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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2009



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

Commission File Number 333-123747





KRATON POLYMERS LLC

(Exact name of Register as specified in its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 26-3739386                          
|(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   ̈    No  x

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

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



|                            |  |                       |  |                           |  |                              
|--------------------------- |  | --------------------- |  | ------------------------- |  | -----------------------------
|Large accelerated filer:   ̈ |  | Accelerated filer:   ̈ |  | 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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##### Table of Contents

KRATON POLYMERS LLC

FORM 10-Q FOR THE QUARTER ENDED

March 31, 2009

TABLE OF CONTENTS



|                              |  |                                                                                                    |  |   
|----------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --
|                              |  | Page                                                                                              
|PART I. FINANCIAL INFORMATION |  |                                                                                                   
|Item 1.                       |  | Financial Statements (Unaudited)                                                                   |  | 4 
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008                   |  | 4 
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 |  | 5 
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 |  | 6 
|                              |  | Notes to Condensed Consolidated Financial Statements                                               |  | 7 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 26
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 34
|Item 4.                       |  | Controls and Procedures                                                                            |  | 35
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                                  |  | 36
|Item 1A.                      |  | Risk Factors                                                                                       |  | 36
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 36
|Item 3.                       |  | Defaults Upon Senior Securities                                                                    |  | 36
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                |  | 36
|Item 5.                       |  | Other Information                                                                                  |  | 36
|Item 6.                       |  | Exhibits                                                                                           |  | 37
|                              |  | Signatures                                                                                         |  | 38



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, other 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:



| |  |  | a downturn in overall economic conditions or changes in levels of consumer spending or preferences,
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our dependence on LyondellBasell Industries, Shell Chemicals and other suppliers to perform their obligations to us,
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | failure of our suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these agreements when they expire,
could increase our cost for these materials and interrupt production,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our substantial level of indebtedness,
| | - |  | --------------------------------------



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



| |  |  | our ability to continue technological innovation and successful commercial introduction of new products,
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical manufacturing,
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | compliance with extensive environmental, health and safety laws, including regulation of our employees exposure to butadiene, could require material
expenditures or changes in our operations,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk of accidents that could disrupt our operations or expose us to significant losses or liabilities,
| | - |  | ----------------------------------------------------------------------------------------------------------



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



| |  |  | exposure to interest rate and currency fluctuations,
| | - |  | ----------------------------------------------------



| |  |  | 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.

You should carefully consider the Risk Factors described in our most recent Annual Report on Form 10-K and subsequent public statements, or reports filed with or furnished to the Securities and Exchange
Commission, before making any investment decision with respect to our securities. If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely
affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this
cautionary statement.



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)



|                                                                                      |  |               |         |   |                  |   |          
|------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ---------
|                                                                                      |  | March 31,2009 |         |   | December 31,2008
|ASSETS                                                                                |  |               |         |   |                  |   |          
|                                                                                      |  |              
|Current Assets                                                                        |  |               |         |   |                  |   |          
|Cash and cash equivalents                                                             |  | $             | 12,845  |   |                  | $ | 101,396  
|Receivables, net of allowances of $2,412 and $2,512                                   |  |               | 93,050  |   |                  |   | 95,443   
|Inventories of products, net                                                          |  |               | 267,259 |   |                  |   | 324,193  
|Inventories of materials and supplies, net                                            |  |               | 10,970  |   |                  |   | 11,055   
|Deferred income taxes                                                                 |  |               | 14,778  |   |                  |   | 14,778   
|Other current assets                                                                  |  |               | 14,149  |   |                  |   | 6,769    
|                                                                                      |  |               |         |   |                  |   |          
|Total current assets                                                                  |  |               | 413,051 |   |                  |   | 553,634  
|Property, plant and equipment, less accumulated depreciation of $184,220 and $182,252 |  |               | 362,414 |   |                  |   | 372,008  
|Identifiable intangible assets, less accumulated amortization of $37,910 and $36,169  |  |               | 65,310  |   |                  |   | 67,051   
|Investment in unconsolidated joint venture                                            |  |               | 11,148  |   |                  |   | 12,371   
|Deferred financing costs                                                              |  |               | 7,179   |   |                  |   | 8,184    
|Other long-term assets                                                                |  |               | 19,090  |   |                  |   | 18,626   
|                                                                                      |  |               |         |   |                  |   |          
|Total Assets                                                                          |  | $             | 878,192 |   |                  | $ | 1,031,874
|                                                                                      |  |               |         |   |                  |   |          
|LIABILITIES AND MEMBERS EQUITY                                                       |  |               |         |   |                  |   |          
|                                                                                      |  |              
|Current Liabilities                                                                   |  |               |         |   |                  |   |          
|Current portion of long-term debt                                                     |  | $             | 3,343   |   |                  | $ | 3,343    
|Accounts payable-trade                                                                |  |               | 58,360  |   |                  |   | 75,177   
|Other payables and accruals                                                           |  |               | 51,833  |   |                  |   | 69,349   
|Due to related party                                                                  |  |               | 13,487  |   |                  |   | 25,585   
|Insurance note payable                                                                |  |               | 3,915   |   |                  |   |         
|                                                                                      |  |               |         |   |                  |   |          
|Total current liabilities                                                             |  |               | 130,938 |   |                  |   | 173,454  
|Long-term debt, net of current portion                                                |  |               | 493,893 |   |                  |   | 571,728  
|Deferred income taxes                                                                 |  |               | 35,294  |   |                  |   | 34,985   
|Long-term liabilities                                                                 |  |               | 62,945  |   |                  |   | 63,117   
|                                                                                      |  |               |         |   |                  |   |          
|Total Liabilities                                                                     |  |               | 723,070 |   |                  |   | 843,284  
|                                                                                      |  |               |         |   |                  |   |          
|Commitments and contingencies (note 11)                                               |  |               |         |   |                  |   |          
|Members equity                                                                       |  |               |         |   |                  |   |          
|Common equity                                                                         |  |               | 166,933 |   |                  |   | 182,767  
|Accumulated other comprehensive income (loss)                                         |  |               | (11,811 | ) |                  |   | 5,823    
|                                                                                      |  |               |         |   |                  |   |          
|Total members equity                                                                 |  |               | 155,122 |   |                  |   | 188,590  
|                                                                                      |  |               |         |   |                  |   |          
|Total Liabilities and Members Equity                                                 |  | $             | 878,192 |   |                  | $ | 1,031,874
|                                                                                      |  |               |         |   |                  |   |          

See Notes to Condensed Consolidated Financial Statements



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KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands)



|                                                          |  |                             |         |   |      |   |         |  
|--------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                          |  | Three Months EndedMarch 31, |        
|                                                          |  | 2009                        |         |   | 2008 |  
|Operating Revenues                                        |  |                             |         |   |      |   |         |  
|Sales                                                     |  | $                           | 177,866 |   |      | $ | 256,288 |  
|Other                                                     |  |                             | 7,092   |   |      |   | 10,573  |  
|                                                          |  |                             |         |   |      |   |         |  
|Total operating revenues                                  |  |                             | 184,958 |   |      |   | 266,861 |  
|Cost of Goods Sold                                        |  |                             | 176,025 |   |      |   | 218,076 |  
|                                                          |  |                             |         |   |      |   |         |  
|Gross Profit                                              |  |                             | 8,933   |   |      |   | 48,785  |  
|                                                          |  |                             |         |   |      |   |         |  
|Operating Expenses                                        |  |                             |         |   |      |   |         |  
|Research and development                                  |  |                             | 4,969   |   |      |   | 7,918   |  
|Selling, general and administrative                       |  |                             | 18,251  |   |      |   | 25,455  |  
|Depreciation and amortization of identifiable intangibles |  |                             | 12,564  |   |      |   | 14,652  |  
|                                                          |  |                             |         |   |      |   |         |  
|Total operating expenses                                  |  |                             | 35,784  |   |      |   | 48,025  |  
|                                                          |  |                             |         |   |      |   |         |  
|Gain on Extinguishment of Debt                            |  |                             | 19,491  |   |      |   |        |  
|Equity in Earnings of Unconsolidated Joint Venture        |  |                             | 74      |   |      |   | 61      |  
|Interest Expense, net                                     |  |                             | 8,908   |   |      |   | 10,385  |  
|                                                          |  |                             |         |   |      |   |         |  
|Loss Before Income Taxes                                  |  |                             | (16,194 | ) |      |   | (9,564  | )
|Income Tax Expense (Benefit)                              |  |                             | 272     |   |      |   | (154    | )
|                                                          |  |                             |         |   |      |   |         |  
|Net Loss                                                  |  | $                           | (16,466 | ) |      | $ | (9,410  | )
|                                                          |  |                             |         |   |      |   |         |  

