**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**Form 10-Q**

** **
|  **(Mark One)**                                                                                                                              | ** **                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                        |
| **For the quarterly period ended March 31, 2007**                                                                                                 |
| ** **                                                                                                                                        |
| **OR**                                                                                                                                            |
| ** **                                                                                                                                        |
| o                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                        |
| **For the transition period  from         to         ** |

 

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| Commission   File Number | ** ** | **Exact Name of Registrant as Specified in its  Charter, Principal Office Address and   Telephone Number** | ** ** | **State of Incorporation** | ** ** | **I.R.S. Employer Identification  No.** |
|--------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|
| **001-32427**            | ** ** | **Huntsman Corporation**                                                                                   | ** ** | **Delaware**               | ** ** | **42-1648585**                          |
|                     |       | **500 Huntsman Way**                                                                                       |       |                       |       |                                    |
|                     |       | **Salt Lake City, Utah 84108**                                                                             |       |                       |       |                                    |
|                     |       | **(801) 584-5700**                                                                                         |       |                       |       |                                    |
|                     |       | ** **                                                                                                 |       |                       |       |                                    |
| **333-85141**            |       | **Huntsman International LLC**                                                                             |       | **Delaware**               | ** ** | **87-0630358**                          |
|                     |       | **500 Huntsman Way**                                                                                       |       |                       |       |                                    |
|                     |       | **Salt Lake City, Utah 84108**                                                                             |       |                       |       |                                    |
|                     |       | **(801) 584-5700**                                                                                         |       |                       |       |                                    |
|                     |       |                                                                                                       |       |                       |       |                                    |

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Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
| Huntsman Corporation       | YES x | NO o |
|----------------------------|------------|-----------|
| Huntsman International LLC | YES x | NO o |

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Huntsman Corporation       | Large accelerated filer  x | Accelerated filer o | Non-accelerated filer   o |
|----------------------------|----------------------------|---------------------|--------------------------------|
| Huntsman International LLC | Large accelerated filer  o | Accelerated filer o | Non-accelerated filer   x |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
| Huntsman Corporation       | YES o | NO x |
|----------------------------|------------|-----------|
| Huntsman International LLC | YES o | NO x |

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On May 1, 2007,221,901,565 shares of common stock of Huntsman Corporation wereoutstanding and 2,728 units of membership interests of Huntsman InternationalLLC (“Huntsman International”) were outstanding. There is no establishedtrading market for Huntsman International’s units of membership interests. Allof Huntsman International’s units of membership interests are held by HuntsmanCorporation.

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This QuarterlyReport on Form 10-Q presents information for two registrants: HuntsmanCorporation and Huntsman International. Huntsman International is a whollyowned subsidiary of Huntsman Corporation and is the principal operating companyof Huntsman Corporation. The information reflected in this Quarterly Report onForm 10-Q is equally applicable to both Huntsman Corporation and HuntsmanInternational, except where otherwise indicated. Huntsman International meetsthe conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Qand, to the extent applicable, is therefore filing this form with a reduceddisclosure format.

 

 

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**HUNTSMANCORPORATION AND SUBSIDIARIES****HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES****QUARTERLY REPORT ON FORM 10-Q FOR THEQUARTERLY PERIOD****ENDED MARCH 31, 2007**

**TABLE OFCONTENTS**
| PART I    |   | FINANCIAL  INFORMATION                                                                      |   |   |   |
|-----------|--------|---------------------------------------------------------------------------------------------|--------|--------|--------|
| ITEM  1.  |   | Financial  Statements:                                                                      |   |   |   |
|      |   | Huntsman  Corporation and Subsidiaries:                                                     |   |   |   |
|      |   | Condensed Consolidated Balance Sheets (Unaudited)                                           |   |   |   |
|      |   | Condensed Consolidated Statements of Operations and  Comprehensive Income (Unaudited)       |   |   |   |
|      |   | Condensed Consolidated Statements of Cash Flows  (Unaudited)                                |   |   |   |
|      |   | Huntsman  International LLC and Subsidiaries:                                               |   |   |   |
|      |   | Condensed Consolidated Balance Sheets (Unaudited)                                           |   |   |   |
|      |   | Condensed Consolidated Statements of Operations and  Comprehensive Income (Unaudited)       |   |   |   |
|      |   | Condensed Consolidated Statements of Cash Flows  (Unaudited)                                |   |   |   |
|      |   | Huntsman  Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:     |   |   |   |
|      |   | Notes to  Condensed Consolidated Financial Statements (Unaudited)                           |   |   |   |
| ITEM 2.   |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |   |   |
| ITEM 3.   |   | Quantitative and Qualitative Disclosures About Market  Risk                                 |   |   |   |
| ITEM 4.   |   | Controls and Procedures                                                                     |   |   |   |
| PART  II  |   | OTHER  INFORMATION                                                                          |   |   |   |
| ITEM  1.  |   | Legal  Proceedings                                                                          |   |   |   |
| ITEM  1A. |   | Risk  Factors                                                                               |   |   |   |
| ITEM 6.   |   | Exhibits                                                                                    |   |   |   |

 

 

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**PART I. FINANCIAL INFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

**HUNTSMAN CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)****(In Millions, Except Share and Per ShareAmounts)**
| ** **                                                                                                                                                                      | ** ** | **March 31,   2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                      |       |                                 |       |                              |       |
| **Current assets:**                                                                                                                                                             |       |                                 |       |                              |       |
| Cash and cash  equivalents                                                                                                                                                      |       | $                                    | 143.5      |                              | $          | 263.2 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $40.2 and $39.0,  respectively)                                                                                 |       | 1,385.1                              |       | 1,243.2                           |       |
| Accounts  receivable from affiliates                                                                                                                                            |       | 15.7                                 |       | 14.1                              |       |
| Inventories, net                                                                                                                                                                |       | 1,581.8                              |       | 1,520.1                           |       |
| Prepaid expenses                                                                                                                                                                |       | 46.2                                 |       | 55.7                              |       |
| Deferred income  taxes                                                                                                                                                          |       | 62.9                                 |       | 64.6                              |       |
| Other current  assets                                                                                                                                                           |       | 170.5                                |       | 175.7                             |       |
| **Total  current assets**                                                                                                                                                       |       | 3,405.7                              |       | 3,336.6                           |       |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| Property, plant and  equipment, net                                                                                                                                             |       | 4,106.7                              |       | 4,059.4                           |       |
| Investment in unconsolidated  affiliates                                                                                                                                        |       | 212.7                                |       | 201.0                             |       |
| Intangible assets, net                                                                                                                                                          |       | 186.2                                |       | 187.6                             |       |
| Goodwill                                                                                                                                                                        |       | 91.7                                 |       | 90.2                              |       |
| Deferred income taxes                                                                                                                                                           |       | 208.3                                |       | 190.4                             |       |
| Other noncurrent assets                                                                                                                                                         |       | 402.1                                |       | 379.7                             |       |
| **Total  assets**                                                                                                                                                               |       | $                                    | 8,613.4    |                              | $          | 8,444.9 |   |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                  |       |                                 |       |                              |       |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| **Current liabilities:**                                                                                                                                                        |       |                                 |       |                              |       |
| Accounts payable                                                                                                                                                                |       | $                                    | 1,104.5    |                              | $          | 1,006.2 |   |
| Accounts payable  to affiliates                                                                                                                                                 |       | 12.4                                 |       | 12.0                              |       |
| Accrued  liabilities                                                                                                                                                            |       | 821.6                                |       | 857.6                             |       |
| Deferred income  taxes                                                                                                                                                          |       | 8.1                                  |       | 9.4                               |       |
| Current portion  of long-term debt                                                                                                                                              |       | 178.8                                |       | 187.9                             |       |
| **Total  current liabilities**                                                                                                                                                  |       | 2,125.4                              |       | 2,073.1                           |       |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| Long-term debt                                                                                                                                                                  |       | 3,516.0                              |       | 3,457.4                           |       |
| Deferred income taxes                                                                                                                                                           |       | 193.5                                |       | 192.6                             |       |
| Other noncurrent  liabilities                                                                                                                                                   |       | 963.8                                |       | 955.8                             |       |
| **Total  liabilities**                                                                                                                                                          |       | 6,798.7                              |       | 6,678.9                           |       |
| ** **                                                                                                                                                                      |       |                                 |       |                              |       |
| Minority interests in  common stock of consolidated subsidiaries                                                                                                                |       | 30.3                                 |       | 29.4                              |       |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| **Commitments and contingencies  (Notes 13 and 14)**                                                                                                                            |       |                                 |       |                              |       |
|                                                                                                                                                                            |       |                                 |       |                              |       |
| **Stockholders’ equity:**                                                                                                                                                  |       |                                 |       |                              |       |
| Common stock  $0.01 par value, 1,200,000,000 shares authorized, 221,901,565 and 221,549,461  issued and 220,934,763 and 220,652,429 outstanding in 2007 and 2006,  respectively |       | 2.2                                  |       | 2.2                               |       |
| Mandatory  convertible preferred stock $0.01 par value, 100,000,000 shares authorized,  5,750,000 issued and outstanding                                                        |       | 287.5                                |       | 287.5                             |       |
| Additional  paid-in capital                                                                                                                                                     |       | 2,810.5                              |       | 2,798.4                           |       |
| Unearned  stock-based compensation                                                                                                                                              |       | (19.2                                | )          | (12.5                             | )          |
| Accumulated  deficit                                                                                                                                                            |       | (1,255.4                             | )          | (1,277.6                          | )          |
| Accumulated  other comprehensive loss                                                                                                                                           |       | (41.2                                | )          | (61.4                             | )          |
| **Total  stockholders’ equity**                                                                                                                                            |       | 1,784.4                              |       | 1,736.6                           |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                            |       | $                                    | 8,613.4    |                              | $          | 8,444.9 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

1

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS AND****COMPREHENSIVE INCOME (UNAUDITED)****(Dollars In Millions)**

 
| ** **                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                             |       |                                                 | ** ** |   | ** ** |
| **Revenues:**                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                   |       | $                                                    | 2,629.3    | ** ** | $ | 2,641.9 | ** ** |
| Related party sales                                                              |       | 18.0                                                 |       | 14.8 |   |
| **Total revenues**                                                               |       | 2,647.3                                              |       | 2,656.7 |   |
| **Cost of  goods sold**                                                          |       | 2,240.0                                              |       | 2,262.9 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **Gross  profit**                                                                |       | 407.3                                                |       | 393.8 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **Operating  expenses:**                                                         |       |                                                 |       |   |   |
| Selling, general and administrative                                              |       | 219.0                                                |       | 167.6 |   |
| Research and development                                                         |       | 33.3                                                 |       | 27.3 |   |
| Other operating expense                                                          |       | 5.9                                                  |       | 0.5 |   |
| Restructuring, impairment and plant closing costs                                |       | 12.2                                                 |       | 7.7 |   |
| Total expenses                                                                   |       | 270.4                                                |       | 203.1 |   |
| **Operating  income**                                                            |       | 136.9                                                |       | 190.7 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| Interest  expense, net                                                           |       | (73.8                                                | )          | (86.8 | ) |
| Loss on accounts  receivable securitization program                              |       | (5.4                                                 | )          | (2.3 | ) |
| Equity in income  of investment in unconsolidated affiliates                     |       | 2.2                                                  |       | 0.7 |   |
| Loss on early  extinguishment of debt                                            |       | (1.4                                                 | )          | — |   |
| Other income  (expense)                                                          |       | 0.5                                                  |       | (0.3 | ) |
|                                                                             |       |                                                 |       |   |   |
| **Income  from continuing operations before income taxes and minority interest** |       | 59.0                                                 |       | 102.0 |   |
| Income tax  expense                                                              |       | (13.0                                                | )          | (15.5 | ) |
| Minority  interest in subsidiaries’ income                                  |       | (0.4                                                 | )          | (0.4 | ) |
| **Income  from continuing operations**                                           |       | 45.6                                                 |       | 86.1 |   |
| Loss from  discontinued operations, net of tax                                   |       | (1.4                                                 | )          | (17.1 | ) |
| **Income  before extraordinary gain**                                            |       | 44.2                                                 |       | 69.0 |   |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 2.4                                                  |       | — |   |
| **Net  income**                                                                  |       | $                                                    | 46.6       |   | $ | 69.0 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **Net  income**                                                                  |       | $                                                    | 46.6       |   | $ | 69.0 |   |
| Other  comprehensive income                                                      |       | 20.2                                                 |       | 31.0 |   |
| **Comprehensive income**                                                         |       | $                                                    | 66.8       |   | $ | 100.0 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

(continued)

2

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS AND****COMPREHENSIVE INCOME(UNAUDITED)****(Continued)****(In Millions, Except PerShare Amounts)**

 
| ** **                                                       | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                             |       |                                                 | ** ** |   | ** ** |
| **Basic  income (loss) per share:**                              |       |                                                 |       |   |   |
| Income from  continuing operations                               |       | $                                                    | 0.21       |   | $ | 0.39 |   |
| Loss from  discontinued operations, net of tax                   |       | (0.01                                                | )          | (0.08 | ) |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.01                                                 |       | — |   |
| Net income                                                       |       | $                                                    | 0.21       |   | $ | 0.31 |   |
| Weighted average  shares                                         |       | 220.8                                                |       | 220.6 |   |
|                                                             |       |                                                 |       |   |   |
| **Diluted  income (loss) per share:**                            |       |                                                 |       |   |   |
| Income from  continuing operations                               |       | $                                                    | 0.20       |   | $ | 0.37 |   |
| Loss from  discontinued operations, net of tax                   |       | (0.01                                                | )          | (0.07 | ) |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.01                                                 |       | — |   |
| Net income                                                       |       | $                                                    | 0.20       |   | $ | 0.30 |   |
| Weighted average  shares                                         |       | 233.4                                                |       | 233.1 |   |
|                                                             |       |                                                 |       |   |   |
| **Dividends  paid per share**                                    |       | $                                                    | 0.10       |   | $ | — |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

 

3

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)****(Dollars in Millions)**
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating Activities:**                                                          | ** ** | ** **                                           | ** ** | ** ** |   |
| Net income                                                                         |       | $                                                    | 46.6       |   | $ | 69.0 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                 |       |   |   |
| Extraordinary  gain on the acquisiton of business, net of tax                      |       | (2.4                                                 | )          | — |   |
| Equity in income  of unconsolidated affiliates                                     |       | (2.2                                                 | )          | (0.7 | ) |
| Depreciation and  amortization                                                     |       | 109.2                                                |       | 117.0 |   |
| Provision for  losses on accounts receivable                                       |       | 2.7                                                  |       | 2.2 |   |
| Loss (gain) on  disposal of assets                                                 |       | (3.2                                                 | )          | (0.2 | ) |
| Loss on early  extinguishment of debt                                              |       | 1.4                                                  |       | — |   |
| Noncash interest  expense (income)                                                 |       | 1.0                                                  |       | (1.7 | ) |
| Noncash  restructuring, impairment and plant closing costs                         |       | 5.8                                                  |       | 2.0 |   |
| Deferred income  taxes                                                             |       | 4.2                                                  |       | 7.3 |   |
| Net unrealized  (gain) loss on foreign currency transactions                       |       | (4.8                                                 | )          | 6.7 |   |
| Stock-based  compensation                                                          |       | 5.3                                                  |       | 3.5 |   |
| Minority  interest in subsidiaries’ income                                    |       | 0.4                                                  |       | 0.4 |   |
| Other, net                                                                         |       | 3.2                                                  |       | (1.3 | ) |
| Changes in operating  assets and liabilities:                                      |       |                                                 |       |   |   |
| Accounts and  notes receivable                                                     |       | (103.1                                               | )          | 69.4 |   |
| Inventories, net                                                                   |       | (59.9                                                | )          | (12.7 | ) |
| Prepaid expenses                                                                   |       | 10.3                                                 |       | 6.6 |   |
| Other current  assets                                                              |       | 5.0                                                  |       | 46.9 |   |
| Other noncurrent  assets                                                           |       | (21.7                                                | )          | 10.5 |   |
| Accounts payable                                                                   |       | 46.1                                                 |       | (71.2 | ) |
| Accrued  liabilities                                                               |       | (68.0                                                | )          | (156.6 | ) |
| Other noncurrent  liabilities                                                      |       | (6.7                                                 | )          | (16.8 | ) |
| **Net cash (used in) provided by  operating activities**                           |       | (30.8                                                | **)**      | 80.3 |   |
| ** **                                                                         |       |                                                 | ** ** |   |   |
| **Investing Activities:**                                                          |       |                                                 |       |   |   |
| Capital expenditures                                                               |       | (105.2                                               | )          | (104.1 | ) |
| Proceeds from sale of  assets                                                      |       | 15.8                                                 |       | 8.5 |   |
| Investment in  unconsolidated affiliates, net                                      |       | (13.0                                                | )          | (17.1 | ) |
| Proceeds from  government securities, restricted as to use                         |       | 3.6                                                  |       | 3.6 |   |
| Other, net                                                                         |       | (0.4                                                 | )          | — |   |
| **Net cash used in investing activities**                                          |       | (99.2                                                | )          | (109.1 | ) |
|                                                                                    |            |                                                      |            |  |  |  |  |

 

See accompanying notes to condensed consolidatedfinancial statements (unaudited).

