |   |  |   | 701,660 |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Gross profit                                              |      |                                 | 94,448  |      |                                |   | 46,451  |   |  |      | 205,779 |   |  |   | 130,212 |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Operating Expenses                                        |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Research and development                                  |      |                                 | 5,808   |      |                                |   | 5,452   |   |  |      | 21,129  |   |  |   | 18,504  |  
|Selling, general, and administrative                      |      |                                 | 28,214  |      |                                |   | 15,594  |   |  |      | 73,578  |   |  |   | 49,208  |  
|Depreciation and amortization of identifiable intangibles |      |                                 | 13,118  |      |                                |   | 12,539  |   |  |      | 40,880  |   |  |   | 36,417  |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Total operating expenses                                  |      |                                 | 47,140  |      |                                |   | 33,585  |   |  |      | 135,587 |   |  |   | 104,129 |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Equity in earnings of unconsolidated joint venture        |      |                                 | (94     | )    |                                |   | (189    | ) |  |      | (314    | ) |  |   | (514    | )
|Interest expense, net                                     |      |                                 | 7,875   |      |                                |   | 12,375  |   |  |      | 27,678  |   |  |   | 32,507  |  
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before income taxes                         |      |                                 | 39,527  |      |                                |   | 680     |   |  |      | 42,828  |   |  |   | (5,910  | )
|Income tax provision                                      |      |                                 | (4,910  | )    |                                |   | (1,434  | ) |  |      | (7,405  | ) |  |   | (1,822  | )
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                         |      | $                               | 34,617  |      |                                | $ | (754    | ) |  | $    | 35,423  |   |  | $ | (7,732  | )
|                                                          |      |                                 |         |      |                                |   |         |   |  |      |         |   |  |   |         |  

See Notes to Condensed Consolidated Financial Statements



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KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                         |      |                                |          |      |  |   |         |  
|---------------------------------------------------------------------------------------- | ---- | ------------------------------ | -------- | ---- |  | - | ------- | -
|                                                                                         |      | Nine Months EndedSeptember 30, |         
|                                                                                         | 2008 |                                |          | 2007 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |      |                                |          |      |  |   |         |  
|Net income (loss)                                                                        |      | $                              | 35,423   |      |  | $ | (7,732  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |      |                                |          |      |  |   |         |  
|Depreciation and amortization of identifiable intangibles                                |      |                                | 40,880   |      |  |   | 36,417  |  
|Amortization of deferred financing costs                                                 |      |                                | 1,648    |      |  |   | 2,213   |  
|Loss on disposal of fixed assets                                                         |      |                                | 192      |      |  |   | 279     |  
|Distributed (undistributed) earnings in joint venture                                    |      |                                | 727      |      |  |   | (408    | )
|Deferred tax benefit                                                                     |      |                                | (2,813   | )    |  |   | (3,937  | )
|Non-cash compensation related to equity awards                                           |      |                                | 778      |      |  |   | 1,814   |  
|Gain on interest rate swaps                                                              |      |                                | (420     | )    |  |   | (1,553  | )
|Decrease (increase) in                                                                   |      |                                |          |      |  |   |         |  
|Accounts receivable                                                                      |      |                                | (46,394  | )    |  |   | (8,550  | )
|Inventories of products, materials and supplies                                          |      |                                | (33,133  | )    |  |   | (16,217 | )
|Other assets                                                                             |      |                                | 310      |      |  |   | (2,891  | )
|Increase (decrease) in                                                                   |      |                                |          |      |  |   |         |  
|Accounts payable-trade, other payables and accruals, and other long-term liabilities     |      |                                | 7,879    |      |  |   | 41,597  |  
|Due to related party                                                                     |      |                                | (1,198   | )    |  |   | 11,048  |  
|                                                                                         |      |                                |          |      |  |   |         |  
|Net cash provided by operating activities                                                |      |                                | 3,879    |      |  |   | 52,080  |  
|                                                                                         |      |                                |          |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |      |                                |          |      |  |   |         |  
|Purchase of property, plant and equipment                                                |      |                                | (15,338  | )    |  |   | (19,861 | )
|Proceeds from sale of property, plant and equipment                                      |      |                                | 17       |      |  |   | 43      |  
|                                                                                         |      |                                |          |      |  |   |         |  
|Net cash used in investing activities                                                    |      |                                | (15,321  | )    |  |   | (19,818 | )
|                                                                                         |      |                                |          |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |      |                                |          |      |  |   |         |  
|Proceeds from debt                                                                       |      |                                | 316,250  |      |  |   |        |  
|Repayment of debt obligations                                                            |      |                                | (278,808 | )    |  |   | (42,787 | )
|Proceeds from cash contribution from member                                              |      |                                | 10,000   |      |  |   |        |  
|Net (payment of) proceeds from insurance note payable                                    |      |                                | (494     | )    |  |   | 1,238   |  
|                                                                                         |      |                                |          |      |  |   |         |  
|Net cash provided by (used in) financing activities                                      |      |                                | 46,948   |      |  |   | (41,549 | )
|                                                                                         |      |                                |          |      |  |   |         |  
|Effect of exchange rate differences on cash and cash equivalents                         |      |                                | 456      |      |  |   | (1,997  | )
|                                                                                         |      |                                |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |      |                                | 35,962   |      |  |   | (11,284 | )
|Cash and cash equivalents, beginning of period                                           |      |                                | 48,277   |      |  |   | 43,601  |  
|                                                                                         |      |                                |          |      |  |   |         |  
|Cash and cash equivalents, end of period                                                 |      | $                              | 84,239   |      |  | $ | 32,317  |  
|                                                                                         |      |                                |          |      |  |   |         |  
|Supplemental Disclosures                                                                 |      |                                |          |      |  |   |         |  
|Cash paid during the period for income taxes, net of refunds received                    |      | $                              | 8,030    |      |  | $ | 8,105   |  
|Cash paid during the period for interest                                                 |      | $                              | 37,239   |      |  | $ | 30,320  |  

See Notes to Condensed Consolidated Financial Statements



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KRATON POLYMERS LLC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. General

Organization and Description of Business. Kraton Polymers LLC, together with its direct and indirect subsidiaries, are, unless the context requires otherwise, collectively referred to herein as
we, our, ours, us or Kraton. Kraton Polymers LLC is the parent of Elastomers Holdings LLC (holding company of Kratons United States (U.S.) operations), Kraton Polymers Global
Holdings, C.V. (holding company of the remainder of our global operations) and Kraton Polymers Capital Corporation (a company with no obligations). Polymer Holdings LLC, or Polymer Holdings, owns 100% of the equity interests of Kraton,
either directly or indirectly. TJ Chemical Holdings LLC, or TJ Chemical, owns 100% of the equity interests of Polymers Holdings. TJ Chemical is owned by TPG Partners III, L.P., TPG Partners IV, L.P. and certain entities affiliated with
said parties, entities affiliated with or managed by J.P. Morgan Partners, LLC, and affiliates, and Kraton Management LLC.

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

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

Basis of Presentation.The accompanying Condensed Consolidated Financial Statements presented herein are for Kraton 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, 2007, and reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly
present Kratons results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods.

Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the U.S., management makes estimates and assumptions that
affect the amounts reported in the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements. Although these estimates are based on managements best available knowledge at the time, actual results
could differ.

2. Share-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which is a revision of FASB
Statement No. 123. SFAS No. 123(R) addresses all forms of share-based compensation including stock options and restricted stock. SFAS No. 123R requires the benefit of tax deductions in excess of recognized compensation



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expense to be reported as a financing cash flow, rather than as an operating cash flow in the consolidated statements of cash flows. Kraton adopted the
provisions of SFAS No. 123(R) effective January 1,2006, using the modified-prospective method and we elected to use the Black-Scholes Merton option-pricing model to estimate the grant-date fair value of share-based awards. We
record non-cash compensation expense for the restricted membership units, notional membership units and option awards over the vesting period using the straight-line method. See Note 10(a) for further discussion.

Information pertaining to option activity for the nine months ended September 30, 2008 is as follows:



|                                  |  |                |   |  |                                |     
|--------------------------------- |  | -------------- | - |  | ------------------------------ | ----
|                                  |  | Options        |   |  | Weighted -AverageExercisePrice
|                                  |  | (in thousands) |   |  |                               
|Outstanding at December 31, 2007  |  | 14,670         |   |  | $                              | 1.00
|Granted                           |  | 10,763         |   |  |                                | 1.00
|Exercised                         |  |               |   |  |                                |    
|Forfeited                         |  | (3,881         | ) |  |                                | 1.00
|                                  |  |                |   |  |                                |     
|Outstanding at September 30, 2008 |  | 21,552         |   |  | $                              | 1.00
|                                  |  |                |   |  |                                |     

3. Restructuring Activities

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

As of September 30, 2008, there was a total liability for restructuring costs of approximately $1.4 million, of which $1.2 million is related to
unpaid severance costs which are expected to be paid by the end of the first quarter of 2009. The exit activity cost of approximately $0.2 million is associated with the closure of our office in London, United Kingdom and is expected to be paid over
the next several years ending in the second quarter of 2011.