See Notes to Condensed Consolidated Financial Statements



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KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                     |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                     |  | Three Months EndedMarch 31, |        
|                                                                                     |  | 2009                        |         |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                             |         |   |      |   |         |  
|Net Loss                                                                             |  | $                           | (16,466 | ) |      | $ | (9,410  | )
|Adjustments to reconcile net loss to net cash used in operating activities:          |  |                             |         |   |      |   |         |  
|Depreciation and amortization of identifiable intangibles                            |  |                             | 12,564  |   |      |   | 14,652  |  
|Lower-of-cost-or-market inventory adjustment                                         |  |                             | 2,061   |   |      |   |        |  
|Gain on extinguishment of debt                                                       |  |                             | (19,491 | ) |      |   |        |  
|Amortization of deferred financing costs                                             |  |                             | 1,005   |   |      |   | 501     |  
|Loss on disposal of fixed assets                                                     |  |                             | 389     |   |      |   |        |  
|Change in fair value of interest rate swaps                                          |  |                             | (421    | ) |      |   |        |  
|Distributed earnings in unconsolidated joint venture                                 |  |                             | 359     |   |      |   | 980     |  
|Deferred income tax expense                                                          |  |                             | 66      |   |      |   | 155     |  
|Non-cash compensation related to equity awards                                       |  |                             | 632     |   |      |   | 770     |  
|Decrease (increase) in                                                               |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                  |  |                             | (508    | ) |      |   | (22,505 | )
|Inventories of products, materials and supplies                                      |  |                             | 41,238  |   |      |   | (23,775 | )
|Other assets                                                                         |  |                             | (368    | ) |      |   | (4,141  | )
|Increase (decrease) in                                                               |  |                             |         |   |      |   |         |  
|Accounts payable-trade, other payables and accruals, and other long-term liabilities |  |                             | (45,530 | ) |      |   | (4,223  | )
|Due to related party                                                                 |  |                             | (10,751 | ) |      |   | (3,305  | )
|                                                                                     |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                                |  |                             | (35,221 | ) |      |   | (50,301 | )
|                                                                                     |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                             |         |   |      |   |         |  
|Purchase of property, plant and equipment                                            |  |                             | (10,279 | ) |      |   | (3,173  | )
|Proceeds from sale of property, plant and equipment                                  |  |                             | 3,833   |   |      |   |        |  
|                                                                                     |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                |  |                             | (6,446  | ) |      |   | (3,173  | )
|                                                                                     |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                             |         |   |      |   |         |  
|Proceeds from debt                                                                   |  |                             | 3,000   |   |      |   | 55,000  |  
|Repayment of debt                                                                    |  |                             | (61,345 | ) |      |   | (55,861 | )
|Cash contribution from member                                                        |  |                             |        |   |      |   | 10,000  |  
|Proceeds from insurance note payable                                                 |  |                             | 3,915   |   |      |   | 3,807   |  
|                                                                                     |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                  |  |                             | (54,430 | ) |      |   | 12,946  |  
|                                                                                     |  |                             |         |   |      |   |         |  
|Effect of exchange rate differences on cash and cash equivalents                     |  |                             | 7,546   |   |      |   | (216    | )
|                                                                                     |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                            |  |                             | (88,551 | ) |      |   | (40,744 | )
|Cash and cash equivalents, beginning of period                                       |  |                             | 101,396 |   |      |   | 48,277  |  
|                                                                                     |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                             |  | $                           | 12,845  |   |      | $ | 7,533   |  
|                                                                                     |  |                             |         |   |      |   |         |  
|Supplemental Disclosures                                                             |  |                             |         |   |      |   |         |  
|Cash paid during the period for income taxes, net of refunds received                |  | $                           | 6,382   |   |      | $ | 3,070   |  
|Cash paid during the period for interest                                             |  | $                           | 11,545  |   |      | $ | 14,910  |  

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), K.P. 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 United States, the largest SBC plant in the world, as well as plants in Germany, France, The Netherlands, Brazil and Japan. The plant in Japan is operated by an unconsolidated manufacturing joint
venture.

We generally sell our products to customers for use in industrial and consumer applications. Based on our management approach, we
believe that all material operations revolve around the manufacturing and sales of SBCs and we currently report our operations, both internally and externally, as a single business segment.

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, 2008, 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 due to the effect of seasonal changes and
weather conditions which typically affect our polymer product sales into our Paving and Roofing end-use market.

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.



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2. New Accounting Pronouncements.

The following new accounting pronouncements were adopted during the three months ended March 31, 2009:

SFAS No. 141R, Business Combinations. In December 2007, the Financial Accounting Standards Board (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. Currently this statement has had no
impact to our financial position, results of operations or cash flows. A significant impact may, however be realized on any future acquisitions by us. The amount of such impact cannot be currently determined and will depend on the nature and terms
of such future acquisition, if any.

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. For Kraton, SFAS
No. 161 is effective as of January 1, 2009.

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. For Kraton, FSP
No. FAS 142-3 is effective as of January 1, 2009. The adoption of FSP No. FAS 142-3 did not materially affect Kratons 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 March 31, 2009:

FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets. In December 2008, the FASB issued
FSP No. FAS 132(R)-1 which provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan and requires employers to provide more transparency about the assets held by the retirement
plan and the concentrations of risk in those plans. FSP No. FAS 132(R)-1 is effective for financial statements issued for fiscal years beginning after December 15, 2009, and interim periods within those fiscal years. For Kraton, FSP No. FAS
132(R)-1 is effective as of January 1, 2010. Kraton is currently evaluating the effect of adopting FSP No. FAS 132(R)-1.

3. Share-Based
Compensation

We account for share-based awards under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, which established the accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period. We record non-cash compensation expense for the restricted membership units, notional membership units and option awards over the vesting period using the straight-line method.
See Note 12(a), (b), (c) and (d) for further discussion.



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Information pertaining to option activity for the three months ended March 31, 2009 is as follows:



|                                 |  |                |   |  |                                |     
|-------------------------------- |  | -------------- | - |  | ------------------------------ | ----
|                                 |  | Options        |   |  | Weighted -AverageExercisePrice
|                                 |  | (in thousands) |   |  |                               
|Outstanding at December 31, 2008 |  | 22,101         |   |  | $                              | 1.00
|Granted                          |  |               |   |  |                                |    
|Exercised                        |  |               |   |  |                                |    
|Forfeited                        |  | (327           | ) |  |                                | 1.00
|                                 |  |                |   |  |                                |     
|Outstanding at March 31, 2009    |  | 21,774         |   |  | $                              | 1.00
|                                 |  |                |   |  |                                |     

4. Restructuring and Restructuring-Related Costs

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

We restructured our research and technical service organizations to better align our research and product development capabilities
with our customers needs and market requirements and to focus on our core capabilities and incurred $1.7 million of severance and other staffing-related costs which were recorded in research and development expenses in the condensed
consolidated statements of operations as of March 31, 2008. Substantially all of the cash expenditures related to these restructurings were paid as of the end of the first quarter of 2009

As of March 31, 2009, there was a total liability for restructuring costs of approximately $1.5 million, of which $1.3 million is related to
severance costs to be paid by the end of the second 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.

5. Detail of Certain Balance Sheet Accounts

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



|                              |  |                |         |                  |   |        
|----------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                              |  | March 31,2009  |         | December 31,2008
|                              |  | (in thousands)
|Inventories of products, net: |  |                |         |                  |   |        
|Finished products             |  | $              | 230,837 |                  | $ | 271,449
|Work in progress              |  |                | 2,047   |                  |   | 1,781  
|Raw materials                 |  |                | 34,375  |                  |   | 50,963 
|                              |  |                |         |                  |   |        
|                              |  | $              | 267,259 |                  | $ | 324,193
|                              |  |                |         |                  |   |        
|Other payables and accruals:  |  |                |         |                  |   |        
|Employee related              |  | $              | 15,732  |                  | $ | 25,418 
|Interest                      |  |                | 10,558  |                  |   | 10,316 
|Property and other taxes      |  |                | 1,289   |                  |   |       
|Customer rebates              |  |                | 2,980   |                  |   | 4,402  
|Income taxes payable          |  |                | 2,366   |                  |   | 8,538  
|Derivative liabilities        |  |                | 5,711   |                  |   | 5,483  
|Other                         |  |                | 13,197  |                  |   | 15,192 
|                              |  |                |         |                  |   |        
|                              |  | $              | 51,833  |                  | $ | 69,349 
|                              |  |                |         |                  |   |        

In March 2009 we recorded a $2.1 million lower-of-cost-or-market inventory adjustment in cost of
goods sold in the Condensed Consolidated Statements of Operations.



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6. Comprehensive Income

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



|                                                                         |  |                             |         |   |                  |   |         |  
|------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                         |  | Three Months EndedMarch 31, |        
|                                                                         |  | 2009                        |         |   | 2008             |  
|                                                                         |  | (in thousands)              |        
|Net Loss                                                                 |  | $                           | (16,466 | ) |                  | $ | (9,410  | )
|Other Comprehensive Income (Loss)                                        |  |                             |         |   |                  |   |         |  
|Foreign currency translation adjustments                                 |  |                             | (17,066 | ) |                  |   | 18,913  |  
|Reclassification of interest rate swaps into earnings, net of tax        |  |                             | (421    | ) |                  |   |        |  
|Net unrealized loss on interest rate swaps, net of tax                   |  |                             | (147    | ) |                  |   | (1,410  | )
|                                                                         |  |                             |         |   |                  |   |         |  
|Total Comprehensive Income (Loss)                                        |  | $                           | (34,100 | ) |                  | $ | 8,093   |  
|                                                                         |  |                             |         |   |                  |   |         |  
|                                                                        
|Accumulated other comprehensive income (loss) consists of the following: | 
|                                                                         |  | March 31,2009               |         |   | December 31,2008 |  
|                                                                         |  | (in thousands)              |        
|Foreign currency translation adjustments                                 |  | $                           | 24,676  |   |                  | $ | 41,742  |  
|Net unrealized loss on interest rate swaps, net of tax                   |  |                             | (2,679  | ) |                  |   | (2,111  | )
|Pension adjustment, net of tax                                           |  |                             | (33,808 | ) |                  |   | (33,808 | )
|                                                                         |  |                             |         |   |                  |   |         |  
|Total Accumulated Other Comprehensive Income (Loss)                      |  | $                           | (11,811 | ) |                  | $ | 5,823   |  
|                                                                         |  |                             |         |   |                  |   |         |  

7. Long-Term Debt

Long-term debt consists of the following:



|                                       |  |                |         |                  |   |        
|-------------------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                                       |  | March 31,2009  |         | December 31,2008
|                                       |  | (in thousands)
|Senior Secured Credit Facilities:      |  |                |         |                  |   |        
|Revolving loans                        |  | $              | 3,000   |                  | $ | 50,000 
|Term loans                             |  |                | 324,236 |                  |   | 325,071
|8.125% Notes                           |  |                | 170,000 |                  |   | 200,000
|                                       |  |                |         |                  |   |        
|Total debt                             |  |                | 497,236 |                  |   | 575,071
|Less current portion of long-term debt |  |                | 3,343   |                  |   | 3,343  
|                                       |  |                |         |                  |   |        
|Total long-term debt                   |  | $              | 493,893 |                  | $ | 571,728
|                                       |  |                |         |                  |   |        

(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 (the Term Facility) of $385 million, and a revolving facility (the Revolving Facility), of up to $75.5 million. In these notes to the condensed consolidated financial
statements, the loans made under the Revolving Facility are referred to as the Revolving Loans, and the loans made under the Term Facility are referred to as the Term Loans.

Three of our subsidiaries, Kraton Polymers U.S. LLC, Elastomers Holdings LLC, and Kraton Polymers Capital Corporation, along with Polymer Holdings, have
guaranteed the Credit Agreement. The guarantors, together with us, are referred to as the Loan Parties. The Credit Agreement is secured by a perfected first priority



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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.