(continued)

4

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)****(Continued)****(Dollars in Millions)**
| ** **                                                          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Financing  Activities:**                                          | ** ** | ** **                                           | ** ** | ** ** |   |
| Net borrowings  under revolving loan facilities                     |       | $                                                    | 93.7       |   | $ | 34.0 |   |
| Net borrowings  from overdraft facilities and other short-term debt |       | 12.3                                                 |       | 8.1 |   |
| Repayments of  long-term debt                                       |       | (225.9                                               | )          | (0.8 | ) |
| Proceeds from  long-term debt                                       |       | 169.0                                                |       | 2.5 |   |
| Repayments on  notes payable                                        |       | (18.4                                                | )          | (11.4 | ) |
| Proceeds from  notes payable                                        |       | 4.7                                                  |       | — |   |
| Dividends paid  to common shareholders                              |       | (22.1                                                | )          | — |   |
| Dividends paid  to preferred stockholders                           |       | (3.6                                                 | )          | (3.6 | ) |
| Call premiums  related to early extinguishment of debt              |       | (1.2                                                 | )          | — |   |
| Debt issuance  costs paid                                           |       | (1.7                                                 | )          | — |   |
| Contribution  from minority shareholder                             |       | —                                               |       | 6.2 |   |
| Other, net                                                          |       | (0.1                                                 | )          | 2.0 |   |
| **Net  cash provided by financing activities**                      |       | 6.7                                                  |       | 37.0 |   |
| ** **                                                          |       |                                                 |       |   |   |
| Effect of  exchange rate changes on cash                            |       | 3.6                                                  |       | (0.7 | ) |
|                                                                |       |                                                 |       |   |   |
| (Decrease)  increase in cash and cash equivalents                   |       | (119.7                                               | )          | 7.5 |   |
| Cash and cash  equivalents at beginning of period                   |       | 263.2                                                |       | 142.8 |   |
| Cash and cash  equivalents at end of period                         |       | $                                                    | 143.5      |   | $ | 150.3 |   |
| ** **                                                          | ** ** | ** **                                           | ** ** | ** ** |   |
| **Supplemental  cash flow information:**                            | ** ** | ** **                                           | ** ** | ** ** |   |
| Cash paid for interest                                              |       | $                                                    | 69.8       |   | $ | 123.2 |   |
| Cash paid for income taxes                                          |       | 11.8                                                 |       | 5.0 |   |

 

During the three months ended March 31, 2007, we incurred capitalexpenditures of $131.1 million, of which $105.2 million was paid incash and $25.9 million was included in accounts payable at March 31,2007.

See accompanying notes tocondensed consolidated financial statements (unaudited).

5

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)****(Dollars in Millions)**
| ** **                                                                                     | ** ** | **March 31,   2007 ** | ** ** | **December 31,  2006  ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **ASSETS**                                                                                     |       |                                 |       |                                    |       |
| **Current  assets:**                                                                           |       |                                 |       |                                    |       |
| Cash and cash equivalents                                                                      |       | $                                    | 143.5      |                                    | $          | 246.0 |   |
| Accounts receivable (net of allowance for doubtful  accounts of $40.2 and $39.0, respectively) |       | 1,385.1                              |       | 1,243.3                                 |       |
| Accounts receivable from affiliates                                                            |       | 29.1                                 |       | 19.5                                    |       |
| Inventories, net                                                                               |       | 1,581.8                              |       | 1,520.1                                 |       |
| Prepaid expenses                                                                               |       | 43.6                                 |       | 55.7                                    |       |
| Deferred income taxes                                                                          |       | 68.9                                 |       | 70.7                                    |       |
| Other current assets                                                                           |       | 156.4                                |       | 161.6                                   |       |
| **Total current assets**                                                                       |       | 3,408.4                              |       | 3,316.9                                 |       |
|                                                                                           |       |                                 |       |                                    |       |
| Property, plant  and equipment, net                                                            |       | 3,882.7                              |       | 3,829.5                                 |       |
| Investment in  unconsolidated affiliates                                                       |       | 212.7                                |       | 201.0                                   |       |
| Intangible  assets, net                                                                        |       | 191.0                                |       | 192.6                                   |       |
| Goodwill                                                                                       |       | 91.7                                 |       | 90.2                                    |       |
| Deferred income  taxes                                                                         |       | 206.6                                |       | 188.7                                   |       |
| Other noncurrent  assets                                                                       |       | 402.1                                |       | 376.6                                   |       |
| **Total assets**                                                                               |       | $                                    | 8,395.2    |                                    | $          | 8,195.5 |   |
|                                                                                           |       |                                 |       |                                    |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                      |       |                                 |       |                                    |       |
|                                                                                           |       |                                 |       |                                    |       |
| **Current  liabilities:**                                                                      |       |                                 |       |                                    |       |
| Accounts payable                                                                               |       | $                                    | 1,104.5    |                                    | $          | 1,006.2 |   |
| Accounts payable to affiliates                                                                 |       | 17.7                                 |       | 16.7                                    |       |
| Accrued liabilities                                                                            |       | 805.8                                |       | 841.7                                   |       |
| Deferred income taxes                                                                          |       | 8.1                                  |       | 9.4                                     |       |
| Current portion of long-term debt                                                              |       | 176.4                                |       | 187.9                                   |       |
| **Total current liabilities**                                                                  |       | 2,112.5                              |       | 2,061.9                                 |       |
|                                                                                           |       |                                 |       |                                    |       |
| Long-term debt                                                                                 |       | 3,516.0                              |       | 3,457.4                                 |       |
| Deferred income  taxes                                                                         |       | 174.9                                |       | 161.6                                   |       |
| Other noncurrent  liabilities                                                                  |       | 963.8                                |       | 952.1                                   |       |
| **Total liabilities**                                                                          |       | 6,767.2                              |       | 6,633.0                                 |       |
| ** **                                                                                     |       |                                 |       |                                    |       |
| Minority  interests in common stock of consolidated subsidiaries                               |       | 30.3                                 |       | 29.4                                    |       |
|                                                                                           |       |                                 |       |                                    |       |
| **Commitments  and contingencies (Notes 13 and 14)**                                           |       |                                 |       |                                    |       |
|                                                                                           |       |                                 |       |                                    |       |
| **Members’  equity:**                                                                     |       |                                 |       |                                    |       |
| Members’ equity, 2,728 units issued and outstanding                                       |       | 2,817.0                              |       | 2,811.8                                 |       |
| Accumulated deficit                                                                            |       | (1,114.0                             | )          | (1,150.4                                | )          |
| Accumulated other comprehensive loss                                                           |       | (105.3                               | )          | (128.3                                  | )          |
| **Total members’ equity**                                                                 |       | 1,597.7                              |       | 1,533.1                                 |       |
| **Total  liabilities and members’ equity**                                                |       | $                                    | 8,395.2    |                                    | $          | 8,195.5 |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

 

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND****COMPREHENSIVE INCOME (UNAUDITED)****(Dollars in Millions)**

** **
| ** **                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                             |       |                                                 |       |   |   |
| **Revenues:**                                                                    |       |                                                 |       |   |   |
| Trade sales,  services and fees                                                  |       | $                                                    | 2,629.3    |   | $ | 2,641.9 |   |
| Related party  sales                                                             |       | 18.0                                                 |       | 14.8 |   |
| **Total  revenues**                                                              |       | 2,647.3                                              |       | 2,656.7 |   |
| **Cost of goods sold**                                                           |       | 2,238.5                                              |       | 2,258.9 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **Gross profit**                                                                 |       | 408.8                                                |       | 397.8 |   |
|                                                                             |       |                                                 |       |   |   |
| **Operating expenses:**                                                          |       |                                                 |       |   |   |
| Selling, general  and administrative                                             |       | 219.0                                                |       | 166.8 |   |
| Research and  development                                                        |       | 33.3                                                 |       | 27.3 |   |
| Other operating  expense                                                         |       | 5.9                                                  |       | 0.5 |   |
| Restructuring,  impairment and plant closing costs                               |       | 12.2                                                 |       | 7.7 |   |
| Total expenses                                                                   |       | 270.4                                                |       | 202.3 |   |
| **Operating income**                                                             |       | 138.4                                                |       | 195.5 |   |
|                                                                             |       |                                                 |       |   |   |
| Interest expense, net                                                            |       | (74.2                                                | )          | (88.0 | ) |
| Loss on accounts  receivable securitization program                              |       | (5.4                                                 | )          | (2.3 | ) |
| Equity in income of  investment in unconsolidated affiliates                     |       | 2.2                                                  |       | 0.7 |   |
| Loss on early  extinguishment of debt                                            |       | (1.8                                                 | )          | — |   |
| Other income (expense)                                                           |       | 0.5                                                  |       | (0.3 | ) |
|                                                                             |       |                                                 |       |   |   |
| **Income from continuing operations  before income taxes and minority interest** |       | 59.7                                                 |       | 105.6 |   |
| Income tax expense                                                               |       | (24.2                                                | )          | (20.8 | ) |
| Minority interest in  subsidiaries’ income                                  |       | (0.4                                                 | )          | (0.4 | ) |
| **Income from continuing  operations**                                           |       | 35.1                                                 |       | 84.4 |   |
| Loss from discontinued  operations, net of tax                                   |       | (1.4                                                 | )          | (17.1 | ) |
| **Income before extraordinary  gain**                                            |       | 33.7                                                 |       | 67.3 |   |
| Extraordinary gain on  the acquisition of a business, net of tax of nil          |       | 2.4                                                  |       | — |   |
| **Net income**                                                                   |       | $                                                    | 36.1       |   | $ | 67.3 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **Net income**                                                                   |       | $                                                    | 36.1       |   | $ | 67.3 |   |
| Other comprehensive  income                                                      |       | 23.0                                                 |       | 34.3 |   |
| **Comprehensive income**                                                         |       | $                                                    | 59.1       |   | $ | 101.6 |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)****(Dollars in Millions)**

** **
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating  Activities:**                                                         |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 36.1       |   | $ | 67.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                 |       |   |   |
| Extraordinary gain on acquisition of a business, net  of tax                       |       | (2.4                                                 | )          | — |   |
| Equity in income of unconsolidated affiliates                                      |       | (2.2                                                 | )          | (0.7 | ) |
| Depreciation and amortization                                                      |       | 103.5                                                |       | 110.2 |   |
| Provision for losses on accounts receivable                                        |       | 2.7                                                  |       | 2.2 |   |
| Loss (gain) on disposal of assets                                                  |       | (3.2                                                 | )          | (0.2 | ) |
| Loss on early extinguishment of debt                                               |       | 1.8                                                  |       | — |   |
| Noncash interest expense (income)                                                  |       | 1.1                                                  |       | (0.7 | ) |
| Noncash restructuring, impairment and plant closing  costs                         |       | 5.8                                                  |       | 2.0 |   |
| Deferred income taxes                                                              |       | 15.4                                                 |       | 12.7 |   |
| Net unrealized (gain) loss on foreign currency  transactions                       |       | (4.8                                                 | )          | 6.7 |   |
| Noncash compensation                                                               |       | 5.3                                                  |       | 3.5 |   |
| Minority interest in subsidiaries’ income                                     |       | 0.4                                                  |       | 0.4 |   |
| Other, net                                                                         |       | (1.5                                                 | )          | (1.1 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                 |       |   |   |
| Accounts and notes receivable                                                      |       | (103.1                                               | )          | 69.4 |   |
| Inventories, net                                                                   |       | (59.9                                                | )          | (12.7 | ) |
| Prepaid expenses                                                                   |       | 12.9                                                 |       | 6.1 |   |
| Other current assets                                                               |       | 5.0                                                  |       | 46.9 |   |
| Other noncurrent assets                                                            |       | (25.2                                                | )          | 2.0 |   |
| Accounts payable                                                                   |       | 46.1                                                 |       | (71.2 | ) |
| Accrued liabilities                                                                |       | (68.0                                                | )          | (157.3 | ) |
| Other noncurrent liabilities                                                       |       | 0.9                                                  |       | (9.6 | ) |
| **Net  cash (used in) provided by operating activities**                           |       | (33.3                                                | )          | 75.9 |   |
|                                                                               |       |                                                 |       |   |   |
| **Investing  Activities:**                                                         |       |                                                 |       |   |   |
| Capital  expenditures                                                              |       | (105.2                                               | )          | (104.1 | ) |
| Proceeds from  sale of assets                                                      |       | 15.8                                                 |       | 8.5 |   |
| Investment in  unconsolidated affiliates, net                                      |       | (13.0                                                | )          | (17.1 | ) |
| Other, net                                                                         |       | (0.4                                                 | )          | — |   |
| **Net  cash used in investing activities**                                         |       | (102.8                                               | )          | (112.7 | ) |
|                                                                               |       |                                                 |       |   |   |
| **Financing  Activities:**                                                         |       |                                                 |       |   |   |
| Net borrowings  under revolving loan facilities                                    |       | 93.7                                                 |       | 34.0 |   |
| Net borrowings  from overdraft facilities and other short-term debt                |       | 12.3                                                 |       | 8.1 |   |
| Repayments of  long-term debt                                                      |       | (225.9                                               | )          | (0.8 | ) |
| Proceeds from  long-term debt                                                      |       | 169.0                                                |       | 2.5 |   |
| Repayments on  notes payable                                                       |       | (18.4                                                | )          | (10.4 | ) |
| Proceeds from  notes payable                                                       |       | 2.3                                                  |       | — |   |
| Call premiums  related to early extinguishment of debt                             |       | (1.2                                                 | )          | — |   |
| Debt issuance  costs paid                                                          |       | (1.7                                                 | )          | — |   |
| Contribution  from minority shareholder                                            |       | —                                               |       | 6.2 |   |
| Other, net                                                                         |       | (0.1                                                 | )          | 2.0 |   |
| **Net  cash provided by financing activities**                                     |       | 30.0                                                 |       | 41.6 |   |
|                                                                               |       |                                                 |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | 3.6                                                  |       | (0.7 | ) |
|                                                                               |       |                                                 |       |   |   |
| (Decrease)  increase in cash and cash equivalents                                  |       | (102.5                                               | )          | 4.1 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 246.0                                                |       | 132.5 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                    | 143.5      |   | $ | 136.6 |   |
|                                                                               |       |                                                 |       |   |   |
| **Supplemental  cash flow information:**                                           |       |                                                 |       |   |   |
| Cash paid for interest                                                             |       | $                                                    | 70.1       |   | $ | 123.5 |   |
| Cash paid for  income taxes                                                        |       | 11.8                                                 |       | 5.0 |   |

 

Duringthe three months ended March 31, 2007, we incurred capital expenditures of$131.1 million, of which $105.2 million was paid in cash and$25.9 million was included in amounts payable at March 31, 2007.

See accompanying notes to condensed consolidated financial statements(unaudited).

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**1.             GENERAL**

**CertainDefinitions**

“Company,”“our,” “us,” or “we” may be used to refer to Huntsman Corporation and, unlessthe context otherwise requires, its subsidiaries and predecessors. Anyreferences to our “Company,” “we,” “us” or “our” as of a date prior toOctober 19, 2004 (the date of our formation) are to Huntsman Holdings, LLCand its subsidiaries (including their respective predecessors). In this report,“Huntsman International” refers to Huntsman International LLC (our 100% ownedsubsidiary) and, unless the context otherwise requires, its subsidiaries; “HuntsmanAdvanced Materials” refers to Huntsman Advanced Materials Holdings LLC (our100% owned indirect subsidiary, the membership interests of which wecontributed to Huntsman International on December 20, 2005) and, unless thecontext otherwise requires, its subsidiaries; “HPS” refers to HuntsmanPolyurethanes Shanghai Ltd. (our consolidated splitting joint venture withShanghai Chlor-Alkali Chemical Company, Ltd); “SLIC” refers to ShanghaiLiengheng Isocyanate Investment BV (our unconsolidated manufacturing jointventure with BASF AG and three Chinese chemical companies); “HMP Equity Trust”refers to HMP Equity Trust (the holder of approximately 59% of our commonstock); and “MatlinPatterson” refers to MatlinPatterson Global OpportunitiesPartners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. andMatlinPatterson Global Opportunities Partners B, L.P. (collectively, an ownerof HMP Equity Trust).

Inthis report, we may use, without definition, the common names of competitors orother industry participants. We may also use the common names or abbreviationsfor certain chemicals or products.

**Descriptionof Business**

We are among theworld’s largest global manufacturers of differentiated chemical products; wealso manufacture inorganic and commodity chemical products. Our productscomprise a broad range of chemicals and formulations, which we market in morethan 100 countries to a diversified group of consumer and industrial customers.Our products are used in a wide range of applications, including those in theadhesives, aerospace, automotive, construction products, durable andnon-durable consumer products, electronics, medical, packaging, paints andcoatings, power generation, refining, synthetic fiber, textile chemicals anddye industries. We are a leading global producer in many of our key productlines, including MDI products, amines, surfactants, epoxy-based polymerformulations, textile chemicals, dyes, maleic anhydride and titanium dioxide.

**Company**

Our Company wasformed in 2004 to hold the Huntsman businesses. Jon M. Huntsman founded thepredecessor to our Company in the early 1970s as a small packaging company.Since then, we have grown through a series of significant acquisitions and nowown a global portfolio of differentiated, inorganic and commodity businesses.

HuntsmanInternational was formed in 1999 in connection with the acquisition of ICI’spolyurethane chemicals, selected petrochemicals and titanium dioxide businessesand BP’s 20% ownership interest in an olefins facility located at Wilton, U.K.and certain related assets.

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**HuntsmanCorporation and Huntsman International Financial Statements**

Exceptwhere otherwise indicated, these notes relate to the condensed consolidatedfinancial statements (unaudited) for each of our Company and HuntsmanInternational. The differences between our financial statements and HuntsmanInternational’s financial statements relate primarily to the following:

·                    purchaseaccounting recorded at our Company for the step-acquisition of HuntsmanInternational in May 2003; and

·                    thedifferent capital structures.

**Principlesof Consolidation**

Ourcondensed consolidated financial statements (unaudited) and HuntsmanInternational’s condensed consolidated financial statements (unaudited) includethe accounts of our wholly-owned and majority-owned subsidiaries and anyvariable interest entities for which we are the primary beneficiary. Allintercompany accounts and transactions have been eliminated, except forintercompany sales between discontinued and continuing operations.

**InterimFinancial Statements**

Our interimcondensed consolidated financial statements (unaudited) and Huntsman International’sinterim condensed consolidated financial statements (unaudited) were preparedin accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP” or “U.S. GAAP”) and in management’s opinion, reflectall adjustments, consisting only of normal recurring adjustments, necessary fora fair presentation of results of operations, financial position and cash flowsfor the periods presented. Results for interim periods are not necessarilyindicative of those to be expected for the full year. These condensedconsolidated financial statements (unaudited) should be read in conjunctionwith the audited consolidated financial statements and notes to consolidatedfinancial statements included in the Annual Report on Form 10-K for theyear ended December 31, 2006 for our Company and Huntsman International.

**Use ofEstimates**

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**Reclassifications**

Certainamounts in the condensed consolidated financial statements (unaudited) forprior periods have been reclassified to conform with the current presentation.The most significant of these reclassifications was to reclassify the resultsof operations of our European base chemicals and polymers business todiscontinued operations. See “Note 3. Discontinued Operations.”

**2.             RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

We adoptedEmerging Issues Task Force (“EITF”) Issue No. 06-2,*Accounting for Sabbatical Leave and Other SimilarBenefits Pursuant to FASB Statement No. 43,* on January 1, 2007.This pronouncement concludes that an employee’s right to a compensated absenceunder a sabbatical or other similar benefit arrangement accumulates; therefore,such benefits should be accrued over the required service period. The adoptionof this pronouncement did not have a significant impact on our consolidatedfinancial statements.