The following table summarizes the activities related to Kratons
restructuring liability by component:



|                              |                |                |        |   |              |   |        |       |  |   |        |  
|----------------------------- | -------------- | -------------- | ------ | - | ------------ | - | ------ | ----- |  | - | ------ | -
|                              |                | SeveranceCosts |        |   | ExitActivity |   |        | Total | 
|                              | (in thousands) |               
|Accrued at December 31, 2007  |                | $              | 294    |   |              | $ | 2,402  |       |  | $ | 2,696  |  
|Accruals                      |                |                | 2,185  |   |              |   |       |       |  |   | 2,185  |  
|Cash payments                 |                |                | (1,257 | ) |              |   | (2,182 | )     |  |   | (3,439 | )
|                              |                |                |        |   |              |   |        |       |  |   |        |  
|Accrued at September 30, 2008 |                | $              | 1,222  |   |              | $ | 220    |       |  | $ | 1,442  |  
|                              |                |                |        |   |              |   |        |       |  |   |        |  



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4. Detail of Certain Balance Sheet Accounts

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



|                              |                |                   |         |                  |   |        
|----------------------------- | -------------- | ----------------- | ------- | ---------------- | - | -------
|                              |                | September 30,2008 |         | December 31,2007
|                              | (in thousands)
|Inventories of products, net: |                |                   |         |                  |   |        
|Finished products             |                | $                 | 235,682 |                  | $ | 212,125
|Work in progress              |                |                   | 4,630   |                  |   | 3,858  
|Raw materials                 |                |                   | 45,662  |                  |   | 40,340 
|                              |                |                   |         |                  |   |        
|                              |                | $                 | 285,974 |                  | $ | 256,323
|                              |                |                   |         |                  |   |        
|Other payables and accruals:  |                |                   |         |                  |   |        
|Employee related              |                | $                 | 19,281  |                  | $ | 12,178 
|Interest                      |                |                   | 3,303   |                  |   | 13,680 
|Property and other taxes      |                |                   | 3,675   |                  |   | 3,735  
|Customer rebates              |                |                   | 6,804   |                  |   | 6,561  
|Income taxes payable          |                |                   | 6,786   |                  |   | 4,643  
|Other                         |                |                   | 18,891  |                  |   | 15,019 
|                              |                |                   |         |                  |   |        
|                              |                | $                 | 58,740  |                  | $ | 55,816 
|                              |                |                   |         |                  |   |        

5. Comprehensive Income

Comprehensive income includes net income and all other non-owner changes in equity. Components of comprehensive income are as follows:



|                                                                  |                |                                 |         |      |                                |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------- | -------------- | ------------------------------- | ------- | ---- | ------------------------------ | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                  |                | Three Months EndedSeptember 30, |         |      | Nine Months EndedSeptember 30, |  
|                                                                  | 2008           |                                 |         | 2007 |                                |   | 2008   |   |  | 2007 |       
|                                                                  | (in thousands) |                                
|Net income (loss)                                                 |                | $                               | 34,617  |      |                                | $ | (754   | ) |  | $    | 35,423 |   |  | $ | (7,732 | )
|Other comprehensive income                                        |                |                                 |         |      |                                |   |        |   |  |      |        |   |  |   |        |  
|Foreign currency translation adjustments                          |                |                                 | (26,197 | )    |                                |   | 15,819 |   |  |      | (4,316 | ) |  |   | 23,828 |  
|Reclassification of interest rate swaps into earnings, net of tax |                |                                 | (421    | )    |                                |   |       |   |  |      | (421   | ) |  |   |       |  
|Unrealized gain on interest rate swaps, net of tax                |                |                                 |        |      |                                |   |       |   |  |      | 2,935  |   |  |   | (1,863 | )
|                                                                  |                |                                 |         |      |                                |   |        |   |  |      |        |   |  |   |        |  
|Total comprehensive income                                        |                | $                               | 7,999   |      |                                | $ | 15,065 |   |  | $    | 33,621 |   |  | $ | 14,233 |  
|                                                                  |                |                                 |         |      |                                |   |        |   |  |      |        |   |  |   |        |  

Accumulated other comprehensive income consists of the following:



|                                                   |  |                   |        |                  |   |       
|-------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                   |  | September 30,2008 |        | December 31,2007
|                                                   |  | (in thousands)   
|Foreign currency adjustments                       |  | $                 | 30,035 |                  | $ | 34,351
|Unrealized gain on interest rate swaps, net of tax |  |                   | 2,514  |                  |   |      
|Pension adjustment, net of tax                     |  |                   | 5,210  |                  |   | 5,210 
|                                                   |  |                   |        |                  |   |       
|Total accumulated other comprehensive income       |  | $                 | 37,759 |                  | $ | 39,561
|                                                   |  |                   |        |                  |   |       



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6. Long-Term Debt

Long-term debt consists of the following:



|                                       |  |                   |         |                  |   |        
|-------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                       |  | September 30,2008 |         | December 31,2007
|                                       |  | (in thousands)   
|Senior Secured Credit Facilities:      |  |                   |         |                  |   |        
|Term loans                             |  | $                 | 325,907 |                  | $ | 338,465
|Revolving loans                        |  |                   | 50,000  |                  |   |       
|8.125% Notes                           |  |                   | 200,000 |                  |   | 200,000
|                                       |  |                   |         |                  |   |        
|Total debt                             |  |                   | 575,907 |                  |   | 538,465
|Less current portion of long-term debt |  |                   | 3,445   |                  |   | 3,445  
|                                       |  |                   |         |                  |   |        
|Total long-term debt                   |  | $                 | 572,462 |                  | $ | 535,020
|                                       |  |                   |         |                  |   |        

(a) Term Loans and Revolving Loans

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

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

Three of our wholly-owned subsidiaries, Kraton Polymers U.S. LLC, Elastomers Holdings LLC, and
Kraton Polymers Capital Corporation (collectively, the Guarantor Subsidiaries), along with Polymer Holdings, have guaranteed our obligations under the Credit Agreement and we refer to these guarantors, together with Kraton, as the Loan
Parties. The Credit Agreement is secured by a perfected first priority security interest in all of each Loan Partys tangible and intangible assets, including intellectual property, real property, all of our capital stock and the capital stock
of our domestic subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of each Loan Party. As of September 30, 2008, we had $50 million outstanding in Revolving Loans.

The following is a summary of the material terms of the Credit Agreement:

Maturity

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

Interest

The Term Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus
1.00% per annum. In general, interest is payable quarterly, subject to the interest period selected by us, under the Credit Agreement. The average effective interest rate on the Term Loans for the nine months ended September 30, 2008 was
4.5% compared to 7.3% for the nine months ended September 30, 2007. The Revolving Loans bear interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum, depending on our leverage ratio, or
at our option, the base rate plus a margin of between 1.00% and 1.50% per annum, depending on our leverage ratio. A commitment fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is
payable quarterly in arrears. In



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February 2008, we entered into a $325 million notional amount interest rate swap agreement to protect against Eurodollar interest rate fluctuations,
which we sold in June 2008. See Note 14(a) for a description of the swap agreement.

Mandatory Prepayments

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

Covenants

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

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

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

(b) Senior Subordinated Notes Due January 15, 2014

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

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

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

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

Security and Ranking.The 8.125% Notes and the guarantees
are general unsecured obligations and are subordinated to Kratons and its guarantor subsidiaries existing and future senior indebtedness, including indebtedness under the senior secured credit facility, and rank equally with
Kratons and its guarantor



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subsidiaries future senior subordinated indebtedness. The 8.125% Notes and the guarantees effectively rank junior to our secured indebtedness and to
the secured indebtedness of all of our guarantor subsidiaries to the extent of the value of the assets securing the indebtedness and are structurally subordinated to all liabilities of Kratons subsidiaries that are not guarantors of the 8.125%
Notes.

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

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

7. Fair Value Measurements

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for financial assets and
liabilities. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 requires entities to, among other things, maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

SFAS No. 157 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.

SFAS No. 157 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 SFAS No. 157, 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

From time to time, we enter into derivative financial instruments that are measured at fair value. See Note 14 for further discussion.

8. Income Taxes

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



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The effective tax rate for the nine months ended September 30, 2008 was approximately 17.3% as
compared to a rate of (30.8%) in the nine months ended September 30, 2007. Our effective tax rate for the nine months ended September 30, 2008 was lower than our statutory rate primarily due to recognition of net operating loss
carryforwards on U.S. operations utilized during the period that were previously offset by valuation allowances, offset by not recording a tax benefit for certain foreign net operating loss carryforwards generated during the period and a different
income mix between foreign and domestic tax jurisdictions. Our effective tax rate for the nine months ended September 30, 2007 was less than our statutory rate primarily due to a different income mix between foreign and domestic tax
jurisdictions and due to not recording a tax benefit for certain net operating loss carryforwards generated during that period.

As of
September 30, 2008, we had total unrecognized tax benefits of $0.7 million. During the nine months ended September 30, 2008, we had an increase of $0.3 million in these tax positions mainly due to expected tax audit settlements. As of
September 30, 2008, we estimated $0.7 million in unrecognized tax benefits that, if recognized, would impact the effective tax rate. We recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes
in our Condensed Consolidated Statement of Operations. During nine months ended September 30, 2008, we recognized $0.2 million of interest charges related to unrecognized tax benefits, and at September 30, 2008, we had accrued $0.2 million
for interest and penalties. As of September 30, 2008, we believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within one year, and no material changes have occurred in our
estimates or are expected to occur in events related to anticipated changes in our unrecognized tax benefits.

Kraton files income tax
returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of September 30, 2008, our 2005 through 2007 U.S. federal income tax returns remain open to examination. In addition, open tax years to state and foreign
jurisdictions remain subject to examination.

9. Commitments and Contingencies

Legal Proceedings

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

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

10. Employee Benefits

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

We provided certain key employees who
held interests in us prior to the acquisition the opportunity to roll over their interests into membership units of Management LLC, which owns a corresponding number of membership units in TJ Chemical. The membership units are subject to customary
tag-along and drag-along rights, as well as a company call right in the event of termination of employment. As of September 30, 2008, there were 1,886,000 membership units of Management LLC issued and outstanding.



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(b) TJ Chemical Holdings LLC 2004 Option Plan

On September 9, 2004, TJ Chemical adopted an option plan, or the Option Plan, which allows for the grant to key employees, consultants, members and
service providers of TJ Chemical and its affiliates, including Kraton, of non-qualified options (Options) to purchase TJ Chemical membership units. All Options granted in 2006, 2007 and 2008 had an exercise price of $1 per membership unit, which is
equal to or in excess of the fair value of the membership unit on the date of grant.