Maturity.The Revolving Loans outstanding are payable in a single maturity on May 12, 2011. The Term Loans are payable in quarterly installments in an amount approximating 0.25% of the principal amount through
June 30, 2012 with the balance payable in four equal quarterly installments commencing on September 30, 2012 and ending on May 12, 2013.

Interest.The Term Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus 1.00% per annum. In general, interest is
payable quarterly, subject to the interest period selected by us, per the terms of the Credit Agreement. The weighted average effective interest rates on the Term Loans for the three months ended March 31, 2009 was 4.3% compared to 6.6% for the
three months ended March 31, 2008. The average effective interest rates include the additional income statement effects of Kratons highly effective interest rate swaps for both periods. See Note 9(a) for a description of the interest rate
swap agreements.

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, also depending on our leverage ratio. The weighted average effective interest rates on the Revolving
Loans for the three months ended March 31, 2009 was 4.6%. We also pay a commitment fee equal to 0.5% quarterly on the daily average undrawn portion of the Revolving Facility.

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 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 beginning March 31, 2010 and continuing thereafter. In addition, we are required to maintain a fiscal quarter end
leverage ratio not to exceed 4.45 beginning March 31, 2009 through September 30, 2009 and 4.00 beginning December 31, 2009 and continuing thereafter. As of March 31, 2009, 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 8.125% Notes. However, the maintenance of these financial ratios is based on our level of
profitability. If the 2009 global economic environment worsens, it would adversely impact our profitability and our ability to meet our covenants. If we are unable to satisfy such covenants or other provisions at any future time we would need to
seek an amendment or waiver of such financial covenants or other provisions. The respective lenders under the senior secured credit facility may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent,
they may not do so on terms which are favorable to us. In the event that we were



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unable to obtain any such waiver or amendment and we were not able to refinance or repay our debt instruments, our inability to meet the financial covenants
or other provisions of the senior secured credit facility would constitute an event of default under our debt instruments, including the senior secured credit facility, which would permit the bank lenders to accelerate the senior secured credit
facility.

On January 14, 2008, we received an equity investment of $10 million, of which $9.6 million was included in the
financial covenant calculation for the twelve-month period ending December 31, 2007 and was 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.

(b) Senior Subordinated Notes Due January 15, 2014.On December 23, 2003, Kraton
and Kraton Polymers Capital Corporation issued the 8.125% Notes in an aggregate principal amount of $200.0 million. The 8.125% Notes are subject to the provisions for mandatory and optional prepayment and acceleration and are payable in full on
January 15, 2014. Polymer Holdings and each of Kraton Polymers U.S. LLC and Elastomers Holdings LLC, which we refer to collectively as the Guarantor Subsidiaries, have guaranteed the 8.125% Notes. The amount of 8.125% Notes outstanding at
March 31, 2009 and December 31, 2008, was $170 million and $200 million, respectively.

Interest.The 8.125% Notes
bear interest at a fixed rate of 8.125% per annum. Interest is payable semi-annually on January 15 and July 15 each year.

Optional Redemption.Prior to January 15, 2007, we had the option to redeem up to 35% of the aggregate principal amount of the 8.125% Notes at a redemption price equal to 108.125% of the principal amount of the
8.125% Notes being redeemed, plus accrued and unpaid interest. Between January 15, 2007 and January 15, 2009, we could not elect to redeem the 8.125% Notes at predetermined redemption prices. After January 15, 2009, we can elect to
redeem all or a part of the 8.125% Notes at certain predetermined redemption prices, plus accrued and unpaid interest.

Extinguishment of Debt.On March 16, 2009, we purchased and extinguished $30 million face value of our 8.125% Notes for cash consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a
gain on extinguishment of debt of approximately $19.5 million on the extinguishment of debt in the Condensed Consolidated Statements of Operations in the quarter ended March 31, 2009. We capitalize financing fees and other related costs and
amortize them to interest expense over the term of the related debt instrument. In the quarter ended March 31, 2009 we amortized to interest expense $0.5 million of remaining deferred financing costs associated with the extinguishment of the
$30 million face value of our 8.125% Notes.

Covenants.The 8.125% Notes contain certain affirmative covenants
including, among others, covenants to furnish the holders of the 8.125% Notes with financial statements and other financial information and to provide the holders of the 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, limitations on lines of businesses and mergers and consolidations. As of March 31, 2009, we were in compliance with all covenants under the 8.125% Notes.

8. 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.



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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 9 for further discussion.

9. 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 subject to the variable quarterly interest rates on $325 million of the term loan
portion 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 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 remaining
portion of the gain would then be reclassified immediately to interest expense. We reclassified $0.7 million into earnings for the quarter ended March 31, 2009.

In October 2008, we entered into a $320 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 2.99%, which resulted in a total cost of 4.99%, and a term through December 31, 2009. 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 million of the term loan portion of the Term Facility. We recorded a loss of $0.2 million in accumulated other comprehensive income related to the effective portion of the hedge for the quarter ended
March 31, 2009.

Foreign Currency Hedge. On February 18, 2009 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 47.3 million which expires on December 29, 2009. The option contract does not qualify for hedge accounting. During the quarter
ended March 31, 2009, we recorded a gain of $0.5 million, which represented the mark-to-market impact of the purchased option contract. The gain was recorded in selling, general, and administrative expense on the Condensed Consolidated
Statements of Operations.



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The financial assets and liabilities measured at fair value on a recurring basis are included below:



|                                          |  |                             |  |                  |       |                                                            |   |                                           |  |                                        |       |  |   |  
|----------------------------------------- |  | --------------------------- |  | ---------------- | ----- | ---------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ----- |  | - | -
|                                          |  |                             |  |                  |       | Fair Value Measurements at Reporting Date Using           
|                                          |  | Balance Sheet Location      |  | March 31,2009    |       | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|                                          |  | (in thousands)             
|Derivative assetsForeign currency option |  | Other current assets        |  | $                | 1,518 |                                                            | $ |                                          |  | $                                      | 1,518 |  | $ | 
|Derivative liabilitiesInterest rate swap |  | Other payables and accruals |  | $                | 5,711 |                                                            | $ |                                          |  | $                                      | 5,711 |  | $ | 
|                                          |  |                             | 
|                                          |  |                             |  |                  |       | Fair Value Measurements at Reporting Date Using           
|                                          |  | Balance Sheet Location      |  | December 31,2008 |       | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|                                          |  | (in thousands)             
|Derivative liabilitiesInterest rate swap |  | Other payables and accruals |  | $                | 5,483 |                                                            | $ |                                          |  | $                                      | 5,483 |  | $ | 

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

(b) Fair Value of Financial Instruments

The following table presents the carrying values and approximate fair values of our long-term debt at March 31, 2009 and December 31, 2008:



|                |                |                |            |                   |               |         |            |   |         |  |   |        
|--------------- | -------------- | -------------- | ---------- | ----------------- | ------------- | ------- | ---------- | - | ------- |  | - | -------
|                |                | March 31, 2009 |            | December 31, 2008
|                | CarryingValue  |                | Fair Value |                   | CarryingValue |         | Fair Value
|                | (in thousands)
|Revolving loans |                | $              | 3,000      |                   | $             | 3,000   |            | $ | 50,000  |  | $ | 50,000 
|Term loans      |                |                | 324,236    |                   |               | 324,236 |            |   | 325,071 |  |   | 325,071
|8.125% Notes    |                |                | 170,000    |                   |               | 52,063  |            |   | 200,000 |  |   | 79,250 

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

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.



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10. 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.

The effective tax rate for the three months ended
March 31, 2009 was approximately (1.7)% as compared to 1.6% in the three months ended March 31, 2008. Our effective tax rate for the three months ended March 31, 2009 and 2008 were lower 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 these periods.

As of March 31, 2009, we had total unrecognized tax benefits of $1.2 million. We recognized interest and penalties related to unrecognized tax
benefits within the provision for income taxes in our Condensed Consolidated Statement of Operations. During the three months ended March 31, 2009, we had no substantial change in interest and penalty charges related to unrecognized tax
benefits, and accrued $0.1 million for interest and penalties. As of March 31, 2009, 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 March 31, 2009, our 2005 through 2007 U.S. federal income tax returns remain open to examination. In addition, open
tax years related to state and foreign jurisdictions remain subject to examination.

11. 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.

12. 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. Additional employees have also been given the opportunity to purchase membership units in TJ Chemical through Management LLC at the original buy-in price. 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 March 31, 2009, there were 1,746,000 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 us, of non-qualified options to purchase TJ Chemical membership units.
As of March 31, 2009 there were 21,774,118 options granted and outstanding. The exercise price per membership unit shall be equal to the fair market value of a membership unit on the date of grant. All options granted in fiscal 2008, fiscal
2007 and fiscal 2006 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. The Options generally vest in 20% annual increments from the date of grant. However,
the Compensation Committee (the Committee) determined that a shorter vesting period was appropriate for grants made during the 2008 fiscal year and therefore Options granted in 2008 were set to vest in increments of 1/3 over 3 years.
With respect to directors, previous to 2008 options were 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. In 2008, Options
granted to directors were granted in increments of 1/3 over 3 years, except the Chairman who has a one year vesting. 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.

The Committee of Kraton Polymers administers the Option Plan on behalf of TJ Chemical, 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 will have 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 (except a merger where membership unit holders receive securities of another corporation), the options will pertain to and apply to the
securities that the option holder would have received in the merger; and 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 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
(other than without cause or by the participant for good reason within the 2-year period immediately following a change in control), 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) 1-year after the date employment is terminated by reason of death or
disability; or (4) the 10th anniversary of the grant date for such option.

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 6 months and 1-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 12(e) for
further discussion.