We adopted FASBInterpretation No. 48 (“FIN 48”),*Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109*, on January 1, 2007. FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 109, *Accountingfor Income Taxes,* by prescribing a recognition threshold and measurementattribute for the financial statement recognition and 

10

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measurement of a taxposition taken or expected to be taken in a tax return. We recorded a credit of$0.3 million to accumulated deficit as of January 1, 2007 for thecumulative effect of a change in accounting principle. See “Note 17.Income Taxes.”

We adopted EITFIssue 06-3,*How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation),* onJanuary 1, 2007. This pronouncement concludes that the presentation of taxeswithin its scope is an accounting policy decision that should be disclosed. Ifthe taxes are reported on a gross basis, companies are required to disclose theamounts of those taxes if such amounts are deemed significant. We present taxeswithin the scope of this issue on a net basis.

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 157,*Fair Value**Measurements*. SFAS No. 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. We are reviewing SFAS No. 157 todetermine the statement’s impact on our consolidated financial statements.

In September 2006,the FASB issued SFAS No. 158,*Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements**No. 87, 88, 106,and 132(R)*. Effective for fiscal years ending afterDecember 15, 2008, SFAS No. 158 will require us to measure the fundedstatus of a plan as of the date of our year-end statement of financialposition. As of the end of 2008, we will be required to measure the fundedstatus of our plans as of December 31. We currently use a November 30 measurementdate for our plans.

We adopted FASBStaff Position (“FSP”) No. AUG AIR-1,*Accounting for Planned Major Maintenance Activities,*on January 1, 2007. This FSPprohibits the use of the accrue-in-advance method of accounting for plannedmajor maintenance activities. The adoption of this FSP did not have asignificant impact on our consolidated financial statements.

We adopted FSPEITF 00-19-2,*Accounting for RegistrationPayment Arrangements,*onJanuary 1, 2007. This FSP requires that the contingent obligation tomake future payments or otherwise transfer consideration under a registrationpayment arrangement should be separately recognized and measured in accordancewith SFAS No. 5,*Accounting forContingencies*. In November 2006 and March 2007, we completedofferings of subordinated notes which contain registration paymentarrangements. See “Note 7. Debt.” We have evaluated the impact of this FSP asit relates to our note offerings, and the adoption of this FSP did not have asignificant impact on our consolidated financial statements.

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115.*SFAS No. 159 permitscompanies to choose to measure many financial instruments and certain otheritems at fair value, with changes in fair value reflected in earnings. SFASNo. 159 is effective as of the beginning of the first fiscal year thatbegins after November 15, 2007. We are evaluating SFAS No. 159 todetermine the statement’s impact on our consolidated financial statements.

**3.             DISCONTINUED OPERATIONS**

**EuropeanBase Chemicals and Polymers Business**

OnDecember 29, 2006, we completed the sale of the outstanding equityinterests of Huntsman Petrochemicals (UK) Limited for an aggregate purchaseprice of $685 million in cash plus the assumption by the purchaser ofapproximately $126 million in unfunded pension liabilities (the “U.K.Petrochemicals Disposition”). The final sales price is subject to agreement bySABIC on adjustments relating to working capital, investment in the LDPE plantcurrently under construction in Wilton, U.K. and unfunded pension liabilities.The transaction did not include our Teesside, U.K.-based Pigments operations orthe Wilton, U.K.-based aniline and nitrobenzene operations of our Polyurethanessegment. We used the net proceeds from the transaction to legally defease theremaining $250 million 

11

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outstanding principalamount of our 9.875% senior notes due 2009 and to repay $400 million of thedebt under our Senior Credit Facilities.

During the threemonths ended March 31, 2007, we recorded an additional pretax loss on disposalof $1.6 million related primarily to working capital adjustments.

The results ofoperations of our European base chemicals and polymers business for current andprior periods have been classified as discontinued operations in our financialstatements in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*.

The followingresults of our European base chemicals and polymers business have beenpresented as discontinued operations in the accompanying condensed consolidatedstatements of operations (unaudited) (dollars in millions):
| ** **                                     | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                           | ** ** | ** **                                           |       |   |   |
| Revenues                                       |       | $                                                    | —     |   | $ | 531.8 |   |
| Costs and  expenses                            |       | —                                               | ** ** | (555.5 | ) |
| Loss on disposal                               |       | (1.6                                                 | )          | — | ** ** |
| Operating loss                                 |       | (1.6                                                 | )          | (23.7 | ) |
| Income tax  benefit                            |       | 0.6                                                  | ** ** | 7.1 |   |
| Loss from discontinued  operations, net of tax |       | $                                                    | (1.0       | ) | $ | (16.6 | ) |

 

In connection withthe U.K. Petrochemicals Disposition, we agreed to make payments to SABIC ofapproximately £18 million (approximately $35 million) related to thetransfer of pension plan assets and liabilities. We accrued this liability in2006 in connection with the sale transaction and expect to fund the obligationin the second quarter of 2007. Also, we expect to incur a non-cash pensionsettlement loss of approximately $16 million during 2007. We have providedan adequate provision relating to these adjustments and expect to resolve theworking capital adjustments in the second quarter of 2007. The European basechemicals and polymers business is reported in our Base Chemicals operatingsegment in the accompanying condensed consolidated financial statements(unaudited).

In connection withthe sale, we agreed to indemnify the buyer with respect to any losses resultingfrom any environmental liability related to the pre-sale operations of theassets sold. These indemnities have various payment thresholds and time limitsdepending on the site and type of claim. Generally, we are not required to payunder these indemnification obligations until claims against us exceed £0.1million, individually, or £1.0 million, in the aggregate. We also agreed toindemnify the buyer with respect to certain tax liabilities. Our maximumexposure generally will not exceed $600 million in the aggregate. We believethat there is a remote likelihood that we will be required to pay anysignificant amounts under the indemnity provision.

**TDIBusiness**

On July 6, 2005, wesold our TDI business. The sale involved the transfer of our TDI customer listand sales contracts. We discontinued the use of our remaining TDI assets. TDIhas been accounted for as a discontinued operation under SFAS No. 144.Accordingly, the following results of TDI have been presented as discontinuedoperations in the accompanying condensed consolidated statements of operations(unaudited) (dollars in millions):
| ** **                                     | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                    | —     |   | $ | — |   |
| Costs and  expenses                            |       | (0.4                                                 | )          | (0.5 | ) |
| Operating loss                                 |       | (0.4                                                 | )          | (0.5 | ) |
| Income tax  benefit                            |       | —                                               |       | — |   |
| Loss from discontinued  operations, net of tax |       | $                                                    | (0.4       | ) | $ | (0.5 | ) |

 

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We expect to incurfinal costs of $0.6 million related to the TDI transaction in the secondquarter of 2007. The TDI business EBITDA is reported in our Polyurethanessegment.

**4.             BUSINESSDISPOSITIONS AND COMBINATIONS**

**Agreement to Sell U.S. Base Chemicals and Polymers Business**

OnFebruary 15, 2007, we entered into an agreement pursuant to which FlintHills Resources, a wholly owned subsidiary of Koch, will acquire our U.S. basechemicals and polymers business assets for approximately $456 million in cash,plus the value of inventory (approximately $248 million at March 31, 2007)on the date of closing (the “Pending U.S. Petrochemicals Disposition”). We willretain other elements of working capital, including accounts receivable,accounts payable and certain accrued liabilities, which will be liquidated forcash in the ordinary course of business. Subject to customary regulatoryapprovals and other closing conditions, the transaction is expected to close bythe fourth quarter of 2007, following the restart of our Port Arthur, Texas,olefins manufacturing facility. For more information, see “Note 16. CasualtyLosses and Insurance Recoveries—Port Arthur, Texas Plant Fire.” In the eventthat the Port Arthur, Texas olefins manufacturing facility is not operating ata specified performance level by August 15, 2007, Flint Hills Resources has theoption to close on its purchase of the U.S. polymers business separate from thepurchase of the U.S. base chemicals business (the “Polymers Purchase Option”).If Flint Hills Resources exercises the Polymers Purchase Option, the U.S.polymers business purchase price will be $150 million, plus the value ofassociated inventory, and we will amend the asset purchase agreement tofacilitate the separate closing of the U.S. base chemicals business for theremaining $306 million of sales price, plus the value of associated inventory.We currently expect that the Port Arthur, Texas olefins manufacturing facilitymay not achieve the specified performance level by August 15, 2007.

We expect to incura pretax loss in connection with the Pending U.S. Petrochemicals Disposition ofapproximately $270 million, related primarily to the polymers assets. As ofMarch 31, 2007, these assets were classified as held and used in accordancewith SFAS No. 144 becausethese assets were not immediately available for sale in their present conditiondue to the required repair and restart of the Port Arthur, Texas facility. Wetested these assets for recoverability using expected future cash flows,including the expected proceeds from the Port Arthur fire insurance recovery,and concluded that the expected future cash flows were in excess of thecarrying value of the business expected to be sold. Therefore, we did notrecognize an impairment charge as of March 31, 2007. We will continue toassess these assets for recoverability during 2007 through the sale date. Asthe date of sale completion nears and insurance proceeds are received, futurecash flows associated with these assets will diminish. At some point in 2007,we expect that future cash flows will no longer be sufficient to recover thecarrying value of the business to be sold, which will continue to increase aswe rebuild the plant, and we will recognize an impairment charge.

The pendingtransaction includes our olefins and polymers manufacturing assets located atfive U.S. sites: Port Arthur, Odessa and Longview, Texas; Peru, Illinois; andMarysville, Michigan. These plants employ about 900 associates. The captiveethylene unit at our retained Port Neches, Texas site which is part of ourPerformance Products segment operations is not included in the sale. Thisasset, along with a long-term post-closing arrangement for the supply ofethylene and propylene from Flint Hills Resources to us, will continue toprovide feedstock for our downstream derivative units.

 

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**Sale of AustralianPolyester Resins Assets**

On January 4, 2007,we completed the sale of our Australian polyester resins assets to Nuplex forA$9.6 million ($7.5 million) in cash, plus the value of inventory at the saledate, for a total transaction value of A$20.3 million ($15.8 million), subjectto post-closing adjustments. During the three months ended March 31, 2007, werecognized a pretax gain on the sale of these assets of $4.1 million. Thetransaction further includes additional consideration to be received over athree year period upon achieving certain associated earnings targets. The saleincludes our Australian polyesters, vinylesters and gelcoats manufacturingassets. In connection with the sale agreement, we also entered into a tollingagreement with Nuplex pursuant to which we will continue to manufacture productusing the Australian polyester resins assets. Nuplex will own the assetslocated on our site. The tolling agreement expires January 2009.

The results ofoperations of these assets were not classified as a discontinued operationunder applicable accounting rules because we expect significant continuingcash flows from the Australian polyester resins assets through the tollingarrangement with Nuplex.

**Sale of U.S.Butadiene and MTBE Business**

On June 27,2006, we sold the assets comprising our U.S. butadiene and MTBE businessoperated by our Base Chemicals segment. The total sales price was $274.0million, of which $204.0 million was paid to us during 2006. Theadditional $70.0 million will be payable to us after the restart of our PortArthur, Texas olefins unit that was damaged in a fire (see “Note 16. CasualtyLosses and Insurance Recoveries—Port Arthur, Texas Plant Fire”) and the relatedresumption of crude butadiene supply; provided that we achieve certainintermediate steps toward restarting the plant and the restart occurs within 30months of this sale. We expect to recognize an additional pretax gain of approximately$69 million upon completion of the conditions referenced above.

The results ofoperations of this business were not classified as a discontinued operationunder applicable accounting rules because of the expected continuing cashflows from the MTBE business we continue to operate in our Polyurethanessegment.

In connection withthe sale, we indemnified the buyer with respect to any losses resulting from(i) the breach of representations and warranties contained in the assetpurchase agreement, (ii) pre-sale liabilities related to the pre-saleoperations of the assets sold not assumed by the buyer, and (iii) environmentalliability related to the pre-sale operations of the assets sold. We are notrequired to pay under these indemnification obligations until claims against usexceed $5 million. Upon exceeding this $5 million threshold, wegenerally are obligated to provide indemnification for any losses in excess of$5 million, up to a limit of $137.5 million. We believe that there isa remote likelihood that we will be required to pay any significant amounts underthe indemnity provision. As a result, we have estimated that the fair value ofthis indemnity at the date of the closing of the sale is minimal, andaccordingly, no amounts have been recorded.

**Textile EffectsAcquisition**

On June 30,2006, we acquired Ciba’s textile effects business for $172.1 million(CHF 215 million) in cash (the “Textile Effects Acquisition”). Thispurchase price was subject to finalization of post-closing working capitaladjustments, which are currently recorded as a receivable to us of $26.9 million,and we expect receipt of this amount during the second quarter of 2007. Theoperating results of the textile effects business have been consolidated withour operating results beginning on July 1, 2006 and are reported with ouradvanced materials operations as part of our Materials and Effects segment.

We have accountedfor the Textile Effects Acquisition using the purchase method in accordancewith SFAS No. 141,*BusinessCombinations.*As such, we analyzed the fair value of tangible andintangible assets acquired and liabilities assumed, and we determined theexcess of fair value of net assets acquired over cost. Because the fair valueof the acquired assets and liabilities assumed exceeded the acquisition price,the valuation of the long-lived assets acquired was reduced to zero inaccordance with SFAS No. 141. Accordingly, no basis was assigned toproperty, 

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plant and equipment orany other non-current assets and the remaining excess was recorded as anextraordinary gain, net of taxes (which were not applicable because the gainwas recorded in purchase accounting). The preliminary allocation of thepurchase price to the assets and liabilities acquired is summarized as follows(dollars in millions):
| Acquisition  cost:                                                                                               |   |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Acquisition payment, exclusive of post-closing  working capital adjustment                                       |   | $      | 172.1  |   |
| Post-closing working capital adjustment                                                                          |   | (26.9  | )      |
| Direct costs of acquisition                                                                                      |   | 12.9   |   |
| Total  acquisition costs                                                                                         |   | 158.1  |   |
| Fair value of  assets acquired and liabilities assumed:                                                          |   |   |   |
| Cash                                                                                                             |   | 7.7    |   |
| Accounts receivable                                                                                              |   | 254.6  |   |
| Inventories                                                                                                      |   | 233.6  |   |
| Prepaid expenses and other current assets                                                                        |   | 12.6   |   |
| Deferred taxes                                                                                                   |   | 1.9    |   |
| Accounts payable                                                                                                 |   | (95.8  | )      |
| Accrued liabilities                                                                                              |   | (35.1  | )      |
| Short-term debt                                                                                                  |   | (5.0   | )      |
| Noncurrent liabilities                                                                                           |   | (158.1 | )      |
| Total fair value  of net assets acquired                                                                         |   | 216.4  |   |
| Extraordinary gain on  the acquisition of a business—excess of fair value of net assets acquired  over cost |   | $      | 58.3   |   |

 

During the threemonths ended March 31, 2007, we adjusted the preliminary purchase priceallocation and in April 2007, we finalized the post-closing working capitaladjustments, resulting in our recording an additional extraordinary gain on theacquisition of $2.4 million in the first quarter of 2007. This purchase priceallocation is preliminary pending finalization of the determination of the fairvalue of assets acquired and liabilities assumed, including final valuation ofworking capital acquired, finalization of restructuring plans, estimates ofasset retirement obligations and determination of related deferred taxes. Weare assessing and formulating plans to exit certain activities of the textileeffects business and expect to involuntarily terminate the employment of, orrelocate, certain textile effects employees. We estimate that we will eliminateup to 650 positions and will create approximately 300 new positions, globally.These plans include the exit of various manufacturing, sales and administrativeactivities throughout the business through 2009. This preliminary purchaseprice allocation includes recorded liabilities for workforce reductions,non-cancelable lease termination costs, demolition and decommissioning andother restructuring costs of $65.4 million, $3.4 million,$1.5 million and $5.6 million, respectively. We have not yet finalizedplans to exit certain business activities and may record additional liabilitiesfor workforce reductions or other restructuring costs as these plans arefinalized. We expect that it is reasonably possible that material changes tothe allocation could occur. Any changes to our purchase price allocation willbe recorded as an adjustment to the extraordinary gain in the second quarter of2007.

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The followingtables reflect our and Huntsman International’s results of operations on anunaudited pro forma basis as if the Textile Effects Acquisition had beencompleted at the beginning of the three months ended March 31, 2006, presentedutilizing historical results for each entity (dollars in millions, except pershare amounts):

**Huntsman Corporation**

|                              | ** ** | **Three months   ended  March 31, 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|
| Revenues                          |       | $                                                            | 2,901.4    |   |
| Income before  extraordinary gain |       | 75.5                                                         |       |
| Net income                        |       | 133.8                                                        |       |
| Basic income per  share           |       | 0.61                                                         |       |
| Diluted income per  share         |       | 0.57                                                         |       |
|                                   |            |                                                              |            |  |

** **

**Huntsman International**

|                              | ** ** | **Three months  ended  March 31, 2006 ** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|
| Revenues                          |       | $                                                            | 2,901.4    |   |
| Income before  extraordinary gain |       | 73.8                                                         |       |
| Net income                        |       | 132.1                                                        |       |
|                                   |            |                                                              |            |  |

 

Our pro forma netincome and the pro forma net income of Huntsman International reflect anextraordinary gain on the Textile Effects Acquisition of $58.3 million forthe three months ended March 31, 2006.

**5.            INVENTORIES**

Inventoriesconsisted of the following (dollars in millions):
| ** **                  | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------|------------|-------------------------|------------|----------------------------|------------|
| Raw materials  and supplies |       | $                       | 296.0      |                       | $          | 320.1 |   |
| Work in progress            |       | 116.6                   |       | 109.8                      |       |
| Finished goods              |       | 1,271.5                 |       | 1,204.3                    |       |
| **Total**                   |       | 1,684.1                 |       | 1,634.2                    |       |
| LIFO reserves               |       | (102.3                  | )          | (114.1                     | )          |
| **Net**                     |       | $                       | 1,581.8    |                       | $          | 1,520.1 |   |

 

As of March 31,2007 and December 31, 2006, approximately 16% and 18%, respectively, ofinventories were recorded using the last-in, first-out cost method.

In the normalcourse of operations, we at times exchange raw materials and finished goods withother companies for similar inventories for the purpose of reducingtransportation costs. The net open exchange positions are valued at our cost.The amount included in inventory under open exchange agreements payable by usat March 31, 2007 was $9.8 million (28.8 million pounds of feedstock andproducts). The amount included in inventory under open exchange agreementsreceivable by us at December 31, 2006 was $9.7 million (30.9 million pounds offeedstock and products).