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

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

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

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

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

The Compensation Committee may grant Profits Units of Management LLC (subject to the 8% pool limitation described above) (Profits Units). Profits Units
are economically equivalent to options, except that they provide the recipient with an opportunity to recognize capital gains in the appreciation of TJ Chemicals and its affiliates and TJ Chemicals and its affiliates are not entitled to receive any
tax deductions at the time of grant or



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##### Table of Contents

disposition of the Profits Units by the employee. Generally, pursuant to the applicable grant agreements, 50% of the Profits Units will vest when the fair
value of TJ Chemicals assets equals or exceeds two times the Threshold Amount, which is defined as the initial value of TJ Chemicals assets on the date of the grant, and 50% of the Profits Units will vest when the fair value of TJ
Chemicals assets equals or exceeds three times the threshold amount, provided that the participant is employed by Kraton or its subsidiaries on such vesting date and provided further, that 100% of the Profits Units shall become vested upon a
change in control of TJ Chemical. If at the time TJ Chemical makes a determination as to whether an individual is entitled to any appreciation with respect to the Profits Units, the value of the assets is more than two times, but less than three
times the Threshold Amount, a pro rata portion of the second tranche will vest based on the appreciation above the two times Threshold Amount. In the case of our President and Chief Executive Officer, if at the time TJ Chemical makes a determination
as to whether he is entitled to any appreciation with respect to the Profits Units, the value of the assets is more than two times, but less than three times the Threshold Amount, a pro rata portion of the second tranche will vest based on the
appreciation above the two times Threshold Amount. If an employees employment terminates prior to any applicable vesting date, such employee shall automatically forfeit all rights to any unvested Profits Units. Upon the occurrence of any
distributions received by Management LLC, the holders of the Profits Units will have a right to receive their pro rata share of the positive difference between initial value of the Profits Units, as determined by the profits unit award agreement,
and the then current fair value of the Profits Units, as determined in accordance with the terms of the agreement governing TJ Chemical and Management LLC. See Note 10(e) for further discussion.

As of September 30, 2008, there were 900,000 Profits Units granted and not yet vested.

(d) Options and Profits Units Outstanding

The aggregate number of Options and Profits Units under the Option Plan shall not exceed 23,740,802 (the Aggregate Limit) representing 8.7% of the outstanding membership units and Profits Units of TJ Chemical on March 31, 2004, on a
fully diluted basis. As of August 2008, the Option Plan was amended to provide for an increase in the number of Options and Profit Units from 21,740,802 to 23,740,802.

In the third quarter of 2008, no Options were granted and 421,000 Options were forfeited. As of September 30, 2008, the total Options granted under the Option Plan amounted to 21,552,118. In addition, as of
September 30, 2008, there were 900,000 Profits Units granted under the Option Plan and not yet vested. See Note 10(c) for further discussion.

(e) Kraton Polymers LLC Executive Deferred Compensation Plan

The Named Executive Officers (as defined in the Annual Report
on Form 10K filed with the Securities and Exchange Commission) have the option of deferring up to 50% of their annual bonus, if any, which is subsequently converted to notional membership units of TJ Chemical. Such Notional Units remain outstanding
until either (1) a change in control or (2) termination of employment. The amount held pursuant to the plan may ultimately be paid in units of Management LLC.

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



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(f) 2008 Incentive Compensation Plan

On February 5, 2008, the Compensation Committee of the Board of Directors, or the Board, of Kraton approved and adopted the 2008 Incentive
Compensation Plan including the performance-based criteria by which potential payouts to participants will be determined. The total award under the Incentive Compensation Plan ranges from $0 to $18.0 million, depending on the level of achievement
against performance goals. As of September 30, 2008, we recorded a total liability for incentive compensation of approximately $12 million.

(g) Retirement Plans

The components of net periodic benefit cost related to pension benefits for the three and nine
months ended September 30, 2008 and September 30, 2007, are as follows:



|                                         |                |                                 |        |      |                                |   |      |   |  |      |        |   |  |   |        |  
|---------------------------------------- | -------------- | ------------------------------- | ------ | ---- | ------------------------------ | - | ---- | - |  | ---- | ------ | - |  | - | ------ | -
|                                         |                | Three Months EndedSeptember 30, |        |      | Nine Months EndedSeptember 30, |  
|                                         | 2008           |                                 |        | 2007 |                                |   | 2008 |   |  | 2007 |       
|                                         | (in thousands) |                                
|Components of net periodic benefit cost: |                |                                 |        |      |                                |   |      |   |  |      |        |   |  |   |        |  
|Service cost                             |                | $                               | 603    |      |                                | $ | 644  |   |  | $    | 1,809  |   |  | $ | 1,932  |  
|Interest cost                            |                |                                 | 1,059  |      |                                |   | 969  |   |  |      | 3,177  |   |  |   | 2,907  |  
|Expected return on plan assets           |                |                                 | (1,032 | )    |                                |   | (908 | ) |  |      | (3,096 | ) |  |   | (2,724 | )
|                                         |                |                                 |        |      |                                |   |      |   |  |      |        |   |  |   |        |  
|Net periodic benefit cost                |                | $                               | 630    |      |                                | $ | 705  |   |  | $    | 1,890  |   |  | $ | 2,115  |  
|                                         |                |                                 |        |      |                                |   |      |   |  |      |        |   |  |   |        |  

The components of net periodic benefit cost related to other postretirement benefits for the three
and nine months ended September 30, 2008 and September 30, 2007, are as follows:



|                                         |      |                                 |      |                                |      |     |      |   |     |  |   |    
|---------------------------------------- | ---- | ------------------------------- | ---- | ------------------------------ | ---- | --- | ---- | - | --- |  | - | ---
|                                         |      | Three Months EndedSeptember 30, |      | Nine Months EndedSeptember 30,
|                                         | 2008 |                                 | 2007 |                                | 2008 |     | 2007
|                                         |      | (in thousands)                 
|Components of net periodic benefit cost: |      |                                 |      |                                |      |     |      |   |     |  |   |    
|Service cost                             |      | $                               | 88   |                                | $    | 88  |      | $ | 264 |  | $ | 264
|Interest cost                            |      |                                 | 212  |                                |      | 187 |      |   | 636 |  |   | 561
|                                         |      |                                 |      |                                |      |     |      |   |     |  |   |    
|Net periodic benefit cost                |      | $                               | 300  |                                | $    | 275 |      | $ | 900 |  | $ | 825
|                                         |      |                                 |      |                                |      |     |      |   |     |  |   |    

11. Industry Segment and Foreign Operations

We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, 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 SFAS 131 can be found in the condensed consolidated financial
statements.



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



|                         |                |                                 |         |                                |      |         |      |   |         |  |   |        
|------------------------ | -------------- | ------------------------------- | ------- | ------------------------------ | ---- | ------- | ---- | - | ------- |  | - | -------
|                         |                | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                         | 2008           |                                 | 2007    |                                | 2008 |         | 2007
|                         | (in thousands)
|Total operating revenues |                |                                 |         |                                |      |         |      |   |         |  |   |        
|United States            |                | $                               | 126,489 |                                | $    | 97,397  |      | $ | 319,361 |  | $ | 285,417
|Germany                  |                |                                 | 45,207  |                                |      | 37,558  |      |   | 120,959 |  |   | 112,491
|The Netherlands          |                |                                 | 25,930  |                                |      | 11,382  |      |   | 68,589  |  |   | 38,824 
|Italy                    |                |                                 | 13,819  |                                |      | 12,601  |      |   | 39,622  |  |   | 38,152 
|Japan                    |                |                                 | 19,367  |                                |      | 12,830  |      |   | 50,922  |  |   | 37,434 
|China                    |                |                                 | 9,165   |                                |      | 11,457  |      |   | 27,895  |  |   | 31,059 
|United Kingdom           |                |                                 | 11,748  |                                |      | 10,979  |      |   | 32,700  |  |   | 30,036 
|Brazil                   |                |                                 | 13,823  |                                |      | 10,143  |      |   | 32,430  |  |   | 26,851 
|Belgium                  |                |                                 | 11,218  |                                |      | 8,945   |      |   | 23,484  |  |   | 23,374 
|France                   |                |                                 | 10,163  |                                |      | 8,734   |      |   | 31,271  |  |   | 22,684 
|Poland                   |                |                                 | 11,000  |                                |      | 8,177   |      |   | 22,032  |  |   | 16,536 
|Canada                   |                |                                 | 6,776   |                                |      | 6,216   |      |   | 21,374  |  |   | 16,342 
|Taiwan                   |                |                                 | 6,701   |                                |      | 5,151   |      |   | 17,497  |  |   | 15,384 
|Thailand                 |                |                                 | 8,103   |                                |      | 4,498   |      |   | 17,372  |  |   | 12,054 
|Turkey                   |                |                                 | 4,526   |                                |      | 4,172   |      |   | 13,953  |  |   | 11,187 
|Argentina                |                |                                 | 4,589   |                                |      | 3,836   |      |   | 12,055  |  |   | 10,601 
|Sweden                   |                |                                 | 4,059   |                                |      | 3,667   |      |   | 11,595  |  |   | 10,025 
|Austria                  |                |                                 | 4,187   |                                |      | 3,264   |      |   | 9,450   |  |   | 7,480  
|Mexico                   |                |                                 | 5,082   |                                |      | 2,214   |      |   | 11,349  |  |   | 6,932  
|Denmark                  |                |                                 | 2,070   |                                |      | 2,008   |      |   | 7,906   |  |   | 6,764  
|Australia                |                |                                 | 3,498   |                                |      | 2,547   |      |   | 11,674  |  |   | 6,264  
|All other countries      |                |                                 | 34,647  |                                |      | 22,374  |      |   | 90,907  |  |   | 65,981 
|                         |                |                                 |         |                                |      |         |      |   |         |  |   |        
|                         |                | $                               | 382,167 |                                | $    | 290,150 |      | $ | 994,397 |  | $ | 831,872
|                         |                |                                 |         |                                |      |         |      |   |         |  |   |        



|                    |  |                   |         |                  |   |        
|------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                    |  | September 30,2008 |         | December 31,2007
|                    |  |                  
|                    |  | (in thousands)   
|Long-lived assets   |  |                   |        
|United States       |  | $                 | 297,019 |                  | $ | 298,979
|Germany             |  |                   | 40,400  |                  |   | 40,406 
|Japan               |  |                   | 4,776   |                  |   | 3,743  
|France              |  |                   | 110,642 |                  |   | 111,441
|The Netherlands     |  |                   | 34,302  |                  |   | 34,454 
|Brazil              |  |                   | 54,586  |                  |   | 56,721 
|China               |  |                   | 2,304   |                  |   | 2,119  
|All other countries |  |                   | 11,942  |                  |   | 12,050 
|                    |  |                   |         |                  |   |        
|                    |  | $                 | 555,971 |                  | $ | 559,913
|                    |  |                   |         |                  |   |        