(c) Profits Units of Kraton Management, LLC (Management, LLC).We provided certain key employees with a
grant of profits units (subject to the 8.7% pool limitation described in Note 11(d)). Profits units are economically equivalent to an option, except that they provide the recipient/employee with an opportunity to recognize capital gains in the
appreciation of TJ Chemical and its affiliates and TJ Chemical and its affiliates does not receive any deduction at the time of grant or disposition of the profits unit by the employee. Generally, pursuant to the applicable grant agreements, 50% of
such profits units will vest when the fair value of TJ Chemicals assets equals or exceeds two times the Threshold Amount, i.e., the first tranche, and the remaining



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50% will vest when the fair value of TJ Chemicals assets equals or exceeds three times the threshold amount, i.e., the second tranche, in each case, as
determined by the Board of TJ Chemical, provided that the executive remains employed through the applicable vesting date. Additionally, 100% of the profits units shall vest upon the effective date of a disposition by the initial investors of 51% or
more of their aggregate interests in Kraton. 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. Compensation expense will be recorded in our condensed consolidated financial statements for
this difference at the time it becomes probable the profits units will become vested. If an employees employment terminates prior to any applicable vesting date, such employee shall automatically forfeit all rights to any unvested profits
units. As of March 31, 2009, there were 1,025,000 profits units granted and not yet vested. See Note 12(e) for further discussion.

(d) Options and Profits Units Outstanding.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, or 8.7% of the outstanding
membership units and profits units of TJ Chemical on March 31, 2004, on a fully diluted basis.

In the first quarter of 2009, no
options were granted and 327,000 options were forfeited. As of March 31, 2009, the total options granted under the Option Plan amounted to 21,774,118. In addition, as of March 31, 2009, there were 1,025,000 profits units granted under the
Option Plan and not yet vested. See Note 12(c) for further discussion.

(e) Kraton Polymers LLC Executive Deferred Compensation Plan.On September 9, 2004, the Board of Directors adopted the Kraton Deferred Compensation Plan. Under the plan, certain employees will be permitted to elect to defer a portion (generally up to 50%) of their annual incentive bonus with
respect to each bonus period. Participating employees will be credited with a notional number of membership units based on the fair value of TJ Chemical membership units as of the date of deferral, although the distribution of membership units in
such accounts may be made indirectly through Management LLC. Such membership units will be distributed upon termination of the participants employment subject to a call right or upon a change in control. We reserved 1,648,750 membership units
for issuance pursuant to the Kraton Deferred Compensation Plan as of December 31, 2007, and 2,000,000 membership units for issuance pursuant to the Kraton Deferred Compensation Plan as of December 31, 2006.

(f) 2009 Incentive Compensation Plan.On February 13, 2009, the Committee of the Board of Directors (the Board) of Kraton
approved and adopted the 2009 Incentive Compensation Plan (the Plan), including the performance-based criteria by which potential bonus payouts to participants in the Plan (Participants) will be determined. The Plan is
designed to attract, retain, motivate and reward officers, including named executive officers, and certain other employees that have been deemed eligible to participate in the Plan. For the bonus year that ends December 31, 2009, the Board
established a common bonus pool based upon performance calculations, in accordance with Plan provisions. The potential range for this bonus pool is from zero to $15 million, depending on Kratons and individual performance factors, including
performance criteria to be established by the Committee. Based on additional performance criteria such as our safety performance, innovation as a percent of total revenue, specific cost out and pricing initiatives, the Committee may add up to $1
million to the bonus pool. Kratons 2009 performance will be the most significant factor in determining the size of the bonus pool. As of March 31, 2009, we recorded a total liability for incentive compensation of approximately $0.8
million.



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(g) Retirement Plans.The components of net periodic benefit cost related to pension
benefits and other postretirement benefits for the three months ended March 31, 2009 and March 31, 2008, are as follows:



|                                         |      |                             |        |      |      |   |        |  
|---------------------------------------- | ---- | --------------------------- | ------ | ---- | ---- | - | ------ | -
|                                         |      | Three Months EndedMarch 31, |       
|                                         |      | 2009                        |        |      | 2008 |  
|Pension Benefits                         |      |                             |        |      |      |   |        |  
|Components of net periodic benefit cost: |      |                             |        |      |      |   |        |  
|Service cost                             |      | $                           | 736    |      |      | $ | 603    |  
|Interest cost                            |      |                             | 1,178  |      |      |   | 1,059  |  
|Expected return on plan assets           |      |                             | (1,187 | )    |      |   | (1,032 | )
|Amortization of prior service cost       |      |                             | 127    |      |      |   |       |  
|                                         |      |                             |        |      |      |   |        |  
|Net periodic benefit cost                |      | $                           | 854    |      |      | $ | 630    |  
|                                         |      |                             |        |      |      |   |        |  
|                                         |     
|                                         |      | Three Months EndedMarch 31, |       
|                                         | 2009 |                             |        | 2008 |     
|Other Postretirement Benefits            |      |                             |        |      |      |   |        |  
|Components of net periodic benefit cost: |      |                             |        |      |      |   |        |  
|Service cost                             |      | $                           | 100    |      |      | $ | 88     |  
|Interest cost                            |      |                             | 230    |      |      |   | 212    |  
|Amortization of prior service cost       |      |                             | 18     |      |      |   |       |  
|                                         |      |                             |        |      |      |   |        |  
|Net periodic benefit cost                |      | $                           | 348    |      |      | $ | 300    |  
|                                         |      |                             |        |      |      |   |        |  

Contributions. We made a $1.2 million contribution to our pension plan in the
quarter ended March 31, 2009 and expect to contribute $5.7 million in 2009.

13. 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 EndedMarch 31,
|                          | 2009 |                             | 2008   
|                          |      | (in thousands)             
|Total Operating Revenues: |      |                             |         |                  |   |        
|United States             |      | $                           | 60,547  |                  | $ | 81,721 
|Germany                   |      |                             | 21,570  |                  |   | 34,849 
|Belgium                   |      |                             | 12,982  |                  |   | 9,123  
|Japan                     |      |                             | 10,929  |                  |   | 15,381 
|The Netherlands           |      |                             | 8,644   |                  |   | 17,223 
|France                    |      |                             | 7,735   |                  |   | 8,153  
|Italy                     |      |                             | 6,881   |                  |   | 12,597 
|Brazil                    |      |                             | 6,399   |                  |   | 7,939  
|United Kingdom            |      |                             | 6,315   |                  |   | 9,016  
|Thailand                  |      |                             | 5,808   |                  |   | 3,426  
|Canada                    |      |                             | 3,727   |                  |   | 7,539  
|China                     |      |                             | 3,618   |                  |   | 7,486  
|Denmark                   |      |                             | 2,803   |                  |   | 2,044  
|Argentina                 |      |                             | 2,645   |                  |   | 3,078  
|Taiwan                    |      |                             | 2,544   |                  |   | 4,618  
|Sweden                    |      |                             | 2,451   |                  |   | 3,026  
|Mexico                    |      |                             | 2,222   |                  |   | 3,114  
|Turkey                    |      |                             | 2,112   |                  |   | 5,484  
|Korea, Republic of        |      |                             | 1,894   |                  |   | 2,543  
|Switzerland               |      |                             | 1,595   |                  |   | 1,014  
|South Africa              |      |                             | 1,168   |                  |   | 1,039  
|Czech Republic            |      |                             | 1,107   |                  |   | 1,252  
|Other                     |      |                             | 9,262   |                  |   | 25,196 
|                          |      |                             |         |                  |   |        
|                          |      | $                           | 184,958 |                  | $ | 266,861
|                          |      |                             |         |                  |   |        
|                          |      |                            
|                          |      | March 31,2009               |         | December 31,2008
|                          |      | (in thousands)             
|Long-Lived Assets:        |      |                             |         |                  |   |        
|United States             |      | $                           | 311,293 |                  | $ | 303,278
|France                    |      |                             | 103,263 |                  |   | 108,665
|Brazil                    |      |                             | 49,515  |                  |   | 48,237 
|Germany                   |      |                             | 36,299  |                  |   | 39,361 
|The Netherlands           |      |                             | 32,437  |                  |   | 34,018 
|China                     |      |                             | 2,317   |                  |   | 2,317  
|Japan                     |      |                             | 106     |                  |   | 6,699  
|Other                     |      |                             | 11,404  |                  |   | 11,685 
|                          |      |                             |         |                  |   |        
|                          |      | $                           | 546,634 |                  | $ | 554,260
|                          |      |                             |         |                  |   |        

14. 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.



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Kraton Polymers LLC

Condensed Consolidating Balance Sheet

March 31, 2009

(In thousands)