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**6.            ****RESTRUCTURING,IMPAIRMENT AND PLANT CLOSING COSTS**

As of March 31,2007 and December 31, 2006, accrued restructuring costs by type of cost andinitiative consisted of the following (dollars in millions):

 
| ** **                                   | ** ** | **Workforce  reductions(1) ** | ** ** | **Demolition and  decommissioning** | ** ** | **Non-cancelable  lease costs ** | ** ** | **Other  restructuring  costs ** | ** ** | **Total(2) ** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| ** **                                   |       |                               |       |                                     |       |                                       |       |                                  |       |               |       |
| Accrued  liabilities as of December 31, 2006 |       | $                                  | 76.4       |                                     | $          | 0.3                                        |       | $                                     | 8.7        |               | $          | 16.7 |   | $ | 102.1 |   |
| 2007 charges for  2004 initiatives           |       | 0.4                                |       | —                                   |       | —                                     |       | 0.1                                   |       | 0.5                |       |
| 2007 charges for  2005 initiatives           |       | 0.2                                |       | —                                   |       | —                                     |       | —                                |       | 0.2                |       |
| 2007 charges for  2007 initiatives           |       | 1.0                                |       | —                                   |       |                                       |       | 5.9                                   |       | 6.9                |       |
| Reversal of  reserves no longer required     |       | (1.2                               | )          | —                                   |       | —                                     |       | —                                |       | (1.2               | )          |
| 2007 payments  for 2003 initiatives          |       | (0.8                               | )          | —                                   |       | (0.1                                       | )          | (0.1                                  | )          | (1.0               | )          |
| 2007 payments  for 2004 initiatives          |       | (1.9                               | )          | (0.1                                     | )          | (0.1                                       | )          | (0.1                                  | )          | (2.2               | )          |
| 2007 payments  for 2005 initiatives          |       | (1.8                               | )          | —                                   |       | —                                     |       | —                                |       | (1.8               | )          |
| 2007 payments  for 2006 initiatives          |       | (3.1                               | )          | —                                   |       | —                                     |       | —                                |       | (3.1               | )          |
| 2007 payments  for 2007 initiatives          |       | —                             |       |                                     |       |                                       |       | (5.9                                  | )          | (5.9               | )          |
| Foreign currency  effect on reserve balance  |       | 1.1                                |       | —                                   |       | 0.5                                        |       | (0.9                                  | )          | 0.7                |       |
| Accrued  liabilities as of March 31, 2007    |       | $                                  | 70.3       |                                     | $          | 0.2                                        |       | $                                     | 9.0        |               | $          | 15.7 |   | $ | 95.2 |   |

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(1)                                 Withthe exception of liabilities recorded in connection with business combinations,accrued liabilities classified as workforce reductions consist primarily ofrestructuring programs involving ongoing termination benefit arrangements andrestructuring programs involving special termination benefits. Accordingly, therelated liabilities were accrued as a one-time charge to earnings in accordancewith SFAS No. 112, *Employers’ Accounting forPostemployment Benefits,* and with SFAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, respectively. The remaining accruedliabilities related to these charges of $6.6 million represent workforcereductions to be paid by the end of 2011. Liabilities for workforce reductionsrecorded in connection with business combinations were accrued in accordancewith EITF 95-3, *Recognition of Liabilitiesin Connection with a Purchase Business Combination*, and are expectedto be paid through 2009. Of the total workforce reduction reserves of $70.3million, $62.6 million relates to 627 positions that have not been terminatedas of March 31, 2007.

(2)           Accrued liabilities by initiativeswere as follows (dollars in millions):

|                                             | ** ** | **March 31,   2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
|                                        |       |                                 |       |                              |       |
| 2001 initiatives                            |       | $                                    | 1.4        |                              | $          | 1.4 |   |
| 2003 initiatives                            |       | 14.8                                 |       | 15.8                              |       |
| 2004 initiatives                            |       | 9.5                                  |       | 12.2                              |       |
| 2005 initiatives                            |       | 0.6                                  |       | 1.4                               |       |
| 2006 initiatives                            |       | 72.1                                 |       | 76.2                              |       |
| 2007 initiatives                            |       | 1.0                                  |       | —                            |       |
| Foreign currency  effect on reserve balance |       | (4.2                                 | )          | (4.9                              | )          |
| Total                                       |       | $                                    | 95.2       |                              | $          | 102.1 |   |

 

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Details with respect toour restructuring reserves are provided below by segment and initiative(dollars in millions):
| ** **                                                               | ** ** | **Polyurethanes ** | ** ** | **Materials and   Effects ** | ** ** | **Performance  Products ** | ** ** | **Pigments ** | ** ** | **Polymers ** | ** ** | **Base  Chemicals ** | ** ** | **Total ** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|---------------------------|------------|-----------------|------------|
| Accrued liabilities as  of December 31, 2006                             |       | $                       | 6.6        |                                        | $          | 78.5                            |       | $                  | 7.4        |               | $          | 7.9                       |       | $               | —     |   | $ | 1.7 |   | $ | 102.1 |   |
| 2007 charges for 2004  initiatives                                       |       | —                  |       | —                                      |       | 0.1                             |       | 0.4                |       | —             |       | —                    |       | 0.5             |       |
| 2007 charges for 2005  initiatives                                       |       | —                  |       | —                                      |       | —                          |       | 0.2                |       | —             |       | —                    |       | 0.2             |       |
| 2007 charges for 2007  initiatives                                       |       | —                  |       | 5.9                                         |       | —                          |       | —             |       | 1.0                |       | —                    |       | 6.9             |       |
| Reversal of reserves no  longer required                                 |       | —                  |       | (0.1                                        | )          | —                          |       | (1.1               | )          | —             |       | —                    |       | (1.2            | )          |
| 2007 payments for 2003  initiatives                                      |       | (0.6                    | )          | (0.1                                        | )          | —                          |       | (0.3               | )          | —             |       | —                    |       | (1.0            | )          |
| 2007 payments for 2004  initiatives                                      |       | (0.1                    | )          | —                                      |       | (1.3                            | )          | (0.8               | )          | —             |       | —                    |       | (2.2            | )          |
| 2007 payments for 2005  initiatives                                      |       | (0.1                    | )          | —                                      |       | (1.1                            | )          | —             |       | —             |       | (0.6                      | )          | (1.8            | )          |
| 2007 payments for 2006  initiatives                                      |       | —                  |       | (3.1                                        | )          | —                          |       | —             |       | —             |       | —                    |       | (3.1            | )          |
| 2007 payments for 2007  initiatives                                      |       | —                  |       | (5.9                                        | )          | —                          |       | —             |       | —             |       | —                    |       | (5.9            | )          |
| Foreign currency effect  on reserve balance                              |       | 0.1                     |       | 0.5                                         |       | —                          |       | —             |       | —             |       | 0.1                       |       | 0.7             |       |
| Accrued liabilities as  of March 31, 2007                                |       | $                       | 5.9        |                                        | $          | 75.7                            |       | $                  | 5.1        |               | $          | 6.3                       |       | $               | 1.0        |   | $ | 1.2 |   | $ | 95.2 |   |
|                                                                     |       |                    |       |                                        |       |                            |       |               |       |               |       |                      |       |            |       |
| Current portion of  restructuring reserve                                |       | $                       | 2.3        |                                        | $          | 29.4                            |       | $                  | 3.9        |               | $          | 2.9                       |       | $               | 1.0        |   | $ | 1.2 |   | $ | 40.7 |   |
| Long-term portion of  restructuring reserve                              |       | 3.6                     |       | 46.3                                        |       | 1.2                             |       | 3.4                |       | —             |       | —                    |       | 54.5            |       |
|                                                                     |       |                    |       |                                        |       |                            |       |               |       |               |       |                      |       |            |       |
| Estimated additional  future charges for current restructuring projects: |       |                    |       |                                        |       |                            |       |               |       |               |       |                      |       |            |       |
| Estimated additional  charges within one year                            |       | $                       | —     |                                        | $          | 0.1                             |       | $                  | —     |               | $          | 3.0                       |       | $               | —     |   | $ | — |   | $ | 3.1 |   |
| Estimated additional charges beyond one year                        |       | —                  |       | 0.1                                         |       | —                          |       | 3.8                |       | —             |       | —                    |       | 3.9             |       |

 

Details with respect tocash and non-cash restructuring charges by initiative are provided below(dollars in millions):
| Cash Charges:                                     |   |   |   |
|---------------------------------------------------|--------|--------|--------|
| 2007 charges for  2004 initiatives                |   | $      | 0.5    |   |
| 2007 charges for  2005 initiatives                |   | 0.2    |   |
| 2007 charges for  2007 initiatives                |   | 6.9    |   |
| Reversal of  reserves no longer required          |   | (1.2   | )      |
| Non-cash charges                                  |   | 5.8    |   |
| Total 2007 Restructuring  and Plant Closing Costs |   | $      | 12.2   |   |

 

During the threemonths ended March 31, 2007, our Materials and Effects segment recorded restructuringcharges of $5.9 million primarily related to supply chain integration processesand redundant service contracts for information technology services.

During the threemonths ended March 31, 2007, our Polymers segment recorded a non-cashimpairment charge of $5.8 million related to capital expenditures andturnaround costs associated with our Australian styrenics business that waspreviously impaired. The long-lived assets in this business were determined tobe impaired in accordance with SFAS No. 144 and an impairment charge wasrecorded in 2005. Capital expenditures and turnaround costs in this business,which are necessary to maintain operations, are also considered to be impairedimmediately after they are incurred.

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**7.             DEBT**

Outstanding debtconsisted of the following (dollars in millions):

**Huntsman Corporation**
| ** **                    | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                    |       |                           |       |                              |       |
| Senior Credit  Facilities:    |       |                           |       |                              |       |
| Revolving Facility            |       | $                              | 109.0      |                              | $          | — |   |
| Term Loans                    |       | 1,637.6                        |       | 1,711.2                           |       |
| Secured Notes                 |       | 294.1                          |       | 294.0                             |       |
| Senior Notes                  |       | 198.0                          |       | 198.0                             |       |
| Subordinated  Notes           |       | 1,241.2                        |       | 1,228.3                           |       |
| Australian  Credit Facilities |       | 47.9                           |       | 61.4                              |       |
| HPS (China) debt              |       | 107.8                          |       | 90.3                              |       |
| Other                         |       | 59.2                           |       | 62.1                              |       |
| Total debt                    |       | $                              | 3,694.8    |                              | $          | 3,645.3 |   |
|                          |       |                           |       |                              |       |
| Current portion               |       | $                              | 178.8      |                              | $          | 187.9 |   |
| Long-term  portion            |       | 3,516.0                        |       | 3,457.4                           |       |
| Total debt                    |       | $                              | 3,694.8    |                              | $          | 3,645.3 |   |

 

**HuntsmanInternational**
| ** **                    | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006  ** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|
| ** **                    |       |                           |       |                                    |       |
| Senior Credit  Facilities:    |       |                           |       |                                    |       |
| Revolving Facility            |       | $                              | 109.0      |                                    | $          | — |   |
| Term Loans                    |       | 1,637.6                        |       | 1,711.2                                 |       |
| Secured Notes                 |       | 294.1                          |       | 294.0                                   |       |
| Senior Notes                  |       | 198.0                          |       | 198.0                                   |       |
| Subordinated  Notes           |       | 1,241.2                        |       | 1,228.3                                 |       |
| Australian  Credit Facilities |       | 47.9                           |       | 61.4                                    |       |
| HPS (China) debt              |       | 107.8                          |       | 90.3                                    |       |
| Other                         |       | 56.8                           |       | 62.1                                    |       |
| Total debt                    |       | $                              | 3,692.4    |                                    | $          | 3,645.3 |   |
|                          |       |                           |       |                                    |       |
| Current portion               |       | $                              | 176.4      |                                    | $          | 187.9 |   |
| Long-term  portion            |       | 3,516.0                        |       | 3,457.4                                 |       |
| Total debt                    |       | $                              | 3,692.4    |                                    | $          | 3,645.3 |   |

 

**Transactions  Affecting ourSenior Credit Facilities**

As of March 31, 2007, our senior secured creditfacilities (“Senior Credit Facilities”) consisted of (i) a$650 million revolving facility (the “Revolving Facility”), (ii) a$1,543.4 million term loan B facility (the “Dollar Term Loan”), and(iii) a €70.7 million ($94.2 million) euro term loan B facility(the “Euro Term Loan”). As of March 31, 2007, there were $109.0 millionborrowings outstanding under our Revolving Facility, and we had $45.5million in U.S. dollar equivalents of lettersof credit and bank guarantees issued and outstanding under our RevolvingFacility.

We have recentlycompleted the following transactions relating to our Senior Credit Facilities:

·                  OnJanuary 16, 2007, we made a voluntary repayment of $75.0 million U.S.dollar equivalents on our term loans with available liquidity.

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·                  OnApril 19, 2007, we entered into an amendment to our Senior Credit Facilities(the “Amendment”). Pursuant to the Amendment, the maturity of the Dollar TermLoan was extended to April 2014 and the loan amount was increased to $1,640.0million. We used the increased amount to repay, in full, the Euro Term Loan.

As of March 31, 2007, borrowings under the Revolving Facility andDollar Term Loan bore interest at LIBOR plus 1.75%. The Amendment made nochanges to the applicable interest rate of the Revolving Facility. However,pursuant to the Amendment, the applicable interest rate of the Dollar Term Loanis currently set at LIBOR plus 1.75%, subject to a reduction to LIBOR plus1.50% upon achieving certain secured leverage ratio thresholds defined in theAmendment. The Amendment contains one financial covenant, which is applicableonly to the Revolving Facility, and this covenant is only in effect when loansor letters of credit are outstanding under the Revolving Facility. TheAmendment, among other things, also increases the restricted payments basketfor certain types of payments, and, subject to certain conditions, increasesour capacity for additional term loan borrowings. The Amendment provides forcontinuing customary restrictions and limitations on our ability to incurliens, incur additional debt, merge or sell assets, make certain restrictedpayments, prepay other indebtedness, make investments or engage in transactionswith affiliates, and it contains other customary default provisions.

**Other Transactions Affecting our Debt**

We have alsocompleted the following other transactions relating to our debt:

·                  Onor about February 28, 2007, we completed a direct private placement of$147.0 million in aggregate principal amount of dollar denominated 7.875%senior subordinated notes due November 15, 2014. These notes were issuedat a premium of 104% of principal amount for a yield of 7.01% and were issuedunder the same indenture and are of the same series as an original placement ofdollar denominated notes issued by us in November 2006. We used the netproceeds of $151.7 million to redeem all (approximately €114 million) ofour remaining outstanding euro denominated 10.125% senior subordinated notesdue 2009, which were called for redemption on March 27, 2007 at a callprice of 101.688% plus accrued interest.

·                  OurAustralian subsidiaries, which maintain credit facilities that are non-recourseto us, received commitment letters from their existing credit facility providerwith respect to the renewal of the existing facilities on substantially thesame terms. The commitment letters are binding, subject to customary provisionsfor final documentation, legal due diligence and other customary matters. Underthe terms of the newly committed facilities, interest will be charged at a rateof the Australian index rate plus a margin of 2.4%, and the maturity will beextended for three years to approximately May 2010. The aggregate outstandingbalance as of March 31, 2007 under the Australian facilities is A$59.3 million($47.9 million, of which $3.6 million is classified as current portion of longterm debt).

**Compliance with Covenants**

Our management believes that we are in compliancewith the covenants contained in the agreements governing the Senior CreditFacilities, the A/R Securitization Program (as defined in “Note 9. Securitizationof Accounts Receivable”) and the indentures governing our notes.

**8.             DERIVATIVEINSTRUMENTS AND HEDGING ACTIVITIES**

Asof March 31, 2007 and December 31, 2006, and for the three months ended March31, 2007 and 2006, the fair value, change in fair value, and realized gains orlosses of outstanding hedging contracts were not significant.

We may enter into foreign currency derivative instruments to minimizethe short-term impact of movements in foreign currency rates. As of March 31,2007 and December 31, 2006, and for the three months ended March 31, 

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2007and 2006, the fair value and realized gains (losses) of outstanding foreigncurrency rate hedging contracts were not significant.

In conjunctionwith our first quarter 2007 redemption of the remaining 10.125% eurodenominated subordinated notes due 2009 discussed in “Note 7. Debt” above, andin an effort to maintain approximately the same amount of euro denominated debtexposure, on March 27, 2007 we entered into a cross currency rate interest rateswap pursuant to which we have agreed to swap $152.6 million of LIBOR floatingrate debt payments for €115.9 million of EURIBOR floating rate debt payments.On maturity, August 15, 2012, we are required to pay principal of €115.9million and will receive principal of $152.6 million. During the life of thisswap, we will receive floating rate interest (LIBOR) in dollars and we will payfloating rate interest (EURIBOR) in euros. The fair value of this swap was a$2.2 million liability as of March 31, 2007. This swap is currently notdesignated as a hedge for financial reporting purposes.

In conjunctionwith the Amendment as discussed in “Note 7. Debt” above, and in an effort tomaintain approximately the same amount of euro denominated debt exposure, onApril 19, 2007 we entered into a cross currency rate interest rate swappursuant to which we have agreed to swap $95.8 million of LIBOR floating ratedebt payments for €70.7 million of EURIBOR floating rate debt payments. Onmaturity, April 19, 2010, we are required to pay principal of €70.7 million andwill receive principal of $95.8 million. During the life of this swap, we willreceive floating rate interest (LIBOR) in dollars and we will pay floating rateinterest (EURIBOR) in euros. This swap was designated as a hedge of a netinvestment for financial reporting purposes.

From time to time,we review our non-U.S. dollar denominated debt and swaps to determine theappropriate amounts designated as hedges. As of March 31, 2007, we havedesignated approximately €421 million of debt as a net investment hedge. As ofMarch 31, 2007, we had approximately €1,097 million in net euro assets.