12. Supplemental Guarantor Information

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



17



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##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Balance Sheet

September 30, 2008

(In thousands)



|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|------------------------------------------------------------- |  | ----------- | --------- | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | ---------
|                                                              |  | Issuers (1) |           |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated
|                                                              |  | (Unaudited)
|Assets                                                        |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|                                                              |  |             |           |   |                      
|Current assets                                                |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Cash and cash equivalents                                     |  | $           |          |   |                       | $ | 64,063                    |  | $ | 20,176       |   |  | $            |           |   |  | $ | 84,239   
|Receivables, net                                              |  |             | 576       |   |                       |   | 80,378                    |  |   | 119,164      |   |  |              | (16,196    | ) |  |   | 183,922  
|Inventories of products, net                                  |  |             |          |   |                       |   | 136,449                   |  |   | 154,925      |   |  |              | (5,400     | ) |  |   | 285,974  
|Inventories of materials and supplies                         |  |             |          |   |                       |   | 6,932                     |  |   | 4,956        |   |  |              |           |   |  |   | 11,888   
|Other current assets                                          |  |             | 4,062     |   |                       |   | 728                       |  |   | 5,461        |   |  |              |           |   |  |   | 10,251   
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total current assets                                          |  |             | 4,638     |   |                       |   | 288,550                   |  |   | 304,682      |   |  |              | (21,596    | ) |  |   | 576,274  
|Property, plant and equipment, less accumulated depreciation  |  |             | 96,209    |   |                       |   | 162,641                   |  |   | 120,543      |   |  |              |           |   |  |   | 379,393  
|Identifiable intangible assets, less accumulated amortization |  |             | 24,195    |   |                       |   |                          |  |   | 46,938       |   |  |              |           |   |  |   | 71,133   
|Investment in consolidated subsidiaries                       |  |             | 897,364   |   |                       |   |                          |  |   |             |   |  |              | (897,364   | ) |  |   |         
|Investment in unconsolidated joint venture                    |  |             | 813       |   |                       |   |                          |  |   | 10,083       |   |  |              |           |   |  |   | 10,896   
|Deferred financing costs                                      |  |             | 8,675     |   |                       |   |                          |  |   |             |   |  |              |           |   |  |   | 8,675    
|Other long-term assets                                        |  |             | 131,159   |   |                       |   | 401,377                   |  |   | 11,707       |   |  |              | (526,440   | ) |  |   | 17,803   
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total assets                                                  |  | $           | 1,163,053 |   |                       | $ | 852,568                   |  | $ | 493,953      |   |  | $            | (1,445,400 | ) |  | $ | 1,064,174
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Liabilities and Members Equity                               |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|                                                              |  |             |           |   |                      
|Current liabilities                                           |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Current portion of long-term debt                             |  | $           | 3,445     |   |                       | $ |                          |  | $ |             |   |  | $            |           |   |  | $ | 3,445    
|Accounts payable-trade                                        |  |             | 2,700     |   |                       |   | 54,729                    |  |   | 50,236       |   |  |              |           |   |  |   | 107,665  
|Other payables and accruals                                   |  |             | 3,318     |   |                       |   | 26,420                    |  |   | 29,002       |   |  |              |           |   |  |   | 58,740   
|Due to related parties                                        |  |             |          |   |                       |   | 5,030                     |  |   | 32,212       |   |  |              | (16,196    | ) |  |   | 21,046   
|Deferred income taxes                                         |  |             | (812      | ) |                       |   |                          |  |   | 9,827        |   |  |              |            |   |  |   | 9,015    
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total current liabilities                                     |  |             | 8,651     |   |                       |   | 86,179                    |  |   | 121,277      |   |  |              | (16,196    | ) |  |   | 199,911  
|Long-term debt, net of current portion                        |  |             | 572,462   |   |                       |   |                          |  |   |             |   |  |              |           |   |  |   | 572,462  
|Deferred income taxes                                         |  |             | (14,158   | ) |                       |   | 52,923                    |  |   | (69          | ) |  |              |           |   |  |   | 38,696   
|Long-term liabilities                                         |  |             | 398,834   |   |                       |   | 17,851                    |  |   | 135,751      |   |  |              | (526,440   | ) |  |   | 25,996   
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total liabilities                                             |  |             | 965,789   |   |                       |   | 156,953                   |  |   | 256,959      |   |  |              | (542,636   | ) |  |   | 837,065  
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Commitments and contingencies                                 |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Members equity                                               |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Common equity                                                 |  |             | 194,750   |   |                       |   | 690,405                   |  |   | 206,959      |   |  |              | (902,764   | ) |  |   | 189,350  
|Accumulated other comprehensive income                        |  |             | 2,514     |   |                       |   | 5,210                     |  |   | 30,035       |   |  |              |           |   |  |   | 37,759   
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total members equity                                         |  |             | 197,264   |   |                       |   | 695,615                   |  |   | 236,994      |   |  |              | (902,764   | ) |  |   | 227,109  
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          
|Total liabilities and members equity                         |  | $           | 1,163,053 |   |                       | $ | 852,568                   |  | $ | 493,953      |   |  | $            | (1,445,400 | ) |  | $ | 1,064,174
|                                                              |  |             |           |   |                       |   |                           |  |   |              |   |  |              |            |   |  |   |          



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



18



---

##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Balance Sheet

December 31, 2007

(In thousands)



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



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



19



---

##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2008

(In thousands)



|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Issuers(1)  |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  | (Unaudited) |        
|Operating Revenues                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $           |        |   |                       | $ | 190,613 |                           |  | $ | 218,192      |   |  | $            | (45,530 | ) |  | $ | 363,275 |  
|Other                                                     |  |             |        |   |                       |   |        |                           |  |   | 18,892       |   |  |              |        |   |  |   | 18,892  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating revenues                                  |  |             |        |   |                       |   | 190,613 |                           |  |   | 237,084      |   |  |              | (45,530 | ) |  |   | 382,167 |  
|Cost of goods sold                                        |  |             | (1,034  | ) |                       |   | 134,803 |                           |  |   | 199,480      |   |  |              | (45,530 | ) |  |   | 287,719 |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |  |             | 1,034   |   |                       |   | 55,810  |                           |  |   | 37,604       |   |  |              |        |   |  |   | 94,448  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Operating Expenses                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Research and development                                  |  |             |        |   |                       |   | 3,285   |                           |  |   | 2,523        |   |  |              |        |   |  |   | 5,808   |  
|Selling, general, and administrative                      |  |             | 500     |   |                       |   | 16,872  |                           |  |   | 10,842       |   |  |              |        |   |  |   | 28,214  |  
|Depreciation and amortization of identifiable intangibles |  |             | 4,169   |   |                       |   | 5,426   |                           |  |   | 3,523        |   |  |              |        |   |  |   | 13,118  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                  |  |             | 4,669   |   |                       |   | 25,583  |                           |  |   | 16,888       |   |  |              |        |   |  |   | 47,140  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Equity in earnings of consolidated subsidiaries           |  |             | (46,631 | ) |                       |   |        |                           |  |   |             |   |  |              | 46,631  |   |  |   |        |  
|Equity in earnings of unconsolidated joint venture        |  |             |        |   |                       |   |        |                           |  |   | (94          | ) |  |              |        |   |  |   | (94     | )
|Interest expense, net                                     |  |             | 8,943   |   |                       |   | (2,715  | )                         |  |   | 1,647        |   |  |              |        |   |  |   | 7,875   |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |             | 34,053  |   |                       |   | 32,942  |                           |  |   | 19,163       |   |  |              | (46,631 | ) |  |   | 39,527  |  
|Income tax benefit (provision)                            |  |             | 564     |   |                       |   | (36     | )                         |  |   | (5,438       | ) |  |              |        |   |  |   | (4,910  | )
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |  | $           | 34,617  |   |                       | $ | 32,906  |                           |  | $ | 13,725       |   |  | $            | (46,631 | ) |  | $ | 34,617  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



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



20



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##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2007