|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|------------------------------------------------------------- |  | ----------- | --------- | - | --------------------- | - | ------- | ------------------------- |  | ------------ | ------- |  | ------------ | ---------- | - |  | - | ------- | -
|                                                              |  | Issuers(1)  |           |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | Eliminations |         |  | Consolidated |           
|                                                              |  | (Unaudited) |          
|ASSETS                                                        |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|                                                              |  |             |           |   |                      
|Current Assets                                                |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Cash and cash equivalents                                     |  | $           |          |   |                       | $ | 6,374   |                           |  | $            | 6,471   |  | $            |           |   |  | $ | 12,845  |  
|Receivables, net                                              |  |             | 655       |   |                       |   | 47,822  |                           |  |              | 65,162  |  |              | (20,589    | ) |  |   | 93,050  |  
|Inventories of products, net                                  |  |             |          |   |                       |   | 116,510 |                           |  |              | 157,385 |  |              | (6,636     | ) |  |   | 267,259 |  
|Inventories of materials and supplies                         |  |             |          |   |                       |   | 6,906   |                           |  |              | 4,064   |  |              |           |   |  |   | 10,970  |  
|Deferred income taxes                                         |  |             |          |   |                       |   | 14,778  |                           |  |              |        |  |              |           |   |  |   | 14,778  |  
|Other current assets                                          |  |             | 7,391     |   |                       |   | 824     |                           |  |              | 5,934   |  |              |           |   |  |   | 14,149  |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total current assets                                          |  |             | 8,046     |   |                       |   | 193,214 |                           |  |              | 239,016 |  |              | (27,225    | ) |  |   | 413,051 |  
|Property, plant and equipment, less accumulated depreciation  |  |             | 98,324    |   |                       |   | 167,481 |                           |  |              | 96,609  |  |              |           |   |  |   | 362,414 |  
|Identifiable intangible assets, less accumulated amortization |  |             | 18,372    |   |                       |   |        |                           |  |              | 46,938  |  |              |           |   |  |   | 65,310  |  
|Investment in consolidated subsidiaries                       |  |             | 868,922   |   |                       |   |        |                           |  |              |        |  |              | (868,922   | ) |  |   |        |  
|Investment in unconsolidated joint venture                    |  |             | 813       |   |                       |   |        |                           |  |              | 10,335  |  |              |           |   |  |   | 11,148  |  
|Deferred financing costs                                      |  |             | 7,179     |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 7,179   |  
|Deferred income taxes                                         |  |             | 21,020    |   |                       |   |        |                           |  |              |        |  |              | (21,020    | ) |  |   |        |  
|Other long-term assets                                        |  |             | 117,998   |   |                       |   | 463,624 |                           |  |              | 12,292  |  |              | (574,824   | ) |  |   | 19,090  |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total Assets                                                  |  | $           | 1,140,674 |   |                       | $ | 824,319 |                           |  | $            | 405,190 |  | $            | (1,491,991 | ) |  | $ | 878,192 |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|LIABILITIES AND MEMBERS EQUITY                               |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|                                                              |  |             |           |   |                      
|Current Liabilities                                           |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Current portion of long-term debt                             |  | $           | 3,343     |   |                       | $ |        |                           |  | $            |        |  | $            |           |   |  | $ | 3,343   |  
|Accounts payable-trade                                        |  |             | 2,700     |   |                       |   | 29,197  |                           |  |              | 26,463  |  |              |           |   |  |   | 58,360  |  
|Other payables and accruals                                   |  |             | 12,370    |   |                       |   | 21,226  |                           |  |              | 18,237  |  |              |           |   |  |   | 51,833  |  
|Due to related party                                          |  |             |          |   |                       |   | 5,601   |                           |  |              | 28,475  |  |              | (20,589    | ) |  |   | 13,487  |  
|Insurance note payable                                        |  |             | 3,915     |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 3,915   |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total current liabilities                                     |  |             | 22,328    |   |                       |   | 56,024  |                           |  |              | 73,175  |  |              | (20,589    | ) |  |   | 130,938 |  
|Long-term debt, net of current portion                        |  |             | 493,893   |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 493,893 |  
|Deferred income taxes                                         |  |             |          |   |                       |   | 53,436  |                           |  |              | 2,878   |  |              | (21,020    | ) |  |   | 35,294  |  
|Long-term liabilities                                         |  |             | 460,199   |   |                       |   | 53,829  |                           |  |              | 123,741 |  |              | (574,824   | ) |  |   | 62,945  |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total liabilities                                             |  |             | 976,420   |   |                       |   | 163,289 |                           |  |              | 199,794 |  |              | (616,433   | ) |  |   | 723,070 |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Commitments and contingencies (Note 11)                       |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Members equity                                               |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Common equity                                                 |  |             | 166,933   |   |                       |   | 694,838 |                           |  |              | 180,720 |  |              | (875,558   | ) |  |   | 166,933 |  
|Accumulated other comprehensive income                        |  |             | (2,679    | ) |                       |   | (33,808 | )                         |  |              | 24,676  |  |              |           |   |  |   | (11,811 | )
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total members equity                                         |  |             | 164,254   |   |                       |   | 661,030 |                           |  |              | 205,396 |  |              | (875,558   | ) |  |   | 155,122 |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  
|Total Liabilities and Members Equity                         |  | $           | 1,140,674 |   |                       | $ | 824,319 |                           |  | $            | 405,190 |  | $            | (1,491,991 | ) |  | $ | 878,192 |  
|                                                              |  |             |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |         |  



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



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Kraton Polymers LLC

Condensed Consolidating Balance Sheet

December 31, 2008

(In thousands)



|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|------------------------------------------------------------- |  | ---------- | --------- | - | --------------------- | - | ------- | ------------------------- |  | ------------ | ------- |  | ------------ | ---------- | - |  | - | ---------
|                                                              |  | Issuers(1) |           |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | Eliminations |         |  | Consolidated
|ASSETS                                                        |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|                                                              |  |            |           |   |                      
|Current Assets                                                |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Cash and cash equivalents                                     |  | $          |          |   |                       | $ | 65,460  |                           |  | $            | 35,936  |  | $            |           |   |  | $ | 101,396  
|Receivables, net                                              |  |            | 944       |   |                       |   | 45,322  |                           |  |              | 68,148  |  |              | (18,971    | ) |  |   | 95,443   
|Inventories of products, net                                  |  |            |          |   |                       |   | 145,654 |                           |  |              | 187,396 |  |              | (8,857     | ) |  |   | 324,193  
|Inventories of materials and supplies                         |  |            |          |   |                       |   | 6,816   |                           |  |              | 4,239   |  |              |           |   |  |   | 11,055   
|Deferred income taxes                                         |  |            |          |   |                       |   | 14,778  |                           |  |              |        |  |              |           |   |  |   | 14,778   
|Other current assets                                          |  |            | 2,905     |   |                       |   | 720     |                           |  |              | 3,144   |  |              |           |   |  |   | 6,769    
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total current assets                                          |  |            | 3,849     |   |                       |   | 278,750 |                           |  |              | 298,863 |  |              | (27,828    | ) |  |   | 553,634  
|Property, plant and equipment, less accumulated depreciation  |  |            | 93,782    |   |                       |   | 164,396 |                           |  |              | 113,830 |  |              |           |   |  |   | 372,008  
|Identifiable intangible assets, less accumulated amortization |  |            | 20,113    |   |                       |   |        |                           |  |              | 46,938  |  |              |           |   |  |   | 67,051   
|Investment in consolidated subsidiaries                       |  |            | 898,565   |   |                       |   |        |                           |  |              |        |  |              | (898,565   | ) |  |   |         
|Investment in unconsolidated joint venture                    |  |            | 813       |   |                       |   |        |                           |  |              | 11,558  |  |              |           |   |  |   | 12,371   
|Deferred financing costs                                      |  |            | 8,184     |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 8,184    
|Deferred income taxes                                         |  |            | 20,131    |   |                       |   |        |                           |  |              |        |  |              | (20,131    | ) |  |   |         
|Other long-term assets                                        |  |            | 137,954   |   |                       |   | 411,841 |                           |  |              | 11,739  |  |              | (542,908   | ) |  |   | 18,626   
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total Assets                                                  |  | $          | 1,183,391 |   |                       | $ | 854,987 |                           |  | $            | 482,928 |  | $            | (1,489,432 | ) |  | $ | 1,031,874
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|LIABILITIES AND MEMBERS EQUITY                               |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|                                                              |  |            |           |   |                      
|Current Liabilities                                           |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Current portion of long-term debt                             |  | $          | 3,343     |   |                       | $ |        |                           |  | $            |        |  | $            |           |   |  | $ | 3,343    
|Accounts payable-trade                                        |  |            | 2,700     |   |                       |   | 36,806  |                           |  |              | 35,671  |  |              |           |   |  |   | 75,177   
|Other payables and accruals                                   |  |            | 15,815    |   |                       |   | 26,184  |                           |  |              | 27,350  |  |              |           |   |  |   | 69,349   
|Due to related party                                          |  |            |          |   |                       |   | 9,546   |                           |  |              | 35,010  |  |              | (18,971    | ) |  |   | 25,585   
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total current liabilities                                     |  |            | 21,858    |   |                       |   | 72,536  |                           |  |              | 98,031  |  |              | (18,971    | ) |  |   | 173,454  
|Long-term debt, net of current portion                        |  |            | 571,728   |   |                       |   |        |                           |  |              |        |  |              |           |   |  |   | 571,728  
|Deferred income taxes                                         |  |            |          |   |                       |   | 53,435  |                           |  |              | 1,681   |  |              | (20,131    | ) |  |   | 34,985   
|Long-term liabilities                                         |  |            | 408,416   |   |                       |   | 53,626  |                           |  |              | 143,983 |  |              | (542,908   | ) |  |   | 63,117   
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total liabilities                                             |  |            | 1,002,002 |   |                       |   | 179,597 |                           |  |              | 243,695 |  |              | (582,010   | ) |  |   | 843,284  
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Commitments and contingencies (Note 11)                       |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Members equity                                               |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Common equity                                                 |  |            | 182,767   |   |                       |   | 694,170 |                           |  |              | 213,252 |  |              | (907,422   | ) |  |   | 182,767  
|Accumulated other comprehensive income                        |  |            | (1,378    | ) |                       |   | (18,780 | )                         |  |              | 25,981  |  |              |           |   |  |   | 5,823    
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total members equity                                         |  |            | 181,389   |   |                       |   | 675,390 |                           |  |              | 239,233 |  |              | (907,422   | ) |  |   | 188,590  
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          
|Total Liabilities and Members Equity                         |  | $          | 1,183,391 |   |                       | $ | 854,987 |                           |  | $            | 482,928 |  | $            | (1,489,432 | ) |  | $ | 1,031,874
|                                                              |  |            |           |   |                       |   |         |                           |  |              |         |  |              |            |   |  |   |          



|(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



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##### Table of Contents

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Three Months Ended March 31, 2009

(In thousands)



|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Issuers(1)  |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|                                                          |  | (Unaudited) |        
|Operating Revenues                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $           |        |   |                       | $ | 96,861  |                           |  | $ | 121,886      |   |  | $            | (40,881 | ) |  | $ | 177,866 |  
|Other                                                     |  |             |        |   |                       |   |        |                           |  |   | 7,092        |   |  |              |        |   |  |   | 7,092   |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating revenues                                  |  |             |        |   |                       |   | 96,861  |                           |  |   | 128,978      |   |  |              | (40,881 | ) |  |   | 184,958 |  
|Cost of Goods Sold                                        |  |             | (9,155  | ) |                       |   | 95,773  |                           |  |   | 130,288      |   |  |              | (40,881 | ) |  |   | 176,025 |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross Profit                                              |  |             | 9,155   |   |                       |   | 1,088   |                           |  |   | (1,310       | ) |  |              |        |   |  |   | 8,933   |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Operating Expenses                                        |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Research and development                                  |  |             |        |   |                       |   | 2,575   |                           |  |   | 2,394        |   |  |              |        |   |  |   | 4,969   |  
|Selling, general, and administrative                      |  |             | (353    | ) |                       |   | 10,231  |                           |  |   | 8,373        |   |  |              |        |   |  |   | 18,251  |  
|Depreciation and amortization of identifiable intangibles |  |             | 4,168   |   |                       |   | 5,503   |                           |  |   | 2,893        |   |  |              |        |   |  |   | 12,564  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                  |  |             | 3,815   |   |                       |   | 18,309  |                           |  |   | 13,660       |   |  |              |        |   |  |   | 35,784  |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gain on Extinguishment of Debt                            |  |             | 19,491  |   |                       |   |        |                           |  |   |             |   |  |              |        |   |  |   | 19,491  |  
|Equity in Earnings of Consolidated Subsidiaries           |  |             | (31,729 | ) |                       |   |        |                           |  |   |             |   |  |              | 31,729  |   |  |   |        |  
|Equity in Earnings of Unconsolidated Joint Venture        |  |             |        |   |                       |   |        |                           |  |   | 74           |   |  |              |        |   |  |   | 74      |  
|Interest Expense, net                                     |  |             | 10,133  |   |                       |   | (2,725  | )                         |  |   | 1,500        |   |  |              |        |   |  |   | 8,908   |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (Loss) Before Income Taxes                         |  |             | (17,031 | ) |                       |   | (14,496 | )                         |  |   | (16,396      | ) |  |              | 31,729  |   |  |   | (16,194 | )
|Income Tax Expense (Benefit)                              |  |             | (565    | ) |                       |   | 34      |                           |  |   | 803          |   |  |              |        |   |  |   | 272     |  
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net Income (Loss)                                         |  | $           | (16,466 | ) |                       | $ | (14,530 | )                         |  | $ | (17,199      | ) |  | $            | 31,729  |   |  | $ | (16,466 | )
|                                                          |  |             |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(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