**9.             SECURITIZATION OF ACCOUNTSRECEIVABLE**

Under our accounts receivable securitization program (“A/R SecuritizationProgram”), we grant an undivided interest in certain of our trade receivablesto a qualified off-balance sheet entity (the “Receivables Trust”) at adiscount. This undivided interest serves as security for the issuance by theReceivables Trust of commercial paper. The A/R Securitization Programcurrently provides for financing through a commercial paper conduit program (inboth U.S. dollars and euros). The A/R Securitization Program consists of acommercial paper conduit program with a committed amount of approximately $500million U.S. dollar equivalents and it terminates in the second quarter of2009. Interest costs to the Receivables Trust are LIBOR and/or EURIBOR, asapplicable, plus 60 basis points per annum based upon a pricing grid (which isdependent upon our credit rating). Transfers of accounts receivable to theReceivables Trust are accounted for as sales.

As of March 31, 2007, the Receivables Trust had $456.7 million in U.S.dollar equivalents (comprised of $230.0 million and approximately €170 million($226.7 million)) in commercial paper outstanding and availability under theprogram was $489.3 million in U.S. dollar equivalents. As a result of thePending U.S. Petrochemicals Disposition (see “Note 4. Business Dispositions andCombinations”), we anticipate that our capacity under the A/R SecuritizationProgram will decrease by approximately $100 million to $150 million.

**10.          EMPLOYEEBENEFIT PLANS**

Components of the netperiodic benefit costs for the three months ended March 31, 2007 and 2006 wereas follows (dollars in millions):

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**Huntsman Corporation**
| ** **                                            | ** ** | **Defined Benefit Plans  Three Months Ended  March 31,** | ** ** | **Other Postretirement Benefit  Plans  Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007 **                                                                    | ** ** | **2006 **                                                                                  | ** ** | **2007 ** | ** ** | **2006 ** | ** ** |
| Service cost                                          |       | $                                                                                 | 20.8       |                                                                                            | $          | 20.3 |   | $ | 1.1 |   | $ | 1.1 |   |
| Interest cost                                         |       | 34.1                                                                              |       | 31.7                                                                                            |       | 2.4 |   | 2.3 |   |
| Expected return  on assets                            |       | (43.6                                                                             | )          | (37.1                                                                                           | )          | — |   | — |   |
| Amortization of  transition obligation                |       | 0.5                                                                               |       | 0.4                                                                                             |       | — |   | — |   |
| Amortization of  prior service cost                   |       | (1.7                                                                              | )          | (1.7                                                                                            | )          | (0.7 | ) | (0.7 | ) |
| Amortization of  actuarial loss                       |       | 3.2                                                                               |       | 4.5                                                                                             |       | 0.9 |   | 0.8 |   |
| Settlement loss                                       |       | —                                                                            |       | 0.4                                                                                             |       | — |   | — |   |
| Net periodic  benefit cost                            |       | 13.3                                                                              |       | 18.5                                                                                            |       | 3.7 |   | 3.5 |   |
| Less amounts  included in discontinued operations     |       | —                                                                            |       | (3.9                                                                                            | )          | — |   | — |   |
| Net periodic benefit  cost from continuing operations |       | $                                                                                 | 13.3       |                                                                                            | $          | 14.6 |   | $ | 3.7 |   | $ | 3.5 |   |

 

**HuntsmanInternational**
| ** **                                            | ** ** | **Defined Benefit Plans  Three Months Ended  March 31,** | ** ** | **Other Postretirement Benefit  Plans  Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007 **                                                                    | ** ** | **2006 **                                                                                  | ** ** | **2007 ** | ** ** | **2006 ** | ** ** |
| Service cost                                          |       | $                                                                                 | 20.8       |                                                                                            | $          | 20.3 |   | $ | 1.1 |   | $ | 1.1 |   |
| Interest cost                                         |       | 34.1                                                                              |       | 31.7                                                                                            |       | 2.4 |   | 2.3 |   |
| Expected return  on assets                            |       | (43.6                                                                             | )          | (37.1                                                                                           | )          | — |   | — |   |
| Amortization of  transition obligation                |       | 0.5                                                                               |       | 0.4                                                                                             |       | — |   | — |   |
| Amortization of  prior service cost                   |       | (1.7                                                                              | )          | (1.7                                                                                            | )          | (0.7 | ) | (0.7 | ) |
| Amortization of  actuarial loss                       |       | 4.9                                                                               |       | 6.9                                                                                             |       | 0.9 |   | 0.8 |   |
| Settlement loss                                       |       | —                                                                            |       | 0.4                                                                                             |       | — |   | — |   |
| Net periodic  benefit cost                            |       | 15.0                                                                              |       | 20.9                                                                                            |       | 3.7 |   | 3.5 |   |
| Less amounts  included in discontinued operations     |       | —                                                                            |       | (4.4                                                                                            | )          | — |   | — |   |
| Net periodic benefit  cost from continuing operations |       | $                                                                                 | 15.0       |                                                                                            | $          | 16.5 |   | $ | 3.7 |   | $ | 3.5 |   |

 

We expect to incura non-cash pension settlement loss of approximately $16 million during2007 in connection with the U.K. Petrochemicals Disposition and acurtailment gain of approximately $19 million related to the PendingU.S. Petrochemicals Disposition.

During the threemonths ended March 31, 2007 and 2006, we made contributions to our pensionplans of $60.3 million and $20.6 million, respectively. During the remainder of2007, we expect to contribute an additional $125.8 million to our pensionplans.

**11.****          DIVIDENDS**

**5% MandatoryConvertible Preferred Stock**

In connection withthe initial public offering of our 5% mandatory convertible preferred stock onFebruary 16, 2005, we declared all dividends that will be payable on suchpreferred stock from the issuance through the mandatory conversion date, whichis February 16, 2008. Accordingly, we recorded dividends payable of 

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$43.1 million and acorresponding charge to net income available to common stockholders during thefirst quarter of 2005. As of March 31, 2007, we had $14.1 million invested ingovernment securities that are restricted for satisfaction of our dividendpayment obligations through the mandatory conversion date. We expect to paydividends in cash on May 16, August 16 and November 16, 2007 andon February 16, 2008. Under certain circumstances, we may not be allowedto pay dividends in cash. If this were to occur, any unpaid dividend would bepayable in shares of common stock on February 16, 2008 based on the marketvalue of common stock at that time.

**Common Stock**

On March 30, 2007,we paid a cash dividend of $22.1 million, or $0.10 per share, to commonstockholders of record as of March 15, 2007.

**12.          OTHERCOMPREHENSIVE INCOME (LOSS)**

The components of othercomprehensive income (loss) were as follows (dollars in millions):

**Huntsman Corporation**
| ** **                                                                                                                                         | ** ** | **Accumulated other   comprehensive income (loss) ** | ** ** | **Other comprehensive  income (loss) ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | ** **                                                                    | ** ** | **Three Months Ended **                 | ** ** |
| ** **                                                                                                                                         | ** ** | **March 31, 2007 **                                            | ** ** | **December 31, 2006 **                  | ** ** | **March 31, 2007 ** | ** ** | **March 31, 2006 ** | ** ** |
| Foreign currency  translation adjustments, net of tax of $28.5 million and $31.8 million as of  March 31, 2007 and December 31, 2006, respectively |       | $                                                                             | 245.8      |                                                   | $          | 228.3 |   | $ | 17.5 |   | $ | 27.7 |   |
|                                                                                                                                               |       |                                                                          |       |                                                   |       |   |   |   |   |
| Pension related  adjustments, net of tax of $64.8 and $63.8 as of March 31, 2007 and December  31, 2006, respectively                              |       | (301.9                                                                        | )          | (304.1                                                 | )          | 2.2 |   | 2.5 |   |
| Other  comprehensive income of unconsolidated affiliates                                                                                           |       | 7.3                                                                           |       | 7.3                                                    |       | — |   | — |   |
| Other, net of  tax of $0.2 million and nil as of March 31, 2007 and December 31, 2006,  respectively                                               |       | 7.6                                                                           |       | 7.1                                                    |       | 0.5 |   | 0.8 |   |
| Total                                                                                                                                              |       | $                                                                             | (41.2      | )                                                      | $          | (61.4 | ) | $ | 20.2 |   | $ | 31.0 |   |

 

**Huntsman International**
| ** **                                                                                                                                       | ** ** | **Accumulated other   comprehensive income (loss)** | ** ** | **Other comprehensive  income (loss)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | ** **                                                              | ** ** | ** **                                       | ** ** | **Three Months Ended** | ** ** |
| ** **                                                                                                                                       | ** ** | **March 31,  2007 **                                          | ** ** | **December 31,  2006 **                | ** ** | **March 31,  2007 ** | ** ** | **March 31,  2006 ** | ** ** |
| Foreign currency  translation adjustments, net of tax of $3.5 million and $0.2 million as of  March 31, 2007 and December 31, 2006, respectively |       | $                                                                       | 285.6      |                                             | $          | 266.9 |   | $ | 18.7 |   | $ | 30.9 |   |
|                                                                                                                                             |       |                                                                    |       |                                             |       |   |   |   |   |
| Pension related  adjustments, net of tax of $101.4 and $101.6 as of March 31, 2007 and  December 31, 2006, respectively                          |       | (400.3                                                                  | )          | (404.1                                           | )          | 3.8 |   | 2.5 |   |
| Other  comprehensive income of unconsolidated affiliates                                                                                         |       | 7.3                                                                     |       | 7.3                                              |       | — |   | — |   |
| Other, net of  tax of $0.2 million and nil as of March 31, 2007 and December 31, 2006,  respectively                                             |       | 2.1                                                                     |       | 1.6                                              |       | 0.5 |   | 0.9 |   |
| Total                                                                                                                                            |       | $                                                                       | (105.3     | )                                                | $          | (128.3 | ) | $ | 23.0 |   | $ | 34.3 |   |

 

Items of othercomprehensive income (loss) of our Company and our unconsolidated affiliateshave been recorded net of tax, with the exception of the foreign currencytranslation adjustments related to subsidiaries with earnings permanentlyreinvested. The tax effect is determined based upon the jurisdiction where theincome or loss was recognized and is net of valuation allowances that have beenrecorded.

**13.          COMMITMENTSAND CONTINGENCIES**

**Legal Matters**

**DiscolorationClaims**

Certain claimshave been filed against us relating to discoloration of unplasticized polyvinylchloride products allegedly caused by our titanium dioxide. Substantially allof the titanium dioxide that is the subject of these claims was manufacturedprior to our acquisition of our titanium dioxide business from ICI in 1999. Netof amounts we have received from insurers and pursuant to contracts ofindemnity, we have paid an aggregate of approximately $16 million in costsand settlement amounts for Discoloration Claims through March 31, 2007.

 

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The followingtable presents information about the number of Discoloration Claims for theperiods indicated. Claims include all claims for which service has beenreceived by us, and each such claim represents a plaintiff who is pursuing aclaim against us.
| ** **                                | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Claims unresolved at  beginning of period |       | 2                                                          |       | 2                                                          |       |
| Claims filed during  period               |       | 0                                                          |       | 0                                                          |       |
| Claims resolved during  period            |       | 0                                                          |       | 0                                                          |       |
| Claims unresolved at end of period        |       | 2                                                          |       | 2                                                          |       |

 

The twoDiscoloration Claims unresolved as of March 31, 2007 asserted aggregate damagesof approximately $70 million. An appropriate liability has been accruedfor these claims. Based on our understanding of the merits of these claims andour rights under contracts of indemnity and insurance, we do not believe thatthe net impact on our financial condition, results of operations or liquiditywill be material.

While additionalDiscoloration Claims may be made in the future, we cannot reasonably estimatethe amount of loss related to such claims. Although we may incur additionalcosts as a result of future claims (including settlement costs), based on ourhistory with Discoloration Claims to date, the fact that substantially all ofthe titanium dioxide that has been the subject of these Discoloration Claimswas manufactured and sold more than six years ago, and the fact that we haverights under contract to indemnity, including from ICI, we do not believe thatany unasserted Discoloration Claims will have a material impact on ourfinancial condition, results of operations, or liquidity. Based on thisconclusion and our inability to reasonably estimate our expected costs withrespect to these unasserted claims, we have made no accruals in our financialstatements as of March 31, 2007 for costs associated with unassertedDiscoloration Claims.

**AsbestosLitigation**

We have been namedas a “premises defendant” in a number of asbestos exposure cases, typically aclaim by a non-employee of exposure to asbestos while at a facility. In thepast, these cases typically have involved multiple plaintiffs bringing actionsagainst multiple defendants, and the complaint has not indicated whichplaintiffs were making claims against which defendants, where or how thealleged injuries occurred or what injuries each plaintiff claimed. These facts,which would be central to any estimate of probable loss, generally have beenlearned only through discovery. Recent changes in Texas tort procedures haverequired many pending cases to be split into multiple cases, one for eachclaimant, increasing the number of pending cases reported below for the threemonths ended March 31, 2007. While the complaints in these cases providelittle additional information, we do not believe that the increased number ofcases resulting from the changes in Texas tort procedure reflects an increasein the number of underlying claims.

Where the allegedexposure occurred prior to our ownership of the relevant “premises,” the priorowners generally have contractually agreed to retain liability for, and toindemnify us against, asbestos exposure claims. This indemnification is notsubject to any time or dollar amount limitations. Upon service of a complaintin one of these cases, we tender it to the prior owner. None of the complaintsin these cases state the amount of damages being sought. The prior owneraccepts responsibility for the conduct of the defense of the cases and paymentof any amounts due to the claimants. In our twelve-year experience withtendering these cases, we have not made any payment with respect to anytendered asbestos cases. We believe that the prior owners have the intentionand ability to continue to honor their indemnity obligations, although wecannot assure you that they will continue to do so or that we will not beliable for these cases if they do not.

The followingtable presents for the periods indicated certain information about cases forwhich service has been received that we have tendered to the prior owner, allof which have been accepted.

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| ** **                         | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 1,367                                                      |       | 576                                                        |       |
| Tendered during  period            |       | 13                                                         |       | 822                                                        |       |
| Resolved during  period (1)        |       | 71                                                         |       | 51                                                         |       |
| Unresolved at end of  period       |       | 1,309                                                      |       | 1,347                                                      |       |

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(1)                                  Althoughthe indemnifying party informs us when tendered cases have been resolved, itgenerally does not inform us of the settlement amounts relating to such cases,if any. The indemnifying party has informed us that it typically manages ourdefense together with the defense of other entities in such cases and resolvesclaims involving multiple defendants simultaneously, and that it considers theallocation of settlement amounts, if any, among defendants to be confidentialand proprietary. Consequently, we are not able to provide the number of casesresolved with payment by the indemnifying party or the amount of such payments.

We have never madeany payments with respect to these cases. As of March 31, 2007, we had anaccrued liability of $12.5 million relating to these cases and acorresponding receivable of $12.5 million relating to our indemnityprotection with respect to these cases. We cannot assure you that our liabilitywill not exceed our accruals or that our liability associated with these caseswould not be material to our financial condition, results of operations orliquidity; however, we are not able to estimate the amount or range of loss inexcess of our accruals. Additional asbestos exposure claims may be made againstus in the future, and such claims could be material. However, because we arenot able to estimate the amount or range of losses associated with such claims,we have made no accruals with respect to unasserted asbestos exposure claims asof March 31, 2007.

Certain cases inwhich we are a “premises defendant” are not subject to indemnification by priorowners or operators. The following table presents for the periods indicatedcertain information about these cases. Cases include all cases for whichservice has been received by us, other than a number of cases that were erroneouslyfiled against us due to a clerical error. The cases filed in error are subjectto a voluntary dismissal agreement and are in the process of being dismissed.
| ** **                         | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 42                                                         |       | 34                                                         |       |
| Filed during  period               |       | 51                                                         |       | 3                                                          |       |
| Resolved during  period            |       | 2                                                          |       | 4                                                          |       |
| Unresolved at end of  period       |       | 91                                                         |       | 33                                                         |       |

 

We paid grosssettlement costs for asbestos exposure cases that are not subject toindemnification of approximately $0.1 million and $5,000 during the threemonths ended March 31, 2007 and 2006, respectively. As of March 31,2007, we had an accrual of approximately $2.0 million relating to these cases.We cannot assure you that our liability will not exceed our accruals or thatour liability associated with these cases would not be material to ourfinancial condition, results of operations or liquidity; however, we are notable to estimate the amount or range of loss in excess of our accruals.Additional asbestos exposure claims may be made against us in the future, andsuch claims could be material. However, because we are not able to estimate theamount or range of losses associated with such claims, we have made no accrualswith respect to unasserted asbestos exposure claims as of March 31, 2007.

**AntitrustMatters**

We have been namedas a defendant in putative class action antitrust suits alleging a conspiracyto fix prices in the MDI, TDI, and polyether polyols industries that are nowconsolidated as the “Polyether Polyols” cases in multidistrict litigation knownas In re Urethane Antitrust Litigation, MDL No. 1616, CivilNo. 2:04-md-01616-JWL-DJW, United States District Court, District ofKansas, initial order transferring and consolidating cases filed August 23,2004. Other defendants named in the Polyether Polyols cases are Bayer, BASF,Dow and Lyondell. Bayer 

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entered into a settlementagreement with the plaintiffs that was approved by the court.Class certification discovery is underway in these consolidated cases.

We have also beennamed as a defendant in putative class action antitrust suits alleging aconspiracy to fix prices in the MDI, TDI and polyether polyols industries filedin the Superior Court of Justice, Ontario, Canada on May 5, 2006 and inSuperior Court, Quebec, Canada on May 17, 2006. The other defendants namedabove in the Polyether Polyols cases are also defendants in these Canadiancases.

The pleadings ofthe plaintiffs in these antitrust suits provide few specifics about any allegedillegal conduct of the defendants, and we are not aware of any evidence ofillegal conduct by us or any of our employees. For these reasons, we cannotestimate the possible loss or range of loss relating to these claims, andtherefore we have not accrued a liability for these claims. Nevertheless, wecould incur losses due to these claims in the future and those losses could bematerial.

In addition, onFebruary 16, 2006, the Antitrust Division of the U.S. Department ofJustice served us with a grand jury subpoena requesting production of documentsrelating to the businesses of TDI, MDI, polyether polyols and related systems.The other defendants in the Polyether Polyols cases have confirmed that theyhave also been served with subpoenas in this matter. We are cooperating fullywith the investigation.

**MTBE Litigation**

In March 2007, wewere named for the first time as a defendant in eight lawsuits allegingliability related to MTBE contamination in groundwater. Numerous othercompanies, including refiners, manufacturers and sellers of gasoline, as wellas manufacturers of MTBE, have been named as defendants in these and many othercases currently pending in U.S. courts. The plaintiffs in the eight cases inwhich we have been named are municipal water districts and a regional watersupply authority that claim that defendants' conduct has caused MTBEcontamination of their groundwater. The plaintiffs seek injunctive relief, suchas monitoring and abatement, compensatory damages, punitive damages andattorney fees. At this time, we have insufficient information to meaningfullyassess our potential exposure in these cases.