(In thousands)



|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- | ----------- | ---------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |             | Issuers(1) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          | (Unaudited) |           
|Operating Revenues                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |             | $          |        |   |                       | $ | 141,096 |                           |  | $ | 174,961      |   |  | $            | (31,559 | ) |  | $ | 284,498 |  
|Other                                                     |             |            |        |   |                       |   | (108    | )                         |  |   | 5,760        |   |  |              |        |   |  |   | 5,652   |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating revenues                                  |             |            |        |   |                       |   | 140,988 |                           |  |   | 180,721      |   |  |              | (31,559 | ) |  |   | 290,150 |  
|Cost of goods sold                                        |             |            | 787     |   |                       |   | 114,486 |                           |  |   | 159,985      |   |  |              | (31,559 |   |  |   | 243,699 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                              |             |            | (787    | ) |                       |   | 26,502  |                           |  |   | 20,736       |   |  |              |        |   |  |   | 46,451  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Operating Expenses                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Research and development                                  |             |            |        |   |                       |   | 2,205   |                           |  |   | 3,247        |   |  |              |        |   |  |   | 5,452   |  
|Selling, general, and administrative                      |             |            | (33     | ) |                       |   | 7,730   |                           |  |   | 7,897        |   |  |              |        |   |  |   | 15,594  |  
|Depreciation and amortization of identifiable intangibles |             |            | 4,324   |   |                       |   | 5,036   |                           |  |   | 3,179        |   |  |              |        |   |  |   | 12,539  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                  |             |            | 4,291   |   |                       |   | 14,971  |                           |  |   | 14,323       |   |  |              |        |   |  |   | 33,585  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Equity in earnings of consolidated subsidiaries           |             |            | (16,887 | ) |                       |   |        |                           |  |   |             |   |  |              | 16,887  |   |  |   |        |  
|Equity in earnings of unconsolidated joint venture        |             |            |        |   |                       |   |        |                           |  |   | (189         | ) |  |              |        |   |  |   | (189    | )
|Interest expense, net                                     |             |            | 13,136  |   |                       |   | (2,495  | )                         |  |   | 1,734        |   |  |              |        |   |  |   | 12,375  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes                         |             |            | (1,327  | ) |                       |   | 14,026  |                           |  |   | 4,868        |   |  |              | (16,887 | ) |  |   | 680     |  
|Income tax benefit (provision)                            |             |            | 573     |   |                       |   | 295     |                           |  |   | (2,302       | ) |  |              |        |   |  |   | (1,434  | )
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                         |             | $          | (754    | ) |                       | $ | 14,321  |                           |  | $ | 2,566        |   |  | $            | (16,887 | ) |  | $ | (754    | )
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



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



21



---

##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2008

(In thousands)



|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|--------------------------------------------------------- | ----------- | ---------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                          |             | Issuers(1) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|                                                          | (Unaudited) |           
|Operating Revenues                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Sales                                                     |             | $          |        |   |                       | $ | 494,733 |                           |  | $ | 588,379      |   |  | $            | (135,187 | ) |  | $ | 947,925 |  
|Other                                                     |             |            |        |   |                       |   |        |                           |  |   | 46,472       |   |  |              |         |   |  |   | 46,472  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Total operating revenues                                  |             |            |        |   |                       |   | 494,733 |                           |  |   | 634,851      |   |  |              | (135,187 | ) |  |   | 994,397 |  
|Cost of goods sold                                        |             |            | (1,101  | ) |                       |   | 373,118 |                           |  |   | 551,788      |   |  |              | (135,187 | ) |  |   | 788,618 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Gross profit                                              |             |            | 1,101   |   |                       |   | 121,615 |                           |  |   | 83,063       |   |  |              |         |   |  |   | 205,779 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Operating Expenses                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Research and development                                  |             |            |        |   |                       |   | 12,915  |                           |  |   | 8,214        |   |  |              |         |   |  |   | 21,129  |  
|Selling, general, and administrative                      |             |            | 752     |   |                       |   | 41,062  |                           |  |   | 31,764       |   |  |              |         |   |  |   | 73,578  |  
|Depreciation and amortization of identifiable intangibles |             |            | 13,959  |   |                       |   | 16,187  |                           |  |   | 10,734       |   |  |              |         |   |  |   | 40,880  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Total operating expenses                                  |             |            | 14,711  |   |                       |   | 70,164  |                           |  |   | 50,712       |   |  |              |         |   |  |   | 135,587 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Equity in earnings of consolidated subsidiaries           |             |            | (76,196 | ) |                       |   |        |                           |  |   |             |   |  |              | 76,196   |   |  |   |        |  
|Equity in earnings of unconsolidated joint venture        |             |            |        |   |                       |   |        |                           |  |   | (314         | ) |  |              |         |   |  |   | (314    | )
|Interest expense, net                                     |             |            | 29,963  |   |                       |   | (7,780  | )                         |  |   | 5,495        |   |  |              |         |   |  |   | 27,678  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes                         |             |            | 32,623  |   |                       |   | 59,231  |                           |  |   | 27,170       |   |  |              | (76,196  | ) |  |   | 42,828  |  
|Income tax benefit (provision)                            |             |            | 2,800   |   |                       |   | (51     | )                         |  |   | (10,154      | ) |  |              |         |   |  |   | (7,405  | )
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Net income (loss)                                         |             | $          | 35,423  |   |                       | $ | 59,180  |                           |  | $ | 17,016       |   |  | $            | (76,196  | ) |  | $ | 35,423  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  



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



22



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##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2007

(In thousands)



|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|--------------------------------------------------------- | ----------- | ---------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                          |             | Issuers(1) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|                                                          | (Unaudited) |           
|Operating Revenues                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Sales                                                     |             | $          |        |   |                       | $ | 416,149 |                           |  | $ | 511,132      |   |  | $            | (114,955 | ) |  | $ | 812,326 |  
|Other                                                     |             |            |        |   |                       |   |        |                           |  |   | 19,546       |   |  |              |         |   |  |   | 19,546  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Total operating revenues                                  |             |            |        |   |                       |   | 416,149 |                           |  |   | 530,678      |   |  |              | (114,955 | ) |  |   | 831,872 |  
|Cost of goods sold                                        |             |            | 799     |   |                       |   | 345,970 |                           |  |   | 469,846      |   |  |              | (114,955 | ) |  |   | 701,660 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Gross profit                                              |             |            | (799    | ) |                       |   | 70,179  |                           |  |   | 60,832       |   |  |              |         |   |  |   | 130,212 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Operating Expenses                                        |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Research and development                                  |             |            |        |   |                       |   | 4,936   |                           |  |   | 13,568       |   |  |              |         |   |  |   | 18,504  |  
|Selling, general, and administrative                      |             |            | (33     | ) |                       |   | 26,778  |                           |  |   | 22,463       |   |  |              |         |   |  |   | 49,208  |  
|Depreciation and amortization of identifiable intangibles |             |            | 12,972  |   |                       |   | 15,023  |                           |  |   | 8,422        |   |  |              |         |   |  |   | 36,417  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Total operating expenses                                  |             |            | 12,939  |   |                       |   | 46,737  |                           |  |   | 44,453       |   |  |              |         |   |  |   | 104,129 |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Equity in earnings of consolidated subsidiaries           |             |            | (38,450 | ) |                       |   |        |                           |  |   |             |   |  |              | 38,450   |   |  |   |        |  
|Equity in earnings of unconsolidated joint venture        |             |            |        |   |                       |   |        |                           |  |   | (514         | ) |  |              |         |   |  |   | (514    | )
|Interest expense, net                                     |             |            | 34,203  |   |                       |   | (7,138  | )                         |  |   | 5,442        |   |  |              |         |   |  |   | 32,507  |  
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes                         |             |            | (9,491  | ) |                       |   | 30,580  |                           |  |   | 11,451       |   |  |              | (38,450  | ) |  |   | (5,910  | )
|Income tax benefit (provision)                            |             |            | 1,759   |   |                       |   | 295     |                           |  |   | (3,876       | ) |  |              |         |   |  |   | (1,822  | )
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  
|Net income (loss)                                         |             | $          | (7,732  | ) |                       | $ | 30,875  |                           |  | $ | 7,575        |   |  | $            | (38,450  | ) |  | $ | (7,732  | )
|                                                          |             |            |         |   |                       |   |         |                           |  |   |              |   |  |              |          |   |  |   |         |  



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



23



---

##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2008

(In thousands)



|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|--------------------------------------------------------------------------------- | ----------- | ---------- | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | -------- | -
|                                                                                  |             | Issuers(1) |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                                  | (Unaudited) |           
|Cash flows provided by (used in) operating activities                             |             | $          | (27,475  | ) |                       | $ | 58,072  |                           |  | $ | (26,718      | ) |              | $ |  |  | $ | 3,879    |  
|                                                                                  |             |            |          |   |                      
|Cash flows used in investing activities                                           |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Purchase of property, plant and equipment net of proceeds from sales of equipment |             |            |         |   |                       |   | (11,880 | )                         |  |   | (3,441       | ) |              |   |  |  |   | (15,321  | )
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in investing activities                                             |             |            |         |   |                       |   | (11,880 | )                         |  |   | (3,441       | ) |              |   |  |  |   | (15,321  | )
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Cash flows provided by (used in) financing activities                             |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Borrowings under debt obligations                                                 |             |            | 316,250  |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 316,250  |  
|Repayment of debt obligations                                                     |             |            | (278,808 | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (278,808 | )
|Proceeds from cash contribution from member                                       |             |            | 10,000   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 10,000   |  
|Proceeds from (payments on) intercompany loans                                    |             |            | (19,473  | ) |                       |   | 6,719   |                           |  |   | 12,754       |   |              |   |  |  |   |         |  
|Net payment of insurance note payable                                             |             |            | (494     | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (494     | )
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net cash provided by financing activities                                         |             |            | 27,475   |   |                       |   | 6,719   |                           |  |   | 12,754       |   |              |   |  |  |   | 46,948   |  
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Effect of exchange rate difference on cash and cash equivalents                   |             |            |         |   |                       |   |        |                           |  |   | 456          |   |              |   |  |  |   | 456      |  
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |             |            |         |   |                       |   | 52,911  |                           |  |   | (16,949      | ) |              |   |  |  |   | 35,962   |  
|Cash and cash equivalents at beginning of period                                  |             |            |         |   |                       |   | 11,152  |                           |  |   | 37,125       |   |              |   |  |  |   | 48,277   |  
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of period                                        |             | $          |         |   |                       | $ | 64,063  |                           |  | $ | 20,176       |   |              | $ |  |  | $ | 84,239   |  
|                                                                                  |             |            |          |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |          |  