Three Months Ended March 31, 2008

(In thousands)



|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------- |  | ---------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                          |  | Issuers(1) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|Operating Revenues                                        |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Sales                                                     |  | $          |        |   |                       | $ | 130,968 |                           |  | $ | 168,203      |   |  | $            | (42,883 | ) |  | $ | 256,288 |  
|Other                                                     |  |            |        |   |                       |   |        |                           |  |   | 10,573       |   |  |              |        |   |  |   | 10,573  |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating revenues                                  |  |            |        |   |                       |   | 130,968 |                           |  |   | 178,776      |   |  |              | (42,883 | ) |  |   | 266,861 |  
|Cost of Goods Sold                                        |  |            | 1,390   |   |                       |   | 98,514  |                           |  |   | 161,055      |   |  |              | (42,883 | ) |  |   | 218,076 |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Gross Profit                                              |  |            | (1,390  | ) |                       |   | 32,454  |                           |  |   | 17,721       |   |  |              |        |   |  |   | 48,785  |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Operating Expenses                                        |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Research and development                                  |  |            |        |   |                       |   | 5,444   |                           |  |   | 2,474        |   |  |              |        |   |  |   | 7,918   |  
|Selling, general, and administrative                      |  |            | 17      |   |                       |   | 15,547  |                           |  |   | 9,891        |   |  |              |        |   |  |   | 25,455  |  
|Depreciation and amortization of identifiable intangibles |  |            | 5,621   |   |                       |   | 5,382   |                           |  |   | 3,649        |   |  |              |        |   |  |   | 14,652  |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                  |  |            | 5,638   |   |                       |   | 26,373  |                           |  |   | 16,014       |   |  |              |        |   |  |   | 48,025  |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Equity in Earnings of Consolidated Subsidiaries           |  |            | 7,654   |   |                       |   |        |                           |  |   |             |   |  |              | (7,654  | ) |  |   |        |  
|Equity in Earnings of Unconsolidated Joint Venture        |  |            |        |   |                       |   |        |                           |  |   | 61           |   |  |              |        |   |  |   | 61      |  
|Interest Expense, net                                     |  |            | 10,965  |   |                       |   | (2,567  | )                         |  |   | 1,987        |   |  |              |        |   |  |   | 10,385  |  
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Income (Loss) Before Income Taxes                         |  |            | (10,339 | ) |                       |   | 8,648   |                           |  |   | (219         | ) |  |              | (7,654  | ) |  |   | (9,564  | )
|Income Tax Expense (Benefit)                              |  |            | (929    | ) |                       |   |        |                           |  |   | 775          |   |  |              |        |   |  |   | (154    | )
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  
|Net Income (Loss)                                         |  | $          | (9,410  | ) |                       | $ | 8,648   |                           |  | $ | (994         | ) |  | $            | (7,654  | ) |  | $ | (9,410  | )
|                                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |  |              |         |   |  |   |         |  



|(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

Three Months Ended March 31, 2009

(In thousands)



|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                                                  |  | Issuers(1)  |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                                  |  | (Unaudited) |        
|Cash flows provided by (used in) operating activities                             |  | $           | (17,220 | ) |                       | $ | 1,285   |                           |  | $ | (19,286      | ) |              | $ |  |  | $ | (35,221 | )
|                                                                                  |  |             |         |   |                      
|Cash flows used in investing activities                                           |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Purchase of property, plant and equipment net of proceeds from sales of equipment |  |             |        |   |                       |   | (8,588  | )                         |  |   | 2,142        |   |              |   |  |  |   | (6,446  | )
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities                               |  |             |        |   |                       |   | (8,588  | )                         |  |   | 2,142        |   |              |   |  |  |   | (6,446  | )
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows provided by (used in) financing activities                             |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Borrowings under debt obligations                                                 |  |             | 3,000   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 3,000   |  
|Repayment of debt obligations                                                     |  |             | (61,345 | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (61,345 | )
|Proceeds from (payments on) intercompany loan                                     |  |             | 71,650  |   |                       |   | (51,783 | )                         |  |   | (19,867      | ) |              |   |  |  |   |        |  
|Net payment of insurance note payable                                             |  |             | 3,915   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 3,915   |  
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |             | 17,220  |   |                       |   | (51,783 | )                         |  |   | (19,867      | ) |              |   |  |  |   | (54,430 | )
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Effect of exchange rate difference on cash and cash equivalents                   |  |             |        |   |                       |   |        |                           |  |   | 7,546        |   |              |   |  |  |   | 7,546   |  
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net decrease in cash and cash equivalents                                         |  |             |        |   |                       |   | (59,086 | )                         |  |   | (29,465      | ) |              |   |  |  |   | (88,551 | )
|Cash and cash equivalents at beginning of period                                  |  |             |        |   |                       |   | 65,460  |                           |  |   | 35,936       |   |              |   |  |  |   | 101,396 |  
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period                                        |  | $           |        |   |                       | $ | 6,374   |                           |  | $ | 6,471        |   |              | $ |  |  | $ | 12,845  |  
|                                                                                  |  |             |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  



|(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

Three Months Ended March 31, 2008

(In thousands)



|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ---------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                                                 |  | Issuers(1) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Cash flows provided by (used in) operating activities                            |  | $          | 22,070  |   |                       | $ | (13,773 | )                         |  | $ | (58,598      | ) |              | $ |  |  | $ | (50,301 | )
|                                                                                 |  |            |         |   |                      
|Cash flows used in investing activities                                          |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Purchase of property, plant and equipment net ofproceeds from sales of equipment |  |            |        |   |                       |   | (2,516  | )                         |  |   | (657         | ) |              |   |  |  |   | (3,173  | )
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                                            |  |            |        |   |                       |   | (2,516  | )                         |  |   | (657         | ) |              |   |  |  |   | (3,173  | )
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows provided by (used in) financing activities                            |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Borrowings under debt obligations                                                |  |            | 55,000  |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 55,000  |  
|Repayment of debt obligations                                                    |  |            | (55,861 | ) |                       |   |        |                           |  |   |             |   |              |   |  |  |   | (55,861 | )
|Proceeds from cash contribution from member                                      |  |            | 10,000  |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 10,000  |  
|Proceeds from (payments on) intercompany loan                                    |  |            | (35,016 | ) |                       |   | 5,312   |                           |  |   | 29,704       |   |              |   |  |  |   |        |  
|Net payment of insurance note payable                                            |  |            | 3,807   |   |                       |   |        |                           |  |   |             |   |              |   |  |  |   | 3,807   |  
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities                              |  |            | (22,070 | ) |                       |   | 5,312   |                           |  |   | 29,704       |   |              |   |  |  |   | 12,946  |  
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Effect of exchange rate difference on cash and cash equivalents                  |  |            |        |   |                       |   |        |                           |  |   | (216         | ) |              |   |  |  |   | (216    | )
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Net decrease in cash and cash equivalents                                        |  |            |        |   |                       |   | (10,977 | )                         |  |   | (29,767      | ) |              |   |  |  |   | (40,744 | )
|Cash and cash equivalents at beginning of period                                 |  |            |        |   |                       |   | 11,152  |                           |  |   | 37,125       |   |              |   |  |  |   | 48,277  |  
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period                                       |  | $          |        |   |                       | $ | 175     |                           |  | $ | 7,358        |   |              | $ |  |  | $ | 7,533   |  
|                                                                                 |  |            |         |   |                       |   |         |                           |  |   |              |   |              |   |   |  |   |         |  



|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15. Subsequent Event

On April 9, 2009, TJ Chemical, purchased approximately $6.3 million face value of our 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon
purchasing our Notes, TJ Chemical contributed the purchased Notes to us. We are holding the Notes in treasury. Also on April 9, 2009, we purchased and retired approximately $0.7 million face value of our 8.125% Notes for cash consideration of
$0.3 million. We will record a gain of approximately $4.3 million related to these transactions in our 2009 second quarter results.



25



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##### Table of Contents

|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, 2008. 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 (in terms of both 2008 sales
revenues and sales volumes) 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, when 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 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 currently offer over 800 products to more than 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 manufacture products at six plants globally, including our flagship Belpre, Ohio plant in the United States, the largest SBC plant in the world, as
well as plants in Germany, France, The Netherlands, Brazil and Japan. The plant in Japan is operated by an unconsolidated manufacturing joint venture.

We serve three core end-use markets: (1) Advanced Materials; (2) Adhesives, Sealants and Coatings; and (3) Paving and Roofing. We also serve an emerging business category which includes our IR Latex
activity. Other markets include footwear; lubricant and fuel additive applications; and high styrenics.

Each of our end-uses 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 2008 sales, in each of our core end-use markets.

Recent Developments

New Innovations.Consistent with our strategy, we continue to lead
SBC innovation as evidenced by numerous developments announced across several of our core end-use markets throughout the first quarter of 2009. Below are our most recently announced product innovations.