**OtherProceedings**

We are a party to variousother proceedings instituted by private plaintiffs, governmental authoritiesand others arising under provisions of applicable laws, including variousenvironmental, products liability and other laws. Except as otherwise disclosedin this report, we do not believe that the outcome of any of these matters willhave a material adverse effect on our financial condition, results ofoperations or liquidity. For more information, see “Note 14.Environmental, Health and Safety Matters—Remediation Liabilities.”

**GuaranteeS**

InJanuary 2003, Huntsman International entered into two related jointventure agreements to build MDI production facilities near Shanghai, China.SLIC, our manufacturing joint venture with BASF AG and three Chinese chemicalcompanies, operates three plants that manufacture MNB, aniline and crude MDI.We effectively own 35% of SLIC and it is an unconsolidated affiliate.

OnSeptember 19, 2003, SLIC obtained secured financing for the constructionof production facilities. SLIC obtained various committed loans in theaggregate amount of approximately $230 million in U.S. dollar equivalents.As of March 31, 2007, there were $87.7 million and RMB 1,095 million($141.8 million) in outstanding borrowings under these facilities. Theinterest rate on these facilities is LIBOR plus 0.48% for U.S. dollarborrowings and 90% of the Peoples Bank of China rate for RMB borrowings. Theloans are secured by substantially all the assets of SLIC and will be paid in16 semiannual installments, beginning on June 30, 2007. We unconditionallyguarantee 35% of any amounts due and unpaid by SLIC under the loans describedabove (except for a $1.5 million VAT facility which is not guaranteed). Ourguarantee remains in effect until SLIC has commenced production of at least 70%of capacity for at least 30 days and achieved a debt service coverage ratio ofat least 1:1. SLIC commenced operations in the third quarter of 2006. We haveestimated that the fair value of this guarantee is nil as of the closing of thetransaction and, accordingly, no amounts have been recorded.

**14.          ENVIRONMENTAL, HEALTH AND SAFETYMATTERS**

We are subject toextensive federal, state, local and foreign laws, regulations, rules andordinances relating to safety, pollution, protection of the environment and thegeneration, storage, handling, transportation, treatment, disposal andremediation of hazardous substances and waste materials. In the ordinary courseof business, we are subject to frequent environmental inspections andmonitoring and occasional investigations by governmental enforcementauthorities. In addition, our production facilities require operating permitsthat are subject to renewal, modification and, in certain circumstances,revocation. Actual or alleged violations of safety laws, environmental laws 

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or permit requirementscould result in restrictions or prohibitions on plant operations, substantialcivil or criminal sanctions, as well as, under some environmental laws, theassessment of strict liability and/or joint and several liability. Moreover,changes in environmental regulations could inhibit or interrupt our operationsor require us to modify our facilities or operations. Accordingly,environmental or regulatory matters may cause us to incur significantunanticipated losses, costs or liabilities.

**EHSCapital Expenditures**

We may incurfuture costs for capital improvements and general compliance under EHS laws,including costs to acquire, maintain and repair pollution control equipment.For the three months ended March 31, 2007 and 2006, our capital expendituresfor EHS matters totaled $7.2 million and $6.7 million, respectively. Sincecapital expenditures for these matters are subject to evolving regulatoryrequirements and depend, in part, on the timing, promulgation and enforcementof specific requirements, we cannot provide assurance that our recentexpenditures will be indicative of future amounts required under EHS laws.

**RemediationLiabilities**

We have incurred,and we may in the future incur, liability to investigate and clean up waste orcontamination at our current or former facilities or facilities operated bythird parties at which we may have disposed of waste or other materials.Similarly, we may incur costs for the cleanup of wastes that were disposed ofprior to the purchase of our businesses. Under some circumstances, the scope ofour liability may extend to damages to natural resources.

Under CERCLA andsimilar state laws, a current or former owner or operator of real property maybe liable for remediation costs regardless of whether the release or disposalof hazardous substances was in compliance with law at the time it occurred, anda current owner or operator may be liable regardless of whether it owned oroperated the facility at the time of the release. We have been notified bythird parties of claims against us for cleanup liabilities at approximately 12former facilities or third party sites, including, but not limited to, siteslisted under CERCLA. Based on current information and past experiences at otherCERCLA sites, we do not expect any of these third party claims to result inmaterial liability to us.

In addition, underRCRA and similar state laws, we may be required to remediate contaminationoriginating from our properties as a condition to our hazardous waste permit.Some of our manufacturing sites have an extended history of industrial chemicalmanufacturing and use, including on-site waste disposal. We are aware of soil,groundwater or surface contamination from past operations at some of our sites,and we may find contamination at other sites in the future. For example, ourOdessa, Port Arthur and Port Neches facilities in Texas, and our Geismarfacility in Louisiana, are the subject of ongoing remediation requirementsunder RCRA authority.

In many cases, ourpotential liability arising from historical contamination is based onoperations and other events occurring prior to our ownership of a business orspecific facility. In these situations, we frequently obtained an indemnityagreement from the prior owner addressing remediation liabilities arising frompre-closing conditions. We have successfully exercised our rights under thesecontractual covenants for a number of sites and, where applicable, mitigatedour ultimate remediation liability. We cannot assure you, however, that all ofsuch matters will be subject to indemnity or that our existing indemnities willbe sufficient to cover our liabilities for such matters.

Based on availableinformation and the indemnification rights we believe are likely to beavailable, we believe that the costs to investigate and remediate knowncontamination will not have a material adverse effect on our financialcondition, results of operations or cash flows. However, if such indemnitiesare unavailable or do not fully cover the costs of investigation andremediation or we are required to contribute to such costs, and if such costsare material, then such expenditures may have a material adverse effect on ourfinancial condition, results of operations or cash flows. At the current time,we are unable to estimate the full cost, exclusive of indemnification benefits,to remediate any of the known contamination sites.

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**Environmental Reserves**

Wehave accrued liabilities relating to anticipated environmental cleanupobligations, site reclamation and closure costs, and known penalties.Liabilities are recorded when potential liabilities are either known orconsidered probable and can be reasonably estimated. Our liability estimatesare based upon available facts, existing technology and past experience. Theenvironmental liabilities do not include amounts recorded as asset retirementobligations. We have accrued $13.4 million and $14.0 million forenvironmental liabilities as of March 31, 2007 and December 31, 2006,respectively. Of these amounts, $6.2 million and $6.0 million areclassified as accrued liabilities on our consolidated balance sheets as ofMarch 31, 2007 and December 31, 2006, respectively, and $7.2 million and$8.0 million are classified as other noncurrent liabilities on ourconsolidated balance sheets as of March 31, 2007 and December 31, 2006,respectively. In certain cases, our remediation liabilities are payable overperiods of up to 30 years. We may incur losses for environmentalremediation in excess of the amounts accrued; however, we are not able toestimate the amount or range of such potential excess.

**Regulatory Developments**

UnderIPPC, EU member governments are to adopt rules and implement a cross media(air, water and waste) environmental permitting program for individualfacilities. While the EU countries are at varying stages in their respectiveimplementation of the IPPC permit program, we have submitted all necessary IPPCpermit applications required to date and in some cases received completedpermits from the applicable government agency. We expect to submit all otherIPPC applications and related documents on a timely basis as the variouscountries implement the IPPC permit program. Although we do not know withcertainty what each IPPC permit will require, we believe, based upon ourexperience with the permits received to date, that the costs of compliance withthe IPPC permit program will not be material to our financial condition,results of operations or cash flows.

InDecember 2006, the EU parliament and EU council approved a new EUregulatory framework for chemicals called “REACH” (Registration, Evaluation andAuthorization of Chemicals). REACH will take effect in June 2007, and theprogram it establishes will be phased in over 11 years. Under the regulation,companies that manufacture or import more than one ton of a chemical substanceper year will be required to register such chemical substances and isolatedintermediates in a central database. Use authorizations will be granted for aspecific chemical if the applicants can show that any risk in using thechemical can be adequately controlled or, where there are no suitablealternatives available, if the applicant can demonstrate that the social andeconomic benefits of using the chemical outweigh the risks. In addition,specified uses of some hazardous substances may be restricted. Furthermore, allapplicants will have to study the availability of alternative chemicals. If analternative is available, an applicant will have to submit a “substitution”plan to the regulatory agency. The regulatory agency will only authorizepersistent bio-accumulative and toxic substances if an alternative chemical isnot available. The registration, evaluation and authorization phases of theprogram will require expenditures and resource commitments in order to, forexample, develop information technology tools, generate data, prepare andsubmit dossiers for substance registration, participate in consortia, obtainlegal advice and reformulate products, if necessary. We have established across-business European REACH team that is working closely with our businessesto identify and list all substances manufactured or imported by us into the EU.Although the total long-term cost for REACH compliance is not estimable at thistime, we do not expect spending on REACH to exceed $5.0 million during 2007.

**Greenhouse Gas Regulation**

In the EU andother jurisdictions committed to compliance with the Kyoto Protocol to theUnited Nations Framework Convention on Climate Change (the “Convention”), thereis an increasing likelihood that our manufacturing sites will be affected insome way over the next few years by taxation of greenhouse gas (“GHG”)emissions. In addition, although the U.S. is not a signatory to the Convention,several states, including California, are implementing their own GHG regulatoryprograms, and a federal program in the U.S. is a possibility for the future.Several of our sites are subject to existing GHG legislation, but few haveexperienced or anticipate significant cost increases as a result, although itis likely that GHG emission restrictions will increase over time. Potentialconsequences of such restrictions include increases in energy costs above thelevel of general inflation, as well as 

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direct compliance costs.Currently, however, it is not possible to estimate the likely financial impactof potential future regulation on any of our sites.

**Chemical Facility Anti-terrorism Rulemaking**

As required by theHomeland Security Appropriations Act of 2006, on April 9, 2007, the Departmentof Homeland Security issued the “Chemical Facility Anti-Terrorism Standards,”an interim final rule establishing risk-based performance standards for thechemical industry. The majority of the standards goes into effect on June 8,2007 and requires security vulnerability assessments and site security plansfor facilities qualifying as high risk.

Since 2003, wehave conducted security vulnerability assessments at our higher riskmanufacturing facilities in the U.S. Those assessments led to changes in ouroperations in certain instances in an effort to ensure greater security.However, not all or our facilities, including some or our recently-acquiredsites, have been assessed. Whether the assessments and resulting improvementswill fully satisfy the requirements of this new regulation, and whetheradditional changes which could cause us to incur costs will have to be made, isunclear to us at this time.

**15.          STOCK-BASED COMPENSATION PLANS**

Under the HuntsmanStock Incentive Plan (the “Stock Incentive Plan”), a plan approved bystockholders, we may grant non-qualified stock options, incentive stockoptions, stock appreciation rights, restricted stock, phantom stock, performanceawards and other stock-based awards to our employees and directors and toemployees and directors of our subsidiaries, provided that incentive stockoptions may be granted solely to employees. The terms of the grants are fixedat the grant date. As of March 31, 2007, we were authorized to grant up to21,590,909 shares under the Stock Incentive Plan. Option awards have a maximumcontractual term of 10 years and generally must have an exercise price atleast equal to the market price of our common stock on the date the optionaward is granted. Stock-based awards generally vest ratably over a three-yearperiod.

The compensationcost for the Stock Incentive Plan was $5.3 million and $3.5 million for thethree months ended March 31, 2007 and 2006, respectively. The total income taxbenefit recognized in the statement of operations for stock-based compensationarrangements was nil for each of the three months ended March 31, 2007 and2006.

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The fair value ofeach stock option award is estimated on the date of grant using theBlack-Scholes valuation model that uses the assumptions noted in the followingtable. Because we became a publicly-held company in February 2005, expectedvolatilities are based on implied volatilities from the stock of comparable companiesand other factors. The expected term of options granted is estimated based onthe contractual term of the instruments and employees’ expected exercise andpost-vesting employment termination behavior. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant.
| ** **                                                | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Dividend yield                                            |       | 1.9                                                  | %          | 0 | % |
| Expected  volatility                                      |       | 20.8                                                 | %          | 23.1 | % |
| Risk-free  interest rate                                  |       | 4.7                                                  | %          | 4.6 | % |
| Expected life of stock  options granted during the period |       | 6.6 years                                            |       | 6.6 years |   |

 

**Stock Options**

A summary of stock optionactivity under the Stock Incentive Plan as of March 31, 2007 and changes duringthe three months then ended is presented below:
| **OptionAwards **          | ** ** | **Shares ** | ** ** | **Weighted  Average  Exercise  Price ** | ** ** | **Weighted  Average  Remaining  Contractual  Term ** | ** ** | **Aggregate  Intrinsic  Value ** | ** ** |
|---------------------------------|------------|------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **(000)**        | ** ** | ** **                                   | ** ** | **(Years)**                                               | ** ** | **($000)**                            | ** ** |
| Outstanding at  January 1, 2007 |       | 4,151            |       | $                                            | 21.72      |                                                      |       |                                  |       |   |
| Granted                         |       | 2,206            |       | 20.66                                        |       |                                                      |       |                                  |       |
| Exercised                       |       | —           |       | —                                       |       |                                                      |       |                                  |       |
| Forfeited                       |       | (19              | )          | 20.74                                        |       |                                                      |       |                                  |       |
| Outstanding at  March 31, 2007  |       | 6,338            |       | 21.35                                        |       | 8.88                                                      |       | $                                     | 36         |   |
| Exercisable at  March 31, 2007  |       | 2,155            |       | 22.17                                        |       | 8.18                                                      |       | —                                |       |
|                                 |            |                  |            |                                              |            |                                                           |            |                                       |            |  |  |

 

Theweighted-average grant-date fair value of stock options granted during thethree months ended March 31, 2007 was $5.16 per option. As of March 31,2007, there was $23.7 million of total unrecognized compensation cost relatedto nonvested stock option arrangements granted under the Stock Incentive Plan.That cost is expected to be recognized over a weighted-average period ofapproximately 1.9 years.

 

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**Nonvested shares**

Nonvested shares grantedunder the Stock Incentive Plan consist of restricted stock and restricted stockunits, which are accounted for as equity awards, and phantom stock, which isaccounted for as a liability award because it can be settled in either stock orcash. A summary of the status of our nonvested shares as of March 31, 2007 andchanges during the three months then ended is presented below:
| ** **                    | ** ** | **Equity Awards** | ** ** | **Liability Awards**                               | ** ** |
|-------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|
| ** **                    | ** ** | **Shares**             | ** ** | **Weighted  Average Grant  Date Fair  Value** | ** ** | **Shares** | ** ** | **Weighted  Average Grant  Date Fair  Value** | ** ** |
| ** **                    | ** ** | **(000)**              | ** ** | ** **                                              | ** ** | **(000)** | ** ** | ** ** | ** ** |
| Nonvested at January 1,  2007 |       | 909                    |       | $                                                       | 21.73      |   | 46 |   | $ | 21.72 |   |
| Granted                       |       | 463                    |       | 20.66                                                   |       | 106 |   | 20.66 |   |
| Vested                        |       | (376                   | )(1)       | 22.02                                                   |       | (19 | ) | 21.97 |   |
| Forfeited                     |       | (2                     | )          | 20.91                                                   |       | — |   | — |   |
| Nonvested at March 31, 2007   |       | 994                    |       | 21.13                                                   |       | 133 |   | 20.84 |   |
|                               |            |                        |            |                                                         |            |  |  |  |  |  |  |

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(1)             Duringthe three months ended March 31, 2007, 3,888 restricted stock units vested.These shares are not reflected as vested shares in this table because, inaccordance with the restricted stock unit agreements, shares of common stockare not issued for vested restricted stock units until termination ofemployment.

As of March 31,2007, there was $24.0 million of total unrecognized compensation cost relatedto nonvested share compensation arrangements granted under the Stock IncentivePlan. That cost is expected to be recognized over a weighted-average period ofapproximately 2.1 years. The total fair value of shares that vested duringthe three months ended March 31, 2007 and 2006 was $8.7 million and $5.9million, respectively.

**16.          CASUALTY LOSSES AND INSURANCE RECOVERIES**

**2005 U.S. Gulf Coast Storms**

On September 22,2005, we suspended operations at our Gulf Coast facilities in Texas andLouisiana as a result of hurricane Rita. In addition, we sustained propertydamage at our Port Neches and Port Arthur, Texas facilities as a result of thehurricane. We maintain customary insurance coverage for property damage andbusiness interruption. With respect to coverage of these losses, the deductiblefor property damage was $10 million per site, while business interruptioncoverage does not apply for the first 60 days.

During 2006, we recordedinsurance recoveries of $26.5 million. We and our insurers are working to reacha settlement on the remainder of the insurance claim, and we can provide noassurance with respect to the ultimate resolution of this matter.

**Port Arthur, Texas Plant Fire**

On April 29, 2006,our Port Arthur, Texas olefins manufacturing plant experienced a major fire.With the exception of cyclohexane operations at the site, which were restartedin June 2006, the remaining operations at the site remain shutdown. Thedamage is significant and, while no assurances can be made, we currently expectoperations to restart early in the fourth quarter of 2007. The Port Arthurmanufacturing plant is covered by property damage and business interruptioninsurance. With respect to coverage for this outage, the deductible forproperty damage is $10 million and business interruption coverage does notapply for the first 60 days, subject to a combined deductible for propertydamage and business interruption of $60 million.

During the fourth quarterof 2006, we received insurance recovery advances of $150.0 million, of which$56.4 million was applied to our insurance receivables related to recovery ofcosts already incurred and $93.6 million was recorded as a deferred insurancerecovery gain in “Accrued liabilities” on the accompanying condensedconsolidated balance sheet (unaudited) as of December 31, 2006. On March 16,2007, we executed a sworn statement in proof of loss with our insurers toreceive additional recovery advances of $100.0 million, of which$58.5 million was received as of March 31, 2007. These proceeds werereflected in net cash used in operating activities in the accompanyingcondensed consolidated statements of cash flows (unaudited) for the threemonths ended March 31, 2007. The remaining $41.5 million was recordedas an insurance receivable in “Other current assets” on the accompanyingcondensed consolidated balance sheet (unaudited). The additional$100.0 million of deferred insurance recovery gain was recorded in “Accruedliabilities.”