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



24



---

##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2007

(In thousands)



|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                                        |  | Issuers(1)  |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                        |  | (Unaudited) |        
|Cash flows provided by (used in) operating activities                   |  | $           | (29,070 | ) |                       | $ | 68,593  |                           |  | $ | 12,557       |   |              | $ |  |  | $ | 52,080  |  
|                                                                        |  |             |         |   |                      
|Cash flows used in investing activities                                 |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Purchase of plant and equipment net of proceeds from sales of equipment |  |             |        |   |                       |   | (11,466 | )                         |  |   | (8,352       | ) |              |   |  |  |   | (19,818 | )
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                                   |  |             |        |   |                       |   | (11,466 | )                         |  |   | (8,352       | ) |              |   |  |  |   | (19,818 | )
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows provided by (used in) financing activities                   |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Repayment of debt obligations                                           |  |             | (42,787 | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (42,787 | )
|Proceeds from cash contribution from member                             |  |             |        |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   |        |  
|Proceeds from (payments on) intercompany loans                          |  |             | 70,619  |   |                       |   | (70,619 | )                         |  |   |             |   |              |   |  |  |   |        |  
|Net proceeds from insurance note payable                                |  |             | 1,238   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 1,238   |  
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities                     |  |             | 29,070  |   |                       |   | (70,619 | )                         |  |   |             |   |              |   |  |  |   | (41,549 | )
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Effect of exchange rate difference on cash and cash equivalents         |  |             |        |   |                       |   |        |                           |  |   | (1,997       | ) |              |   |  |  |   | (1,997  | )
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                    |  |             |        |   |                       |   | (13,492 | )                         |  |   | 2,208        |   |              |   |  |  |   | (11,284 | )
|Cash and cash equivalents at beginning of period                        |  |             |        |   |                       |   | 13,850  |                           |  |   | 29,751       |   |              |   |  |  |   | 43,601  |  
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period                              |  | $           |        |   |                       | $ | 358     |                           |  | $ | 31,959       |   |              | $ |  |  | $ | 32,317  |  
|                                                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  



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

13. New Accounting Pronouncements.

The following new accounting pronouncements were adopted during the nine months ended September 30, 2008:

SFAS No. 157, Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes
a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13. Also in February 2008, the FASB issued FSP No. 157-2, Effective Date of
FASB Statement No. 157, which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statement on a recurring basis (at least annually). The adoption of SFAS No. 157 and FSP No. FAS 157-1 by Kraton effective January 1, 2008 did not have a material impact on our consolidated results of
operations, financial position or cash flows. See Note 7 for further discussion. Kraton has elected to defer the adoption of SFAS No. 157 for the measurement of asset retirement obligations until January 1, 2009 as permitted.



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In October 2008, the FASB issued FSP No. FAS 157-3,Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS No. 157 in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. FAS 157-3 was effective
upon issuance, including prior periods for which financial statements have not been issued. Revisions in fair values resulting from a change in the valuation technique or its application would be accounted for as a change in accounting estimate. The
adoption of FSP No. FAS 157-3 had no impact on Kratons consolidated results of operations, financial position or cash flows.

SFAS
No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115.In February 2007, the FASB issued SFAS No.159, which permits an entity to choose to
measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of SFAS
No. 159 by Kraton effective January 1, 2008 did not have a material impact on our consolidated results of operations, financial position or cash flows.

The following new accounting pronouncements have been issued, but have not yet been adopted as of September 30, 2008:

SFAS No. 141R, Business Combinations. In December 2007, the FASB issued SFAS No. 141R which replaces SFAS No. 141, Business Combinations. SFAS No. 141R requires the
acquiring entity in a business combination to recognize all and only the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and cannot be early adopted.

SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133.In
March 2008, the FASB issued SFAS No. 161 which amends and expands the disclosure requirements for SFAS No. 133 with the intent to provide users of financial statements an enhanced understanding of how and why derivative instruments are
used, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods within those fiscal years, beginning on or after November 15, 2008.

FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. In April 2008, the FASB issued FSP No. FAS 142-3 which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Kraton does not expect the adoption of FSP No. FAS 142-3 to have a material impact on our consolidated results of operations, financial position or cash flows.

14. Financial Instruments, Hedging Activities and Credit Risk

Financial Instruments

(a) Interest Rate Swap Agreements

In February 2008, we entered into a $325 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar
interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, which resulted in a total cost of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the
exposure of the variability of future cash flows



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subject to the variable quarterly interest rates on $325 million of the Term Facility. We settled the swap early in June 2008 and realized cash proceeds of
$4.6 million, resulting in a gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income at September 30, 2008 and is being reclassified as a reduction in interest expense through March 31, 2010 using
the effective interest method, unless we determine that the forecasted interest payments under the Term Facility are probable not to occur, in which case the gain would then be reclassified immediately to interest expense.

(b) Fair Value of Financial Instruments

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



|                |                |                    |            |                   |               |         |            |   |         |  |   |        
|--------------- | -------------- | ------------------ | ---------- | ----------------- | ------------- | ------- | ---------- | - | ------- |  | - | -------
|                |                | September 30, 2008 |            | December 31, 2007
|                | CarryingValue  |                    | Fair Value |                   | CarryingValue |         | Fair Value
|                | (in thousands)
|Term loans      |                | $                  | 325,907    |                   | $             | 325,907 |            | $ | 338,465 |  | $ | 338,465
|Revolving loans |                |                    | 50,000     |                   |               | 50,000  |            |   |        |  |   |       
|8.125% Notes    |                |                    | 200,000    |                   |               | 115,250 |            |   | 200,000 |  |   | 187,250

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

Foreign Currency Hedge

In July, 2008 we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of 20 million. The option contract does not
qualify for hedge accounting and is scheduled to expire on December 29, 2008. During the third quarter of 2008, we recorded a charge of $0.5 million, which represented the mark-to-market impact of the purchased option contract. The charge has
been classified within selling, general, and administrative expense on the Condensed Consolidated Statements of Operations.

Credit Risk

Kratons customers are diversified by industry and geography with approximately 700 customers in approximately 60 countries worldwide. We do not
have concentrations of receivables from these industry sectors throughout these countries. The recent global economic downturn may affect our overall credit risk. Where exposed to credit risk, Kraton analyzes 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.

15. Deferred Financing Costs

We capitalize financing fees and other related costs and
amortize them to interest expense over the term of the related debt instrument. In the second and third quarters of 2008, we incurred fees of approximately $1.4 million associated with preliminary analysis of refinancing options
associated with our Credit Agreement, of which $0.9 million was capitalized to Deferred financing costs on the Condensed Consolidated Balance Sheet as of June 2008. In the third quarter of 2008, we
recorded a charge of $1.4 million to selling, general, and administrative expense in the Condensed Consolidated Statements of Operations as we determined our refinancing efforts were not probable due to current market conditions.

16. Subsequent Events

On October 15, 2008, we
entered into a $320.0 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. This agreement was designated as a cash flow hedge on the
exposure of the variability of future cash flows subject to the variable quarterly interest rates on $320.0 million of the term loan portion of the credit facility.



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

Executive Overview

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

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

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

Recent Developments

Pricing

Through September 2008, Kraton continued to implement a series of global price increases which were generally broad-based across our end-use markets and
in response to the continuing increase in raw material and energy costs. As of the date of this filing, the slowdown in the global economy is beginning to impact our global sales primarily in our Paving and Roofing and Advanced Materials end-use
markets as a result of lower sales volumes. We will respond to these developments as they are better understood.



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Raw Materials

With Hurricanes Gustav and Ike causing unplanned outages at a number of U.S. Gulf Coast ethylene and butadiene extraction plants, even larger butadiene shortages initially developed in September and early October.
More recently, Gulf Coast butadiene supply has improved significantly:



| |  |  | Producers have returned to normal operations, while several large butadiene consumers have remained idled from hurricane damage. We believe these butadiene
consumers will however return to normal operation during the fourth quarter.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The financial market crisis has coincided with a rapid decline in crude oil prices during October.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | In November, the price of butadiene in North America declined 20% after 12 consecutive months of price increases.
| | - |  | -----------------------------------------------------------------------------------------------------------------

As a result, we are currently able to acquire all the butadiene we need, and have therefore discontinued our allocation of selected
Styrene-butadiene-styrene block copolymers. We cannot predict the extent, duration or ultimate market effect of these changes in energy and raw material costs, availability, or individual supply/demand constraints.

New Products

Our latest innovation
product, MD6705, breaks the processing barrier of conventional styrenic block copolymers now allowing fabricators to make bicomponent elastic nonwovens on commercial production equipment at full speed. Materials like PP, PET and nylon can be used as
sheath, while MD6705 is in the core of the bicomponent fibers. MD6705 brings significant system cost savings via processing simplification to our customers and also achieves excellent elastic recovery and a soft fabric-like feel.

Cost Reduction Initiative

We
launched a global initiative aimed at further reducing Kratons annual fixed costs by approximately $10 million beginning in 2009. Though not final in scope, the initiative is expected to include purchasing savings, staffing reductions, and
curtailing other expenditures. The initiative also includes a full review of planned capital expenditures in 2009, with the expectation that any growth-oriented discretionary spending would be postponed.

Customer Event

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

Kraton intends to seek payment on the pre-petition receivables due from SEM through the appropriate claim-filing procedures in SEM's bankruptcy cases.

Factors Affecting Our Results of Operations

Raw Materials

Our results of operations are directly affected by the cost of raw materials. We use three monomers as our primary raw materials in the manufacture of our
products: styrene; butadiene; and isoprene. These monomers together represented approximately 49%, 52% and 54% of our total cost of goods sold for the twelve months ended December 31, 2007, and the nine months ended September 30, 2008 and
2007, respectively. The cost of these monomers has generally increased as crude oil prices have escalated. In addition to changes in crude oil prices, global supply and demand and economic conditions have resulted in increased costs for these
monomers in 2008. Styrene, butadiene and isoprene used by our U.S. and European facilities are primarily supplied by Shell



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Chemicals or its affiliates, LyondellBasell, and other suppliers under long-term supply contracts with various expiration dates.