26



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##### Table of Contents

In April 2009 we announced a series of new formulations designed to support lower Volatile Organic
Compound (VOC) requirements and reduce costs associated with contact adhesives. The unique structure of the styrenic block copolymers provides key advantages to formulators. The end block enables cohesion, good load bearing properties and
temperature resistance, while the center block promotes adhesion and elongation.

In March 2009 we announced the introduction of the
first high polymer content binder uniquely designed to enhance durability and safety of porous asphalt roads. The new tough binder has the capability to reduce aggregate loss (also known as raveling) which often results in increased road noise and
damage to cars caused by debris. Contractors and binder producers will now have the opportunity to increase polymer concentrations to enhance performance without sacrificing workability and compatibility. Kratons new polymer is
ideally suited for high performance asphalt road applications.

In February 2009 we announced Kraton G1643, a clear solution to the market
demand for materials with enhanced performance capabilities and lower system costs. Kraton G1643 is a very durable material and is highly compatible with polypropylene. It features excellent clarity and offers improved resistance to blushing
and cracking which often occur during transport of large molded parts such as totes and bins. Manufacturers using Kraton G1643 have the ability to reduce wall thickness, and this lowers overall material usage and production costs.

In January 2009 we announced the introduction of a new Kraton A family of polymers. Kraton A1535 is the first polymer in the new
Advantaged series to debut for global commercialization later this year. The new product family is halogen-free recyclable and FDA approved for direct food contact applications. The Advantaged polymers offer an expansion
of opportunities for TPE compounds in a variety of soft grip and other over-mold applications for markets that range from personal care to high tech electronics.In addition, Kraton A1535 can also be easily compounded with TPU materials
to reduce hardness and enhance flexibility.

Purchase of a portion of our 8.125% Notes.On March 16, 2009, we purchased
and extinguished $30 million face value of our 8.125% Notes for cash consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a gain on extinguishment of debt of approximately $19.5 million in the quarter ending
March 31, 2009 related to this transaction.

On April 9, 2009, TJ Chemical Holdings LLC, or TJ Chemical, purchased
approximately $6.3 million face value of our 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon purchasing our Notes, TJ Chemical contributed the purchased Notes to us. We are
holding the Notes in treasury. Also on April 9, 2009, we purchased and extinguished approximately $0.7 million face value of our 8.125% Notes for cash consideration of $0.3 million. We will record a gain on extinguishment of debt of
approximately $4.3 million related to these transactions in our 2009 second quarter results.

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 52%, 54% and 51% of our total cost of goods sold for the twelve months ended December 31, 2008, and
the three months ended March 31, 2009 and 2008, respectively. Other raw materials used in our production process include catalysts, solvents, stabilizers and various process control chemicals. The cost of these monomers has generally been
correlated to changes in crude prices and affected by global supply and demand and global economic conditions. After significant increases in the cost of these monomers through the third quarter of 2008, the market prices for these monomers
declined significantly late in the year and into the first quarter of 2009.

We believe that through our contractual arrangements with
suppliers, or through other arrangements, we can presently source adequate supplies of styrene, butadiene and isoprene at competitive, market-based prices. We can provide no assurances that our suppliers of raw materials will not terminate
applicable contracts at the



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expiration of their terms or that we will be able to obtain substitute contractual arrangements on comparable terms, or that we generally will be able to
source raw materials on an economic basis in the future. Our U.S. butadiene supply agreement with Shell Chemical expired as of April 30, 2009. We currently have access to adequate butadiene supplies at competitive market rates, and we are
currently engaged in efforts with various suppliers and potential suppliers to purchase ongoing and continuing supplies of butadiene for our U.S operations. We believe the current butadiene market dynamics are favorable for contract negotiations and
supply is available at reasonable terms on a spot basis.

Styrene, butadiene and isoprene used by our U.S. and European facilities are
primarily supplied by Shell Chemicals or its affiliates, LyondellBasell Industries, and other suppliers under long-term supply contracts with various expiration dates. Our Isoprene Sales Contract with Shell Chemical ends on December 31, 2009,
subject to termination as of that date or any date thereafter, on not less than seven (7) months prior written notice given by either party.

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.

International Operations and Currency Fluctuations.We operate a geographically diverse business serving customers in more than 60 countries from six manufacturing plants in six countries. For the quarter ended March 31,
2009, 43% of net product sales were generated from customers located in the Americas, 38% in Europe and 16% in the Asia Pacific region.

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

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. On February 18, 2009 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 47.3 million which expires on December 29, 2009. See Note 9(b) of Notes to Condensed Consolidated Financial Statements for further discussion.

In addition, 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.

Outlook

Our first quarter of 2009 sales volume declined 39% from the first quarter of 2008. Our current expectation for the second quarter of 2009 is that the
macro-economic environment will improve relative to the first quarter, but volume may likely continue to fall short of 2008 levels.



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RESULTS OF OPERATIONS

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



|                                                          |  |                             |         |   |      |   |         |  
|--------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                          |  | Three Months EndedMarch 31, |        
|                                                          |  | 2009                        |         |   | 2008 |  
|Operating Revenues                                        |  |                             |         |   |      |   |         |  
|Sales                                                     |  | $                           | 177,866 |   |      | $ | 256,288 |  
|Other                                                     |  |                             | 7,092   |   |      |   | 10,573  |  
|                                                          |  |                             |         |   |      |   |         |  
|Total operating revenues                                  |  |                             | 184,958 |   |      |   | 266,861 |  
|Cost of Goods Sold                                        |  |                             | 176,025 |   |      |   | 218,076 |  
|                                                          |  |                             |         |   |      |   |         |  
|Gross Profit                                              |  |                             | 8,933   |   |      |   | 48,785  |  
|                                                          |  |                             |         |   |      |   |         |  
|Operating Expenses                                        |  |                             |         |   |      |   |         |  
|Research and development                                  |  |                             | 4,969   |   |      |   | 7,918   |  
|Selling, general and administrative                       |  |                             | 18,251  |   |      |   | 25,455  |  
|Depreciation and amortization of identifiable intangibles |  |                             | 12,564  |   |      |   | 14,652  |  
|                                                          |  |                             |         |   |      |   |         |  
|Total operating expenses                                  |  |                             | 35,784  |   |      |   | 48,025  |  
|                                                          |  |                             |         |   |      |   |         |  
|Gain on Extinguishment of Debt                            |  |                             | 19,491  |   |      |   |        |  
|Equity in Earnings of Unconsolidated Joint Venture        |  |                             | 74      |   |      |   | 61      |  
|Interest Expense, net                                     |  |                             | 8,908   |   |      |   | 10,385  |  
|                                                          |  |                             |         |   |      |   |         |  
|Loss Before Income Taxes                                  |  |                             | (16,194 | ) |      |   | (9,564  | )
|Income Tax Expense (Benefit)                              |  |                             | 272     |   |      |   | (154    | )
|                                                          |  |                             |         |   |      |   |         |  
|Net Loss                                                  |  | $                           | (16,466 | ) |      | $ | (9,410  | )
|                                                          |  |                             |         |   |      |   |         |  

Three Months Ended March 31, 2009 Compared to Same Period in 2008

Operating Revenues

Operating revenues for the three
months ended March 31, 2009 decreased $81.9 million or 30.7% compared to the same period in 2008. The decrease was driven primarily by:

Sales decreased $78.4 million or 30.6%. Sales volume amounted to 47.1 kT in 2009 compared to 76.8 kT in 2008. The 29.7 kT or 39% decline in sales volume reduced sales by $93.7 million. The impact of changes in foreign currency exchange
rates reduced sales by $13.5 million. Partially offsetting these decreases in sales was a $28.8 million increase in global product sales prices and changes in product mix.

The following are the primary factors influencing our sales volume:



| |  |  | In our Adhesives, Sealants and Coatings end-use market, we experienced a decrease in sales volume due to weakness in demand for commercial tape applications which
began in the second-half of 2008 and has continued into the first quarter of 2009. This weakness includes aggressive de-stocking by our customers that began in the fourth quarter of 2008, and was primarily due to the global economic
conditions. In addition, raw material availability negatively impacted sales volume in the second half of 2008 which has not been recovered.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In our Advanced Materials end-use market, our sales volume into automotive and consumer applications declined commensurate with the global economic conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In our Paving and Roofing end-use market, roofing applications were lower due to the overall decline in construction activity. We also experienced a decline in
asphalt modification volume, largely due to delays associated with the uncertainty around the impact of the U.S. Government stimulus spending.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Other revenue decreased $3.5 million or 32.9%. Other revenue primarily consists of the sales of small
quantities of by-products resulting from the manufacturing process of isoprene rubber, which is offset by a corresponding cost included in cost of goods sold.

Cost of Goods Sold

Cost of goods sold for three months ended March 31, 2009 decreased $42.1 million or 19.3% compared
to the same period in 2008. The decrease was driven primarily by:



| |  |  | $67.8 million decline in cost of goods sold directly related to the decline in sales volume,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | $10.6 million decrease from changes in foreign currency exchange rates,
| | - |  | -----------------------------------------------------------------------



| |  |  | $3.5 million decrease due to lower by-product costs, partially offset by
| | - |  | ------------------------------------------------------------------------



| |  |  | $39.8 million increase in monomer and other production costs.
| | - |  | -------------------------------------------------------------

As a percentage of operating revenues, cost of goods sold increased to 95.2% from 81.7%.

Gross Profit

Gross profit for the three months ended March 31, 2009 decreased $39.9 million or 81.7% compared to the same period in 2008. As a percentage of
operating revenues, gross profit decreased to 4.8% from 18.3%.

Operating Expenses

Operating expenses for the three months ended March 31, 2009 decreased $12.2 million or 25.5% compared to the same period in 2008. The decrease was
driven primarily by:

Research and development decreased $2.9 million or 37.2%. The decrease was largely due to the costs associated with
the realignment of our Research and Technology Service organization in 2008. As a percentage of operating revenues, research and development decreased to 2.7% from 3%.

Selling, general and administrative decreased $7.2 million or 28.3%. The decrease was primarily due to lower staffing-related costs of $5.8 million. As a percentage of operating revenues, selling, general and
administrative increased to 9.9% from 9.5%.

Depreciation and amortization of identifiable intangibles decreased $2.1 million or 14.3%. The
decrease in depreciation and amortization expense is primarily related to $1.5 million in depreciation for the SIS plant at our Pernis facility that we exited in September 2007 and the impact of changes in foreign currency exchange rates of $0.5
million.