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During the three monthsended March 31, 2007, we incurred expenditures and losses for both propertydamage and business interruption as a result of the Port Arthur fire. Duringthe first quarter ended March 31, 2007, we incurred $12.2 million in repair andmaintenance costs and $25.0 million of fixed costs during the businessinterruption period, all of which were charged to the deferred insurancerecovery gain, as recovery from our insurers was considered probable.

The following tabledescribes changes to the deferred insurance recovery gain during the threemonths ended March 31, 2007 (dollars in millions):
| Balance as of  January 1, 2007                                                                |   | $     | 93.6   |   |
|-----------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Additional  insurance recovery advances                                                       |   | 100.0 |   |
| Incurrence of  repair and maintenance costs during the three months ended March 31, 2007      |   | (12.2 | )      |
| Incurrence of business  interruption fixed costs during the three months ended March 31, 2007 |   | (25.0 | )      |
| Balance as of March 31,  2007                                                                 |   | $     | 156.4  |   |

 

The incurrence offuture fixed costs during the business interruption period and the futurerepair and maintenance expense of the damaged equipment will be offset againstthe deferred insurance recovery gain. Any such amounts incurred above thedeferred gain will be recorded as an insurance receivable if realization isdeemed probable. Future insurance recovery advances, if any, in excess ofaccrued fixed costs and other expenses relating to the damaged facilities willbe recorded as a deferred gain, and any remaining deferred gains associatedwith this event will not be recognized in our consolidated statements ofoperations until final settlement is reached with our insurance carriers.

**17.          INCOME TAXES**

We use the asset and liability method of accounting for income taxes.Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial and tax reporting purposes. We evaluatedeferred tax assets to determine whether it is more likely than not that theywill be realized. Valuation allowances have been established against a materialportion of the net deferred tax assets due to the uncertainty of realization.Valuation allowances are reviewed each period on a tax jurisdiction byjurisdiction basis to analyze whether there is sufficient positive or negativeevidence to support a change in judgment about the realizability of the relateddeferred tax assets.

We adopted the provisions of FIN 48 on January 1, 2007 and recognized a$0.3 million decrease in the liability for unrecognized tax benefits andrecorded a corresponding credit to accumulated deficit for the cumulativeeffect of a change in accounting principle. As of the adoption date, we had $123.8 millionof unrecognized tax benefits, of which $100.9 million, if recognized,would affect the effective tax rate.

In accordance with our accounting policy, we continue to recognizeinterest and penalties accrued related to unrecognized tax benefits in incometax expense. During the three months ended March 31, 2007, we recognized $1.0 million in income tax expense related to interest andpenalties. We had $11.3 million and $10.3 million accrued for the payment ofinterest and penalties at March 31, 2007 and January 1, 2007, respectively.

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We conduct business globally and, as a result, we file income tax returns in U.S. federal, various U.S. state and variousnon-U.S. jurisdictions. The following table summarizes the tax years thatremain subject to examination by major tax jurisdictions:
| **Tax  Jurisdiction** | ** ** | **Open Tax Years** | ** ** |
|-----------------------|------------|--------------------|------------|
| Australia             |       | 2001 and later     |
| Belgium               |       | 2004 and later     |
| China                 |       | 2002 and later     |
| Germany               |       | 2002 and later     |
| Italy                 |       | 2000 and later     |
| Switzerland           |       | 2004 and later     |
| The Netherlands       |       | 2003 and later     |
| U.K.                  |       | 1999 and later     |
| U.S. federal          |       | 2002 and later     |

 

On April 12, 2007, we received aRevenue Agent Report from the Internal Revenue Service related to theexamination of our U.S. federal income tax returns for the years 2002 through2004. The Internal Revenue Service proposed a decrease to our net operatinglosses of approximately $387 million related to transactions completed in2002. We believe that these claims are largely without merit and, therefore,will continue to dispute the proposed adjustments. We believe that adequateprovision for this item has been made in the financial statements. 

Certain of our U.S. and non-U.S.income tax returns are currently under various stages of audit by applicabletax authorities and the amounts ultimately agreed upon in resolution of theissues raised may differ materially from the amounts accrued. An estimate ofthe range of possible changes in the unrecognized tax benefits within the next12 months cannot be made.

**Huntsman Corporation**

We recorded an income taxexpense of $13.0 million for the three months ended March 31, 2007 and expenseof $15.5 million for the same period in 2006. Our tax obligations areaffected by the mix of income and losses in the tax jurisdictions in which weoperate.

Our effective incometax rates were 22% for the three months ended March 31, 2007 and 15% for thethree months ended March 31, 2006. Theseeffective tax rates are lower than the U.S. statutory rate of 35% primarily dueto our mix of earnings in tax jurisdictions where no tax expense is provideddue to the release of valuation allowances, losses in tax jurisdictions wherewe recognize tax benefits and earnings in tax jurisdictions with lower statutory rates. Our effective tax rateincreased largely due to income in jurisdictions where we are projected to nolonger have a valuation allowance, net increases in operating losses injurisdictions which do not record a tax benefit and net increases in operatingincome in jurisdictions which record a tax expense.

**Huntsman International**

Huntsman International recorded an income tax expense of $24.2 million for the three monthsended March 31, 2007 and expense of $20.8 million for the same period in 2006.Huntsman International’s tax obligations are affected by the mix ofincome and losses in the tax jurisdictions in which it operates.

Huntsman International’seffective income tax rates were 40% for the three months ended March 31, 2007and 20% for the three months ended March 31, 2006. Huntsman International’seffective tax rate increased largely due to income in jurisdictions where it isprojected to no longer have a valuation allowance, net increases in operatinglosses in jurisdictions which do not record a tax benefit and net increases inoperating income in jurisdictions which record a tax expense.

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**18.          NETINCOME PER SHARE**

Basicincome per share excludes dilution and is computed by dividing net incomeavailable to common stockholders by the weighted average number of sharesoutstanding during the period. Diluted income per share reflects potentialdilution and is computed by dividing net income available to commonstockholders by the weighted average number of shares outstanding during theperiod, increased by the number of additional shares that would have beenoutstanding if the potential dilutive units had been exercised or converted.

Basic and diluted incomeweighted average shares are determined as follows:
| ** **                                             | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Weighted average  shares outstanding                   |       | 220,783,501                                          |       | 220,554,906 |   |
| Dilutive securities:                                   |       |                                                 |       |   |   |
| Stock-based awards                                     |       | 162,363                                              |       | 49,093 |   |
| Preferred stock conversion                             |       | 12,499,925                                           |       | 12,499,925 |   |
| Total dilutive shares  outstanding assuming conversion |       | 233,445,789                                          |       | 233,103,924 |   |

 

                Additionalstock-based awards of 5,349,413 and 3,291,828 weighted average equivalentshares of stock were outstanding during the three months ended March 31, 2007and 2006, respectively and were not included in the computation of dilutedearnings per share because the effect would be anti-dilutive.

**19.          OPERATINGSEGMENT INFORMATION**

We report our operationsthrough six operating segments: Polyurethanes, Materials and Effects,Performance Products, Pigments, Polymers and Base Chemicals.

The major products ofeach reportable operating segment are as follows:
| **Segment**              | ** ** | **Products**                                                                                                                                                                                 |
|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Polyurethanes            |       | MDI products, PO, polyols, PG, TPU, aniline and MTBE                                                                                                                                         |
| Materials and Effects(2) |       | epoxy resin compounds and formulations;  cross-linking, matting and curing agents; epoxy, acrylic and  polyurethane-based adhesives, tooling resin formulations, textile chemicals  and dyes |
| Performance Products(1)  |       | amines, surfactants, LAB, maleic anhydride, other  performance chemicals, EG and technology licenses                                                                                         |
| Pigments                 |       | titanium dioxide                                                                                                                                                                             |
| Polymers(2)(3)           |       | LDPE and LLDPE, polypropylene, EPS and styrene                                                                                                                                               |
| Base Chemicals(1)(2)(3)  |       | ethylene, propylene and cyclohexane                                                                                                                                                          |

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(1)                                 Inthe fourth quarter of 2006, our Port Neches, Texas olefins facility wastransferred from our Base Chemicals segment to our Performance Productssegment. All segment information for prior periods has been reclassified toreflect this transfer.

(2)                                 EffectiveJanuary 1, 2007, the results of our APAO facility are reported in our Materialsand Effects segment. These results were previously reported in our Polymerssegment. All segment information for prior periods has been reclassified toreflect this transfer.

(3)                                 OnFebruary 15, 2007, we entered into an agreement on the Pending U.S.Petrochemicals Disposition. See “Note 4. Business Dispositions andCombinations—Agreement to Sell U.S. Base Chemicals and Polymers Business.” OnDecember 29, 2006, we completed the U.K. Petrochemicals Disposition. Theoperating results 

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of our European base chemicals and polymers businesshave been classified as discontinued operations and, accordingly, the revenuesof this business are excluded from the Base Chemicals operating segmentrevenues for all periods presented. The EBITDA of our European base chemicalsand polymers business is included in the Base Chemicals segment EBITDA for allperiods presented. See “Note 3. Discontinued Operations—Sale of European BaseChemicals and Polymers Business.” On June 27, 2006, we sold our U.S.butadiene and MTBE business operated in our Base Chemicals segment. See “Note4. Business Dispositions and Combinations—Sale of U.S. Butadiene and MTBEBusiness.” The PO/MTBE operations in our Polyurethanes segment were notincluded in this sale.

Sales betweensegments are generally recognized at external market prices and are eliminatedin consolidation. We use EBITDA to measure the financial performance of ourglobal business units and for reporting the results of our operating segments.This measure includes all operating items relating to the businesses. TheEBITDA of operating segments excludes items that principally apply to ourCompany as a whole. The revenues and EBITDA for each of our reportableoperating segments are as follows (dollars in millions):
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Net  Sales:**                               |       |                                                 |       |   |   |
| Polyurethanes                                 |       | $                                                    | 840.0      |   | $ | 809.1 |   |
| Materials and Effects                         |       | 589.6                                                |       | 323.1 |   |
| Performance Products                          |       | 551.9                                                |       | 509.9 |   |
| Pigments                                      |       | 270.2                                                |       | 258.8 |   |
| Polymers                                      |       | 411.3                                                |       | 423.5 |   |
| Base Chemicals                                |       | 132.6                                                |       | 447.3 |   |
| Eliminations                                  |       | (148.3                                               | )          | (115.0 | ) |
| Total                                         |       | $                                                    | 2,647.3    |   | $ | 2,656.7 |   |
|                                          |       |                                                 |       |   |   |
| **Huntsman  Corporation:**                    |       |                                                 |       |   |   |
| **Segment  EBITDA****(1)****:**               |       |                                                 |       |   |   |
| Polyurethanes                                 |       | $                                                    | 118.3      |   | $ | 159.2 |   |
| Materials and Effects                         |       | 57.1                                                 |       | 34.9 |   |
| Performance Products                          |       | 72.1                                                 |       | 50.9 |   |
| Pigments                                      |       | 23.5                                                 |       | 33.3 |   |
| Polymers                                      |       | 10.8                                                 |       | 35.2 |   |
| Base Chemicals                                |       | (0.5                                                 | )          | 14.8 |   |
| Corporate and other(2)                        |       | (39.3                                                | )          | (47.1 | ) |
| Total                                         |       | 242.0                                                |       | 281.2 |   |
|                                          |       |                                                 |       |   |   |
| Interest  expense, net                        |       | (73.8                                                | )          | (86.8 | ) |
| Income tax  expense - continuing operations   |       | (13.0                                                | )          | (15.5 | ) |
| Income tax  benefit - discontinued operations |       | 0.6                                                  |       | 7.1 |   |
| Depreciation and  amortization                |       | (109.2                                               | )          | (117.0 | ) |
| Net income                                    |       | $                                                    | 46.6       |   | $ | 69.0 |   |
|                                          |       |                                                 |       |   |   |
| **Huntsman  International:**                  |       |                                                 |       |   |   |
| **Segment EBITDA****(1):**                    |       |                                                 |       |   |   |
| Polyurethanes                                 |       | $                                                    | 118.3      |   | $ | 159.2 |   |
| Materials and Effects                         |       | 57.1                                                 |       | 34.9 |   |
| Performance Products                          |       | 72.1                                                 |       | 50.9 |   |
| Pigments                                      |       | 23.5                                                 |       | 33.3 |   |
| Polymers                                      |       | 10.8                                                 |       | 35.2 |   |
| Base Chemicals                                |       | (0.5                                                 | )          | 14.8 |   |
| Corporate and other(2)                        |       | (43.9                                                | )          | (49.1 | ) |
| Total                                         |       | 237.4                                                |       | 279.2 |   |
|                                          |       |                                                 |       |   |   |
| Interest  expense, net                        |       | (74.2                                                | )          | (88.0 | ) |
| Income tax  expense - continuing operations   |       | (24.2                                                | )          | (20.8 | ) |
| Income tax  benefit - discontinued operations |       | 0.6                                                  |       | 7.1 |   |
| Depreciation and  amortization                |       | (103.5                                               | )          | (110.2 | ) |
| Net income                                    |       | $                                                    | 36.1       |   | $ | 67.3 |   |

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(1)                                 SegmentEBITDA is defined as net income before interest, income tax and depreciationand amortization.

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(2)                                 EBITDAfrom corporate and other items includes unallocated corporate overhead, loss onearly extinguishment of debt, loss on A/R Securitization Program, unallocatedforeign exchange gains or losses, other non-operating income (expense), andextraordinary gain on the acquisition of a business.

**20.****                              CONDENSEDCONSOLIDATING FINANCIAL INFORMATION OF HUNTSMAN INTERNATIONAL LLC (UNAUDITED)**

The following condensedconsolidating financial information (unaudited) of Huntsman International LLCpresent, in separate columns, financial information for the following: HuntsmanInternational (on a parent only basis), with its investment in subsidiariesrecorded under the equity method; the guarantors of Huntsman International’sdebt on a combined, and where appropriate, consolidated basis; andnon-guarantor subsidiaries on a combined, and where appropriate, consolidatedbasis. Additional columns present eliminating adjustments and consolidatedtotals as of March 31, 2007 and December 31, 2006 and for the three monthsended March 31, 2007 and 2006. There are no contractual restrictions limitingtransfers of cash from Huntsman International’s guarantors to HuntsmanInternational. Each Huntsman International’s guarantor is 100% owned byHuntsman International and has fully and unconditionally guaranteed HuntsmanInternational’s debt on a joint and several basis.

 

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING BALANCE SHEET(UNAUDITED)****AS OF MARCH 31, 2007****(Dollars in Millions)**
| ** **                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **ASSETS**                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Current assets:**                                              |       |                |       |           |       |                 |       |             |       |                                           |       |
| Cash and cash  equivalents                                       |       | $                   | 1.8        |           | $          | 1.0                  |       | $                | 140.7      |                                           | $          | — |   | $ | 143.5 |   |
| Accounts and  notes receivables, net                             |       | 49.9                |       | 277.9          |       | 1,057.3              |       | —           |       | 1,385.1                                        |       |
| Accounts  receivable from affiliates                             |       | 680.5               |       | 3,139.7        |       | 427.8                |       | (4,218.9         | )          | 29.1                                           |       |
| Inventories, net                                                 |       | 155.5               |       | 404.3          |       | 1,026.5              |       | (4.5             | )          | 1,581.8                                        |       |
| Prepaid expenses                                                 |       | 4.3                 |       | 32.7           |       | 20.6                 |       | (14.0            | )          | 43.6                                           |       |
| Deferred income  taxes                                           |       | 4.8                 |       | 65.8           |       | 3.3                  |       | (5.0             | )          | 68.9                                           |       |
| Other current  assets                                            |       | 5.7                 |       | 2.6            |       | 147.9                |       | 0.2              |       | 156.4                                          |       |
| **Total  current assets**                                        |       | 902.5               |       | 3,924.0        |       | 2,824.1              |       | (4,242.2         | )          | 3,408.4                                        |       |
|                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| Property, plant and  equipment, net                              |       | 527.8               |       | 1,341.9        |       | 2,010.1              |       | 2.9              |       | 3,882.7                                        |       |
| Investment in  unconsolidated affiliates                         |       | 3,079.1             |       | 1,286.7        |       | 105.5                |       | (4,258.6         | )          | 212.7                                          |       |
| Intangible assets, net                                           |       | 139.8               |       | (8.5           | )          | 59.7                 |       | —           |       | 191.0                                          |       |
| Goodwill                                                         |       | —              |       | 86.9           |       | 8.9                  |       | (4.1             | )          | 91.7                                           |       |
| Deferred income taxes                                            |       | 20.8                |       | 2.7            |       | 183.1                |       | —           |       | 206.6                                          |       |
| Notes receivables from  affiliates                               |       | 4,028.5             |       | 1,578.6        |       | —               |       | (5,607.1         | )          | —                                         |       |
| Other noncurrent assets                                          |       | 63.6                |       | 134.3          |       | 204.2                |       | —           |       | 402.1                                          |       |
|                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Total  assets**                                                |       | $                   | 8,762.1    |           | $          | 8,346.6              |       | $                | 5,395.6    |                                           | $          | (14,109.1 | ) | $ | 8,395.2 |   |
|                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Current liabilities:**                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| Accounts payable                                                 |       | $                   | 77.8       |           | $          | 299.6                |       | $                | 727.1      |                                           | $          | — |   | $ | 1,104.5 |   |
| Accounts payable  to affiliates                                  |       | 3,335.7             |       | 292.3          |       | 608.5                |       | (4,218.8         | )          | 17.7                                           |       |
| Accrued  liabilities                                             |       | 75.2                |       | 279.2          |       | 465.4                |       | (14.0            | )          | 805.8                                          |       |
| Deferred income  tax                                             |       | 2.9                 |       | —         |       | 5.2                  |       | —           |       | 8.1                                            |       |
| Current portion  of long-term debt                               |       | 143.9               |       | 0.5            |       | 32.0                 |       | —           |       | 176.4                                          |       |
| **Total  current liabilities**                                   |       | 3,635.5             |       | 871.6          |       | 1,838.2              |       | (4,232.8         | )          | 2,112.5                                        |       |
|                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| Long-term debt                                                   |       | 3,354.5             |       | 2.4            |       | 159.1                |       | —           |       | 3,516.0                                        |       |
| Long-term  debt-affiliates                                       |       | 27.7                |       | 3,991.7        |       | 1,587.7              |       | (5,607.1         | )          | —                                         |       |
| Deferred income taxes                                            |       | 2.9                 |       | 75.6           |       | 101.3                |       | (4.9             | )          | 174.9                                          |       |
| Other noncurrent  liabilities                                    |       | 143.8               |       | 198.9          |       | 622.3                |       | (1.2             | )          | 963.8                                          |       |
| **Total  liabilities**                                           |       | 7,164.4             |       | 5,140.2        |       | 4,308.6              |       | (9,846.0         | )          | 6,767.2                                        |       |
| ** **                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| Minority interests in  common stock of consolidated subsidiaries |       | —              |       | 122.6          |       | 23.9                 |       | (116.2           | )          | 30.3                                           |       |
| **Members’ equity:**                                        |       |                |       |           |       |                 |       |             |       |                                           |       |
| Members’ equity                                             |       | 2,817.0             |       | 2,147.7        |       | 1,338.1              |       | (3,485.8         | )          | 2,817.0                                        |       |
| Subsidiary  preferred stock                                      |       | —              |       | 73.4           |       | 1.4                  |       | (74.8            | )          | —                                         |       |
| Accumulated  deficit                                             |       | (1,114.0            | )          | 731.4          |       | (25.7                | )          | (705.7           | )          | (1,114.0                                       | )          |
| Accumulated  other comprehensive (loss) income                   |       | (105.3              | )          | 131.3          |       | (250.7               | )          | 119.4            |       | (105.3                                         | )          |
| **Total members’  equity**                                  |       | 1,597.7             |       | 3,083.8        |       | 1,063.1              |       | (4,146.9         | )          | 1,597.7                                        |       |
|                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Total liabilities and members’ equity**                   |       | $                   | 8,762.1    |           | $          | 8,346.6              |       | $                | 5,395.6    |                                           | $          | (14,109.1 | ) | $ | 8,395.2 |   |