We have received Shell Chemicals termination notice for isoprene supply to Pernis, The Netherlands, effective December 31, 2009, and are in
the process of reviewing the strategic and economic options for our Pernis assets. Upon termination of the isoprene supply agreement with Shell Chemicals on December 31, 2009, we may not be able to obtain the isoprene required for our
operations at our Pernis, The Netherlands, facility on terms favorable to us or at all. On April 24, 2008, we received a notice of termination from Shell Chemicals for our U.S. butadiene supply contract effective April 30, 2009. We source
butadiene in the U.S. pursuant to this contract. We expect to negotiate and enter into one or more replacement agreements with Shell Chemicals and/or other suppliers, although no assurances can be provided that any such replacement agreement will be
entered into or as to the volumes or terms of any such replacement agreement(s). As of September 2008, we were unable to obtain the supply of butadiene to which we are entitled under all supply agreements. The significant factors causing the
shortfall were the continued tight supply/demand balance for butadiene, especially in North America. The high cost of crude oil (relative to natural gas) led ethylene producers to crack lighter feedstocks which resulted in less Crude C4 production
and butadiene extraction. As a result, we were unable to produce all products necessary to meet customer demand and, in turn, had to allocate certain available product supplies among our customers.

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

Butadiene is used in the production of certain grades of both USBC and HSBC products. The price for butadiene is volatile and is determined by worldwide
supply and demand and prevailing crude oil and ethylene prices. Butadiene is a by-product of the production of other petrochemicals and worldwide supply may be less responsive to increased demand for butadiene as compared to other petrochemicals.
Isoprene is used in the production of certain grades of USBC, HSBC and IR. Isoprene is primarily produced and consumed captively for the production of isoprene rubber, which is primarily used in the manufacture of rubber tires. As a result, there is
limited non-captive isoprene produced in the market in which we operate and as such the market for isoprene is tight. Since there are a limited number of isoprene producers, the price for isoprene can also be driven by the operating efficiency of
some key producers. The cracking of light ethylene feedstocks that has limited butadiene supply has also restricted the production of Crude C5 and the extraction of isoprene.

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

Economic and Market Conditions

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



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International Operations and Currency Fluctuations

We operate a geographically diverse business, with 40% of net product sales generated from customers located in the Americas, 46% in Europe and 14% in the
Asia Pacific region during the nine months ended September 30, 2008. Our products are sold to customers in more than 60 countries. We serve our customer base from six manufacturing plants in six countries.

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

Our financial results are subject to gains and losses on currency transactions denominated in currencies other
than the functional currency of the relevant operations. Any gains and losses are included in operating income, but have historically not been material. In 2008, we entered into two foreign currency option contracts to reduce our exposure to
fluctuations in the Euro to U.S. dollar exchange rate. The first option contract was entered into on April 3, 2008 and expired on June 26, 2008. The second option contract was entered into on July 1, 2008 and is scheduled to expire on
December 29, 2008. See Note 14 of Notes to Condensed Consolidated Financial Statements for further discussion.

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



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RESULTS OF OPERATIONS



|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|--------------------------------- | -------------- | ------------------------------- | ------- | ---- | ------------------------------ | - | ------------------ | - |  | ---- | ------ | - | ---- | - | ------- | ------------------ |  | - | ------- | - |  | - | ------- | -
|                                  |                | Three Months EndedSeptember 30, |         |      | Nine Months EndedSeptember 30, |  
|                                  | 2008           |                                 |         | 2007 |                                |   | Increase(Decrease) |   |  | 2008 |        |   | 2007 |   |         | Increase(Decrease) | 
|                                  |                |                                 |         |      |                               
|                                  | (in thousands) |                                
|RESULTS OF OPERATIONS             |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Operating revenues                |                | $                               | 382,167 |      |                                | $ | 290,150            |   |  | $    | 92,017 |   |      | $ | 994,397 |                    |  | $ | 831,872 |   |  | $ | 162,525 |  
|Cost of goods sold                |                |                                 | 287,719 |      |                                |   | 243,699            |   |  |      | 44,020 |   |      |   | 788,618 |                    |  |   | 701,660 |   |  |   | 86,958  |  
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Gross profit                      |                |                                 | 94,448  |      |                                |   | 46,451             |   |  |      | 47,997 |   |      |   | 205,779 |                    |  |   | 130,212 |   |  |   | 75,567  |  
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Operating expenses                |                |                                 | 47,140  |      |                                |   | 33,585             |   |  |      | 13,555 |   |      |   | 135,587 |                    |  |   | 104,129 |   |  |   | 31,458  |  
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Interest expense, net             |                |                                 | 7,875   |      |                                |   | 12,375             |   |  |      | (4,500 | ) |      |   | 27,678  |                    |  |   | 32,507  |   |  |   | (4,829  | )
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Income (loss) before income taxes |                |                                 | 39,527  |      |                                |   | 680                |   |  |      | 38,847 |   |      |   | 42,828  |                    |  |   | (5,910  | ) |  |   | 48,738  |  
|Income tax provision              |                |                                 | (4,910  | )    |                                |   | (1,434             | ) |  |      | 3,476  |   |      |   | (7,405  | )                  |  |   | (1,822  | ) |  |   | 5,583   |  
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  
|Net income (loss)                 |                | $                               | 34,617  |      |                                | $ | (754               | ) |  | $    | 35,371 |   |      | $ | 35,423  |                    |  | $ | (7,732  | ) |  | $ | 43,155  |  
|                                  |                |                                 |         |      |                                |   |                    |   |  |      |        |   |      |   |         |                    |  |   |         |   |  |   |         |  

Three Months Ended September 30, 2008 as Compared to September 30, 2007

Operating Revenues.Operating revenues for the three months ended September 30, 2008 increased $92.0 million or 31.7% compared to the same
period in 2007. The increase was driven primarily by:



| |  |  | Sales increased $78.8 million or 27.7%. The increase in sales was the result of increases in global product sales prices and changes in product mix of $70.4 million
and impact of changes in foreign currency exchange rates of $18.4 million, partially offset by a $9.9 million decrease related to a 6.0 kt, or 6.3 % decline in sales volume.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We implemented a series of global price increases in the first three quarters of 2008, which were generally broad-based across our end-use markets and in
response to the continuing increase in raw material and energy costs. We experienced lower volume in our Paving and Roofing and Advanced Materials end-use market, largely due to constrained availability of butadiene. We continue to see lower
sales volume in non-core end uses, such as footwear.



| |  |  | Other revenue increased $13.2 million or 234.3%. The increase primarily consists of the sales of small quantities of residual products that are a by-product of the
manufacturing process of isoprene rubber.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Goods Sold.Cost of goods sold for the three months ended
September 30, 2008 increased $44.0 million or 18.1% compared to the same period in 2007. The increase was driven primarily by:



| |  |  | a $13.4 million increase from changes in foreign currency exchange rates,
| | - |  | -------------------------------------------------------------------------



| |  |  | a $24.6 million increase in monomer and other production costs,
| | - |  | ---------------------------------------------------------------



| |  |  | a $13.2 million increase in by-product cost, partially offset by,
| | - |  | -----------------------------------------------------------------



| |  |  | a $7.2 million decline in cost of goods sold directly related to the decline in sales volume.
| | - |  | ---------------------------------------------------------------------------------------------

As a percentage of operating revenues, cost of goods sold decreased to 75.3% for the three months ended September 30, 2008 from 84.0% for the same
period in 2007.

Gross Profit.Gross profit for the three months ended September 30, 2008 increased $48.0 million or 103.3%
compared to the same period in 2007. As a percentage of operating revenues, gross profit increased to 24.7% for the three months ended September 30, 2008 from 16.0% for the same period in 2007.



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Operating Expenses.Operating expenses for the three months ended September 30, 2008
increased $13.6 million or 40.4% compared to the same period in 2007. The increase was driven primarily by:



| |  |  | Research and development increased $0.4 million or 6.5%. The increase was largely due to the costs associated with the realignment of our research, technical
service and new business development organizations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of operating revenues, research and development
decreased to 1.5% for the three months ended September 30, 2008 from 1.9% for the same period in 2007.



| |  |  | Selling, general and administrative increased $12.6 million or 80.9%. The increase was primarily due to $9.7 million associated with Kratons incentive
compensation plan, $1.4 million related to analysis of refinancing options and $1.1 million from changes in foreign currency exchange rates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of operating revenues, selling, general and administrative increased to 7.4% for the three months ended September 30, 2008 from 5.4% for the same period in 2007.



| |  |  | Depreciation and amortization of identifiable intangibles increased $0.6 million or 4.6%. The increase in depreciation and amortization expense reflects assets that
were under construction in prior periods that were completed and placed in service, including our polyisoprene latex plant at our Paulinia, Brazil facility and changes in foreign currency exchange rates.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest expense, net.Interest expense, net for the three months ended September 30, 2008 decreased $4.5 million or 36.4% compared to
the same period in 2007. The decrease was primarily due to lower debt balances and lower interest rates, and the impact of the interest rate swap agreement. The average debt balances outstanding were $542.0 million and $580.2 million, in
the three months ended September 30, 2008 and 2007, respectively. The effective interest rates on our debt during the same periods were 6.3% and 8.1%, respectively. We borrowed $50.0 million on our Revolver on September 23, 2008. See Note 14(a)
for a description of the swap agreement.

Income tax provision.Income tax provision for the three months ended September 30,
2008 was $4.9 million compared to $1.4 million for the same period in 2007. The effective tax rate was approximately 12.4% for the three months ended September 30, 2008 as compared to 210.9% for the same period in 2007. Our effective tax rate
for the three months ended September 30, 2008 was less than our statutory rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period and recognition of deferred tax assets on US
operations that were previously offset by valuation allowances, as well as a different income mix between foreign and domestic tax jurisdictions. Our effective tax rate for the three months ended September 30, 2007 was higher than our statutory
rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period and a different income mix between foreign and domestic tax jurisdictions.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007

Operating Revenues.Operating revenues for the nine months ended September 30, 2008 increased $162.5 million or 19.5% compared to the same
period in 2007. The increases were driven primarily by:



| |  |  | Sales increased $135.6 million or 16.7%. The increase in sales was the result of increases in global product sales prices and changes in product mix of $105.7
million and impact of changes in foreign currency exchange rates of $59.5 million, partially offset by a $29.5 million decrease related to a 14.6 kt, or 5.3 % decline in sales volume.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | Other revenue increased $26.9 million or 137.8%. The increase primarily consists of the sales of small quantities of residual products that are a by-product of the
manufacturing process of isoprene rubber.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Cost of Goods Sold.Costs of goods sold for the nine months ended September 30, 2008
increased $86.9 million or 12.4 % compared to the same period in 2007. The increase was driven primarily by:



| |  |  | a $45.7 million increase from changes in foreign currency exchange rates,
| | - |  | -------------------------------------------------------------------------



| |  |  | a $26.9 million increase in by-product cost,
| | - |  | --------------------------------------------



| |  |  | a $37.1 million increase in monomer and other production costs, partially offset by,
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a $22.8 million decline in cost of goods sold directly related to the decline in sales volume.
| | - |  | ----------------------------------------------------------------------------------------------

As a percentage of operating revenues, cost of goods sold decreased to 79.3% for the nine months ended September 30, 2008 from 84.3% for the same
period in 2007.