Interest expense, net.

Interest expense, net for the three months ended March 31, 2009 decreased $1.5 million or 14.2% to $8.9 million compared to $10.4 million during the same period in 2008. The decrease was primarily due to lower interest rates and
amortized gains from our interest rate swap that was settled in June 2008. The average debt balances outstanding were $566.2 million and $562.3 million, respectively. The effective interest rates on our debt during the same periods were 6.7% and
7.4%, respectively.

Income tax expense

Income tax expense was $0.3 million for three months ended March 31, 2009, as compared to income tax benefit of $0.2 million for the three months ended March 31, 2008. Income tax expense increased by $0.5 million primarily due to
an increase of losses in those jurisdictions where we do not record tax benefits for certain net



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operating loss carryforwards generated during that period and a change in the mix of earnings of our various subsidiaries. The effective tax rate was (1.7)%
for the three months ended March 31, 2009, as compared to 1.6% for the three months ended March 31, 2008.

Net loss

Net loss was $16.5 million for the three months ended March 31, 2009, a decrease of $7.1 million compared to a net loss of $9.4 million in the same
period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Known Trends and Uncertainties

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.

Credit markets in the United States have experienced varying degrees of credit volatility and contraction that have limited and reduced our ability to
explore financing options. This volatility has been caused by many factors, including concerns about creditworthiness in the overall market, especially the financial services sector, which has culminated in the failure or consolidation of several
large financial and investment institutions. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the
stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investor to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and
international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, to timely replace maturing liabilities, and access the capital markets to meet liquidity
needs, resulting in adverse effects on our financial condition and results of operations. During this credit contraction, we have been able to access borrowings available to us in amounts sufficient to fund liquidity needs.

Based upon current and anticipated levels of operations, we believe that cash flow from operations of our subsidiaries and borrowings available to us
will be adequate for the foreseeable future for us to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our 8.125% Notes and senior secured credit facility. However, these cash
flows are subject to a number of factors, including, but not limited to, earnings sensitivities to the cost of raw materials, seasonality, currency transactions and currency translation. Since feedstock costs represent approximately 50% of our cost
of production, in periods of rising feedstock costs, we consume cash in operating activities due to increases in accounts receivable and inventory, partially offset by increased value of accounts payable. Conversely, in periods where feedstock costs
are declining, Kraton generates cash flow from decreases in working capital. We currently expect to have lower levels of working capital in 2009. There can be no assurance that continued or increased volatility and disruption in the global capital
and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or at all.

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. At March 31, 2009, we had $12.8 million of cash and cash equivalents. This available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of invested cash and
cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can
provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. 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 $3.0 million at March 31, 2009. Under the terms of our



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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 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 beginning March 31, 2010 and continuing thereafter. In addition, we
are required to maintain a fiscal quarter end leverage ratio not to exceed 4.45 beginning March 31, 2009 through September 30, 2009 and 4.00 beginning December 31, 2009 and continuing thereafter.

Our failure to comply with any of these financial covenants would give rise to a default under the senior secured credit facility. As of March 31,
2009, 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 8.125% Notes. The maintenance of these
financial ratios is based on our level of profitability. If the 2009 global economic environment worsens, it would adversely impact our profitability and our ability to meet our covenants. If we are unable to satisfy such covenants or other
provisions at any future time we would need to seek an amendment or waiver of such financial covenants or other provisions. The respective lenders under the senior secured credit facility may not consent to any amendment or waiver requests that we
may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. In the event that we were unable to obtain any such waiver or amendment and we were not able to refinance or repay our debt instruments, our
inability to meet the financial covenants or other provisions of the senior secured credit facility would constitute an event of default under our debt instruments, including the senior secured credit facility, which would permit the bank lenders to
accelerate the senior secured credit facility.

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 cash purchases, in the open market, privately negotiated transactions or otherwise, of Kraton indebtedness up to amounts permitted under our senior secured credit facility.
Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. On March 16, 2009, we purchased and extinguished $30 million face value of our 8.125% Notes for cash
consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a gain on extinguishment of debt of approximately $19.5 million in the quarter ended March 31, 2009 related to the purchase and extinguishment of these
8.125% Notes. In April 2009 TJ Chemical purchased approximately $6.3 million face value of our 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon purchasing our Notes, TJ Chemical
contributed the purchased Notes to us. We are holding the Notes in treasury. Also in April 2009 we purchased and retired approximately $0.7 million face value of our 8.125% Notes for cash consideration of $0.3 million. We will record a gain of
approximately $4.3 million related to these transactions in our 2009 second quarter results.

Operating Cash Flows

Net cash used in operating activities decreased $15.1 million to $35.2 million for the three months ended March 31, 2009 compared to $50.3 million
during the same period in 2008. This change was driven primarily by:



| |  |  | Decreased inventory and accounts receivable balances, partially offset by decreased accounts payable balances primarily related to decreased costs of feedstocks and
sales volume.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing Cash Flows

Net cash flows used in investing activities totaled $6.4 million for the three months ended March 31, 2009 compared to net cash flows used in investing activities of $3.2 million during the same period
in 2008. This $3.2 million increase was primarily driven by timing of capital expenditures.

Expected Capital
Expenditures.We are forecasting 2009 expenditures of approximately $45.0 million. These capital expenditures are primarily for maintenance, infrastructure, and cost reduction projects. Our minimum annual capital expenditure levels to maintain
and achieve incremental improvements in our



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facilities in each of the next three to five years are expected to be approximately $12 million to $16 million. Included in our 2009 estimated
expenditures:

Belpre Plant Instrumentation Upgrade.We are upgrading certain systems and operating controls at our
Belpre, Ohio facility. This project is designed to significantly improve the effectiveness, competitiveness and operating efficiency of the Belpre plant. The project began in the second-half of 2008 and will be completed in distinct phases extending
into 2012, with 2009 spending estimated at $10.5 million and the total project spending estimated at $40.0 million.

Global Enterprise Resource Plan.We are investing in a Global Enterprise Resource Plan (ERP) which began in January 2009 with a cost of approximately $15 million to be incurred in 2009. We have undertaken this project to upgrade to
an ERP implementation utilizing a single global system and implementing best practices for our industry. This will result in Kraton having a world-class global ERP system. The ERP implementation is projected to be completed by January 2010.

Financing Cash Flows and Liquidity

Kratons consolidated capital structure as of March 31, 2009, was 74% debt and 26% members equity.

Net cash used
in financing activities totaled $54.4 million for the three months ended March 31, 2009 compared to $12.9 million net cash provided by financing activities during the same period in 2008. This change was driven primarily by:



| |  |  | $10.5 million to purchase and extinguish $30 million face value of our 8.125% Notes,
| | - |  | ------------------------------------------------------------------------------------



| |  |  | $47 million repayment on the Revolver in March 2009.
| | - |  | ----------------------------------------------------

Description of Our Indebtedness.See Note 7 of Notes to Condensed Consolidated Financial Statements for a discussion of our debt facilities and related financial and other covenants.

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, 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.



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

We had no material operating expenditures for environmental fines, penalties, government imposed remedial or
corrective actions in the presented periods of 2009 and 2008.

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 2008 Annual Report on Form 10-K. There has been no material change since that date.

Off-Balance Sheet Transactions

We are not involved in any material off-balance sheet transactions as of March 31, 2009.

OTHER ISSUES

New Accounting Pronouncements

The following new accounting pronouncements have been issued, but have not yet been adopted as of March 31, 2009:

FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets. In December 2008, the FASB issued
FSP No. FAS 132(R)-1 which provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan and requires employers to provide more transparency about the assets held by the retirement
plan and the concentrations of risk in those plans. FSP No. FAS 132(R)-1 is effective for financial statements issued for fiscal years beginning after December 15, 2009, and interim periods within those fiscal years. For Kraton, FSP No. FAS
132(R)-1 is effective as of January 1, 2010. Kraton is currently evaluating the effect of adopting FSP No. FAS 132(R)-1.



|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 $324.2 million of variable rate debt outstanding under our senior secured credit facility as of March 31, 2009. The debt bears interest at the adjusted Eurodollar rate plus 2.00% per annum or at our option, the base
rate plus 1.00% per annum. In addition, we have $3.0 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 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate
fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, which resulted in a total cost of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the exposure of the
variability of future cash flows subject to the variable quarterly interest rates on $325 million of the term loan portion of the Term Facility. We settled the swap early in June 2008 and realized cash proceeds of $4.6 million,



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resulting in a gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income at March 31, 2009 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. In October 2008, we entered into a $320 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 2.99%, which resulted in a total cost of 4.99%, and a term through December 31, 2009. 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 million of the term loan portion of the Term Facility.

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 February, 2009 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 47.3 million which expires on December 29, 2009.

Credit Risk. Our 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, we analyze the counterparties financial condition prior to entering into an agreement, establish credit limits and monitor 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.

Commodity Price Risk.We are subject to commodity price risk under agreements for the supply of our
raw materials and energy. From time to time we may 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 March 31, 2009. 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 March 31, 2009 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 11 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 26, 2009, 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.
|------- | ---------



|              |  |                                                                                                                                                                                                                                                                                      
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |                                                                                                                                                                                                                                                                                      
|10.1          |  | Amendment Number 3 to Isoprene Sales Contract dated April 24, 2009 between Shell Chemical LP and Kraton Polymers U.S. LLC f/k/a Shell Elastomers LLC (incorporated by reference from Exhibit
99.1 to Kratons Current Report on Form 8-K filed with the Commission on April 29, 2009)
|              | 
|10.2          |  | Amendment Number 2 to Isoprene Sales Contract dated March 26, 2009 between Shell Chemical LP and Kraton Polymers U.S. LLC f/k/a Shell Elastomers LLC (incorporated by reference from
Exhibit 99.1 to Kratons Current Report on Form 8-K filed with the Commission on March 30, 2009)
|              | 
|*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: May 13, 2009 |  | /s/    KEVIN M.
FOGARTY                                       
|                   |  | Kevin M. Fogarty President and Chief Executive Officer        
|Date: May 13, 2009 |  | /s/    STEPHEN E.
TREMBLAY                                    
|                   |  | Stephen E. Tremblay Vice President and Chief Financial Officer



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