Gross Profit.Gross profit for the nine months ended September 30, 2008 increased $75.6 million or 58.0 %
compared to the same period in 2007. As a percentage of operating revenues, gross profit increased to 20.7% for the nine months ended September 30, 2008 from 15.7% for the same period in 2007.

Operating Expenses.Operating expenses for the nine months ended September 30, 2008 increased $31.5 million or 30.2% compared to the same
period in 2007. The increase was driven primarily by:



| |  |  | Research and development increased $2.6 million or 14.2%. The increase was primarily due to the costs associated with the realignment of our research, technical
service and new business development organizations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of operating revenues, research and development
decreased to 2.1% from 2.2% compared to the same period in 2007.



| |  |  | Selling, general and administrative increased $24.4 million or 49.5 %. The increase was primarily due to $5.5 million associated with the previously announced
senior executive and other management changes, $4.6 million from changes in foreign currency exchange rates, $11.3 million associated with Kratons incentive compensation plan and $1.4 million related to analysis of refinancing options.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of operating revenues, selling, general and administrative increased to 7.4% from 5.9% compared to the
same period in 2007.



| |  |  | Depreciation and amortization of identifiable intangibles increased $4.5 million or 12.3%. The increase in depreciation and amortization was due to timing of
capital expenditures, including our polyisoprene latex plant at our Paulinia, Brazil facility, accelerated depreciation on the SIS plant assets at our Pernis facility beginning in September 2007, and changes in foreign currency exchange rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest expense, net.Interest expense, net for the nine months ended September 30, 2008 decreased $4.8
million or 14.9% compared to the same period in 2007. The decrease was primarily due to lower debt balances and lower interest rates, and the impact of the interest rate swap agreement. However, the decrease was partially offset by an adjustment to
interest expense, net in 2007 related to the accounting for interest rate swaps that resulted in a decrease in interest expense and therefore an increase in pre-tax income of approximately $1.6 million for the nine months ended September 30,
2007. The average debt balances outstanding were $557.8 million and $580.1 million with effective interest rates of 6.6% and 7.6%, respectively. See Note 14(a) for a description of the swap agreement.

Income tax provision.Income tax provision was $7.4 million for the nine months ended September 30, 2008, as compared to $1.8 million for the
nine months ended September 30, 2007. The effective tax rate for the nine months ended September 30, 2008 was approximately 17.3% as compared to a rate of (30.8)% for the nine months ended September 30, 2007. Our effective tax rate
for the nine months ended September 30, 2008 was less than our statutory rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period and recognition of deferred tax assets on U.S.
operations that were previously offset by valuation allowances, as well as a different income mix between foreign and domestic tax jurisdictions. Our effective tax rate for the nine months ended September 30, 2007 was less than our statutory
rate primarily due to not recording a tax benefit for certain net operating loss carryforwards generated during that period and a different income mix between foreign and domestic tax jurisdictions.



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LIQUIDITY AND CAPITAL RESOURCES

We are a holding company without any operations or assets other than the operations of our subsidiaries. Our liquidity depends on distributions from our
subsidiaries and we expect to continue to fund our liquidity requirements principally with cash derived from operations and existing cash balances. We believe that, based on current and anticipated levels of operations, cash flow from operations of
our subsidiaries and borrowings available to us will be adequate for the foreseeable future for us to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our 8.125% Notes and
senior secured credit facility. Going forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facility to fund liquidity needs
in an amount sufficient to enable us to service our indebtedness. As of September 30, 2008, we had $84.2 million of cash and cash equivalents. We have available to us, upon compliance with customary conditions, the $75.5 million revolving
portion of the senior secured credit facility of which we had borrowed $50.0 million on our Revolver at September 30, 2008. From time to time, on an ongoing basis, we continue to evaluate options with respect to our overall debt structure,
including, without limitation, the possibility of purchases in the open market of Kraton indebtedness up to amounts permitted under our senior secured credit facility. The ability for us to pay principal and interest on our indebtedness, fund
working capital and make anticipated capital expenditures depends on our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control.

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

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

Operating Cash Flows

Net cash provided by operating
activities decreased $48.2 million for the nine months ended September 30, 2008 compared to the same period in 2007. This change was driven primarily by:



| |  |  | Increased accounts receivable and inventory balances principally related to increases in global product pricing and increased cost of raw materials, partially
offset by higher earnings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing Cash Flows

Net cash used in investing activities totaled $15.3 million for the nine months ended September 30, 2008 compared to $19.8 million used in investing activities during the same period in 2007. This $4.5
million decrease was primarily driven by:



| |  |  | a lower rate of capital expenditures.
| | - |  | -------------------------------------

Capital Expenditures.We are forecasting 2008 capital expenditures of approximately $30.0 million to $35.0 million. These capital expenditures will be for maintenance, infrastructure, expansion and cost reduction projects. Our
minimum annual capital expenditure levels to maintain and achieve incremental improvements in our facilities in each of the next three to five years are expected to be approximately $12 million to $16 million.

Belpre Plant Instrumentation Upgrade.In May, we entered into a contract with Invensys Systems Inc. pursuant to which certain systems and
operating controls at the Belpre, Ohio facility will be upgraded in stages over the next several years. Pursuant to the contract, Invensys will provide detailed engineering design necessary



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to implement the new systems, as well as supply hardware and software for such systems. This project is designed to significantly improve the
effectiveness, competitiveness and operating efficiency of the Belpre plant. The project will begin in the second-half of 2008 and will be completed in distinct phases extending into 2012, with the total spending currently estimated at $40.0
million.

Financing Cash Flows and Liquidity

Net cash provided by financing activities totaled $46.9 million in the first nine months of 2008 compared to $41.5 million net cash used in financing activities in the first nine months of 2007. This change was driven primarily by:



| |  |  | a voluntary pre-payment of $40 million on the Term Facility in September 2007, and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a $50 million draw on the Revolver in September 2008.
| | - |  | -----------------------------------------------------

Description of Our Indebtedness.See Note 6 of Notes to Condensed Consolidated Financial Statements for a discussion of our debt facilities and related financial and other covenants. In September 2008, we borrowed $50 million on our
Revolving Loans due to the uncertainties resulting from the recent and on-going global credit crisis. The proceeds are classified within Cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Other Contingencies

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

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

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

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

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



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

Contractual Commitments

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

Off-Balance Sheet Transactions

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

OTHER ISSUES

New Accounting Pronouncements

See Note 13 of Notes to Condensed Consolidated Financial Statements.



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

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

Interest
Rate Risk.We have $325.9 million of variable rate debt outstanding under our senior secured credit facility as of September 30, 2008. The debt bears interest at the adjusted Eurodollar plus 2.00% per annum or at our option, the base
rate plus 1.00% per annum. In addition, we have $50.0 million of variable rate debt outstanding under our Revolving Loans. The Revolving Loans bear interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 2.00% and
2.50% per annum, depending on our leverage ratio, or at our option, the base rate plus a margin of between 1.00% and 1.50% per annum, depending on our leverage ratio. A commitment fee equal to 0.5% per annum times the daily average
undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears. In February 2008, we entered into a $325.0 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate
fluctuations on a portion of our variable debt. The agreement had a fixed rate of 2.77%, which resulted in a total cost of 4.77% and was scheduled to expire on April 1, 2010. We settled the swap early in June 2008 and realized cash proceeds of
$4.6 million resulting in a gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income and is being reclassified as a reduction in interest expense through March 31, 2010 using the effective interest
method, unless we determine that the forecasted interest payments under the Term Facility are probable not to occur, in which case the gain would then be reclassified immediately to interest expense.

Foreign Currency Risk.We conduct operations in many countries around the world. Our results of operations are subject to both currency
transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to currency
translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our historical consolidated financial statements. In recent years,
exchange rates between these currencies and U.S. dollars have fluctuated significantly and may do so in the future. Approximately, one-half of our revenue and costs are denominated in U.S. dollars. Euro-related currencies are also significant. In
July, 2008 we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of 20 million. The option contract is scheduled to expire on December 29,
2008.

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



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

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

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



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PART IIOTHER INFORMATION



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

For information regarding legal
proceedings, see Note 9 of Notes to Condensed Consolidated Financial Statements.



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

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

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



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

Not Applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

Not Applicable.



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



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



|               |  |                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------
|Exhibit Number |  |                                                                                         
|*10.1          |  | Amendment to TJ Chemical Holdings LLC 2004 Option Plan                                  
|               | 
|*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                     



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



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SIGNATURES

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



|                        |  |                                                               
|----------------------- |  | --------------------------------------------------------------
|                        |  | KRATON POLYMERS LLC                                           
|                        | 
|Date: November 12, 2008 |  | /S/    KEVIN M.
FOGARTY                                       
|                        |  | Kevin M. Fogarty President and Chief Executive Officer        
|                        | 
|Date: November 12, 2008 |  | /S/    STEPHEN E.
TREMBLAY                                    
|                        |  | Stephen E. Tremblay Vice President and Chief Financial Officer



41