 

37

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING BALANCE SHEET(UNAUDITED)****AS OF DECEMBER 31, 2006****(Dollars in Millions)**

 
| ** **                                          | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **ASSETS**                                          |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Current assets:**                                 |       |                |       |           |       |                 |       |             |       |                                           |       |
| Cash and cash  equivalents                          |       | $                   | 18.1       |           | $          | —               |       | $                | 227.9      |                                           | $          | — |   | $ | 246.0 |   |
| Accounts and  notes receivables, net                |       | 35.3                |       | 216.0          |       | 992.0                |       | —           |       | 1,243.3                                        |       |
| Accounts  receivable from affiliates                |       | 605.2               |       | 2,766.0        |       | 445.0                |       | (3,796.7         | )          | 19.5                                           |       |
| Inventories, net                                    |       | 157.9               |       | 424.9          |       | 942.3                |       | (5.0             | )          | 1,520.1                                        |       |
| Prepaid expenses                                    |       | 8.0                 |       | 58.6           |       | 16.9                 |       | (27.8            | )          | 55.7                                           |       |
| Deferred income  taxes                              |       | 4.7                 |       | 66.5           |       | 4.5                  |       | (5.0             | )          | 70.7                                           |       |
| Other current  assets                               |       | 6.4                 |       | 4.6            |       | 150.6                |       | —           |       | 161.6                                          |       |
| **Total  current assets**                           |       | 835.6               |       | 3,536.6        |       | 2,779.2              |       | (3,834.5         | )          | 3,316.9                                        |       |
|                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| Property, plant and  equipment, net                 |       | 536.0               |       | 1,298.0        |       | 1,992.5              |       | 3.0              |       | 3,829.5                                        |       |
| Investment in  unconsolidated affiliates            |       | 3,094.4             |       | 1,250.6        |       | 92.9                 |       | (4,236.9         | )          | 201.0                                          |       |
| Intangible assets, net                              |       | 145.9               |       | (8.0           | )          | 54.7                 |       | —           |       | 192.6                                          |       |
| Goodwill                                            |       | —              |       | 86.9           |       | 7.4                  |       | (4.1             | )          | 90.2                                           |       |
| Deferred income taxes                               |       | 2.0                 |       | 2.0            |       | 184.7                |       | —           |       | 188.7                                          |       |
| Notes receivables from  affiliates                  |       | 3,572.2             |       | 1,539.9        |       | —               |       | (5,112.1         | )          | —                                         |       |
| Other noncurrent assets                             |       | 63.4                |       | 124.9          |       | 188.3                |       | —           |       | 376.6                                          |       |
|                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Total  assets**                                   |       | $                   | 8,249.5    |           | $          | 7,830.9              |       | $                | 5,299.7    |                                           | $          | (13,184.6 | ) | $ | 8,195.5 |   |
|                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**           |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Current liabilities:**                            |       |                |       |           |       |                 |       |             |       |                                           |       |
| Accounts payable                                    |       | $                   | 73.3       |           | $          | 281.3                |       | $                | 651.6      |                                           | $          | — |   | $ | 1,006.2 |   |
| Accounts payable  to affiliates                     |       | 2,924.7             |       | 245.1          |       | 643.7                |       | (3,796.8         | )          | 16.7                                           |       |
| Accrued  liabilities                                |       | 98.5                |       | 264.2          |       | 506.8                |       | (27.8            | )          | 841.7                                          |       |
| Deferred income  tax                                |       | —              |       | —         |       | 9.4                  |       | —           |       | 9.4                                            |       |
| Current portion  of long-term debt                  |       | 111.8               |       | 0.5            |       | 75.6                 |       | —           |       | 187.9                                          |       |
| **Total  current liabilities**                      |       | 3,208.3             |       | 791.1          |       | 1,887.1              |       | (3,824.6         | )          | 2,061.9                                        |       |
|                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| Long-term debt                                      |       | 3,356.6             |       | 2.5            |       | 98.3                 |       | —           |       | 3,457.4                                        |       |
| Long-term  debt-affiliates                          |       | 27.7                |       | 3,536.7        |       | 1,547.7              |       | (5,112.1         | )          | —                                         |       |
| Deferred income taxes                               |       | 4.8                 |       | 67.1           |       | 94.6                 |       | (4.9             | )          | 161.6                                          |       |
| Other noncurrent  liabilities                       |       | 119.0               |       | 197.4          |       | 635.7                |       | —           |       | 952.1                                          |       |
| **Total  liabilities**                              |       | 6,716.4             |       | 4,594.8        |       | 4,263.4              |       | (8,941.6         | )          | 6,633.0                                        |       |
| ** **                                          |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Minority interest in  consolidated subsidiaries** |       | —              |       | 118.5          |       | 23.4                 |       | (112.5           | )          | 29.4                                           |       |
| **Members’ equity:**                           |       |                |       |           |       |                 |       |             |       |                                           |       |
| Members’ equity                                |       | 2,811.8             |       | 2,228.7        |       | 1,314.0              |       | (3,542.7         | )          | 2,811.8                                        |       |
| Subsidiary  preferred stock                         |       | —              |       | 73.4           |       | 1.4                  |       | (74.8            | )          | —                                         |       |
| Accumulated  deficit                                |       | (1,150.4            | )          | 711.6          |       | (33.1                | )          | (678.5           | )          | (1,150.4                                       | )          |
| Accumulated  other comprehensive (loss) income      |       | (128.3              | )          | 103.9          |       | (269.4               | )          | 165.5            |       | (128.3                                         | )          |
| **Total members’  equity**                     |       | 1,533.1             |       | 3,117.6        |       | 1,012.9              |       | (4,130.5         | )          | 1,533.1                                        |       |
|                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Total liabilities and members’ equity**      |       | $                   | 8,249.5    |           | $          | 7,830.9              |       | $                | 5,299.7    |                                           | $          | (13,184.6 | ) | $ | 8,195.5 |   |

 

 

38

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)****THREE MONTHS ENDED MARCH 31, 2007****(Dollars in Millions)**

 
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales,  services and fees                                                  |       | $                   | 359.8      |           | $          | 836.1                |       | $                | 1,433.4    |                                           | $          | — |   | $ | 2,629.3 |   |
| Related party  sales                                                             |       | 124.0               |       | 79.2           |       | 252.0                |       | (437.2           | )          | 18.0                                           |       |
| **Total revenues**                                                               |       | 483.8               |       | 915.3          |       | 1,685.4              |       | (437.2           | )          | 2,647.3                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of goods sold**                                                           |       | 390.4               |       | 815.5          |       | 1,470.0              |       | (437.4           | )          | 2,238.5                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross Profit**                                                                 |       | 93.4                |       | 99.8           |       | 215.4                |       | 0.2              |       | 408.8                                          |       |
| Selling, general and  administrative                                             |       | 51.6                |       | 30.1           |       | 137.5                |       | (0.2             | )          | 219.0                                          |       |
| Research and  development                                                        |       | 9.7                 |       | 8.3            |       | 15.3                 |       | —           |       | 33.3                                           |       |
| Other operating expense  (income)                                                |       | 5.1                 |       | (3.6           | )          | 4.4                  |       | —           |       | 5.9                                            |       |
| Restructuring,  impairment and plant closing costs                               |       | —              |       | —         |       | 12.2                 |       | —           |       | 12.2                                           |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating income**                                                             |       | 27.0                |       | 65.0           |       | 46.0                 |       | 0.4              |       | 138.4                                          |       |
| Interest expense, net                                                            |       | (0.4                | )          | (41.7          | )          | (32.1                | )          | —           |       | (74.2                                          | )          |
| Gain (loss) on accounts  receivable securitization program                       |       | 0.8                 |       | (3.4           | )          | (2.8                 | )          | —           |       | (5.4                                           | )          |
| Equity in income of  investment in affiliates and subsidiaries                   |       | 18.3                |       | 14.1           |       | 2.1                  |       | (32.3            | )          | 2.2                                            |       |
| Loss on early  extinguishment of debt                                            |       | (1.8                | )          | —         |       | —               |       | —           |       | (1.8                                           | )          |
| Other income                                                                     |       | —              |       | —         |       | 0.5                  |       | —           |       | 0.5                                            |       |
| **Income from continuing  operations before income taxes and minority interest** |       | 43.9                |       | 34.0           |       | 13.7                 |       | (31.9            | )          | 59.7                                           |       |
| Income tax expense                                                               |       | (1.9                | )          | (10.5          | )          | (11.8                | )          | —           |       | (24.2                                          | )          |
| Minority interest in  subsidiaries’ income                                  |       | —              |       | (4.0           | )          | (0.4                 | )          | 4.0              |       | (0.4                                           | )          |
| **Income from continuing  operations**                                           |       | 42.0                |       | 19.5           |       | 1.5                  |       | (27.9            | )          | 35.1                                           |       |
| Loss from discontinued  operations, net of tax                                   |       | (1.3                | )          | —         |       | (0.1                 | )          | —           |       | (1.4                                           | )          |
| Extraordinary gain on  the acquisition of a business, net of tax of nil          |       | (4.6                | )          | —         |       | 7.0                  |       | —           |       | 2.4                                            |       |
| **Net income**                                                                   |       | $                   | 36.1       |           | $          | 19.5                 |       | $                | 8.4        |                                           | $          | (27.9 | ) | $ | 36.1 |   |

 

39

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)****THREE MONTHS ENDED MARCH 31, 2006****(Dollars in Millions)**

 
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales, services and fees                                                   |       | $                   | 347.0      |           | $          | 1,229.5              |       | $                | 1,065.4    |                                           | $          | — |   | $ | 2,641.9 |   |
| Related party sales                                                              |       | 59.1                |       | 80.6           |       | 225.3                |       | (350.2           | )          | 14.8                                           |       |
| **Total  revenues**                                                              |       | 406.1               |       | 1,310.1        |       | 1,290.7              |       | (350.2           | )          | 2,656.7                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of  goods sold**                                                          |       | 323.2               |       | 1,162.9        |       | 1,121.2              |       | (348.4           | )          | 2,258.9                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  Profit**                                                                |       | 82.9                |       | 147.2          |       | 169.5                |       | (1.8             | )          | 397.8                                          |       |
| Selling, general  and administrative                                             |       | 60.6                |       | 25.9           |       | 80.5                 |       | (0.2             | )          | 166.8                                          |       |
| Research and  development                                                        |       | 11.4                |       | 6.7            |       | 9.2                  |       | —           |       | 27.3                                           |       |
| Other operating  expense (income)                                                |       | 8.6                 |       | (8.9           | )          | 0.8                  |       | —           |       | 0.5                                            |       |
| Restructuring,  impairment and plant closing costs                               |       | (0.1                | )          | 0.9            |       | 6.9                  |       | —           |       | 7.7                                            |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  income**                                                            |       | 2.4                 |       | 122.6          |       | 72.1                 |       | (1.6             | )          | 195.5                                          |       |
| Interest  expense, net                                                           |       | (49.2               | )          | (3.3           | )          | (35.5                | )          | —           |       | (88.0                                          | )          |
| Gain (loss) on  accounts receivable securitization program                       |       | 2.1                 |       | (0.7           | )          | (3.7                 | )          | —           |       | (2.3                                           | )          |
| Equity in income  of investment in affiliates and subsidiaries                   |       | 113.6               |       | 10.6           |       | 0.7                  |       | (124.2           | )          | 0.7                                            |       |
| Other expense                                                                    |       | —              |       | —         |       | (0.3                 | )          | —           |       | (0.3                                           | )          |
| **Income  from continuing operations before income taxes and minority interest** |       | 68.9                |       | 129.2          |       | 33.3                 |       | (125.8           | )          | 105.6                                          |       |
| Income tax  expense                                                              |       | (1.1                | )          | (8.1           | )          | (11.6                | )          | —           |       | (20.8                                          | )          |
| Minority  interest in subsidiaries’ income                                  |       | —              |       | (10.1          | )          | (0.3                 | )          | 10.0             |       | (0.4                                           | )          |
| **Income  from continuing operations**                                           |       | 67.8                |       | 111.0          |       | 21.4                 |       | (115.8           | )          | 84.4                                           |       |
| Loss from  discontinued operations, net of tax                                   |       | (0.5                | )          | —         |       | (16.6                | )          | —           |       | (17.1                                          | )          |
| **Net  income**                                                                  |       | $                   | 67.3       |           | $          | 111.0                |       | $                | 4.8        |                                           | $          | (115.8 | ) | $ | 67.3 |   |

 

40

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS (UNAUDITED)****THREE MONTHS ENDED MARCH 31, 2007****(Dollars in Millions)**
| ** **                                                   | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net  cash provided (used in) by operating activities**     |       | $                   | 297.8      |           | $          | (230.7               | )          | $                | (100.4     | )                                              | $          | — |   | $ | (33.3 | ) |
|                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Investing  activities:**                                   |       |                |       |           |       |                 |       |             |       |                                           |       |
| Capital  expenditures                                        |       | (6.2                | )          | (43.9          | )          | (55.1                | )          | —           |       | (105.2                                         | )          |
| Proceeds from  the sale of assets                            |       | —              |       | —         |       | 15.8                 |       | —           |       | 15.8                                           |       |
| Investment in  affiliates, net                               |       | 59.7                |       | 1.0            |       | (14.0                | )          | (59.7            | )          | (13.0                                          | )          |
| Other, net                                                   |       | —              |       | —         |       | (0.4                 | )          | —           |       | (0.4                                           | )          |
| **Net  cash provided by (used in) investing activities**     |       | 53.5                |       | (42.9          | )          | (53.7                | )          | (59.7            | )          | (102.8                                         | )          |
|                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Financing  activities:**                                   |       |                |       |           |       |                 |       |             |       |                                           |       |
| Net borrowings  (repayments) under revolving loan facilities |       | 109.0               |       | —         |       | (15.3                | )          | —           |       | 93.7                                           |       |
| Net borrowings  on overdraft facilities                      |       | —              |       | —         |       | 12.3                 |       | —           |       | 12.3                                           |       |
| Repayment of  long-term debt                                 |       | (225.2              | )          | (0.1           | )          | (0.6                 | )          | —           |       | (225.9                                         | )          |
| Proceeds from  long-term debt                                |       | 152.8               |       | —         |       | 16.2                 |       | —           |       | 169.0                                          |       |
| Intercompany  (repayments) borrowings                        |       | (384.7              | )          | 358.9          |       | 25.8                 |       | —           |       | —                                         |       |
| Repayments on  note payable                                  |       | (18.3               | )          | —         |       | (0.1                 | )          | —           |       | (18.4                                          | )          |
| Proceeds from  notes payable                                 |       | —              |       | —         |       | 2.3                  |       | —           |       | 2.3                                            |       |
| Call premiums  related to early extinguishment of debt       |       | (1.2                | )          | —         |       | —               |       | —           |       | (1.2                                           | )          |
| Debt issuance  cost paid                                     |       | (1.7                | )          | —         |       | —               |       | —           |       | (1.7                                           | )          |
| (Distribution  to) contribution from parent, net             |       | —              |       | (84.2          | )          | 24.5                 |       | 59.7             |       | —                                         |       |
| Other                                                        |       | (0.1                | )          | —         |       | —               |       | —           |       | (0.1                                           | )          |
| **Net  cash (used in) provided by financing activities**     |       | (369.4              | )          | 274.6          |       | 65.1                 |       | 59.7             |       | 30.0                                           |       |
|                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| Effect of  exchange rate changes on cash                     |       | 1.8                 |       | —         |       | 1.8                  |       | —           |       | 3.6                                            |       |
|                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| (Decrease)  increase in cash and cash equivalents            |       | (16.3               | )          | 1.0            |       | (87.2                | )          | —           |       | (102.5                                         | )          |
| Cash and cash  equivalents at beginning of period            |       | 18.1                |       | —         |       | 227.9                |       | —           |       | 246.0                                          |       |
| Cash and cash  equivalents at end of period                  |       | $                   | 1.8        |           | $          | 1.0                  |       | $                | 140.7      |                                           | $          | — |   | $ | 143.5 |   |

 

 

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES****CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS (UNAUDITED)****THREE MONTHS ENDED MARCH 31, 2006****(Dollars in Millions)**
| ** **                                               | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net cash (used in) provided by  operating activities** |       | $                   | (95.0      | )              | $          | 72.7               |       | $                | 98.2       |                                           | $          | — |   | $ | 75.9 |   |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| **Investing activities:**                                |       |                |       |           |       |               |       |             |       |                                           |       |
| Capital expenditures                                     |       | (6.7                | )          | (13.0          | )          | (84.4              | )          | —           |       | (104.1                                         | )          |
| Proceeds from sale of  assets                            |       | —              |       | 0.6            |       | 7.9                |       | —           |       | 8.5                                            |       |
| Investment in  affiliates, net                           |       | 29.1                |       | (2.7           | )          | (14.4              | )          | (29.1            | )          | (17.1                                          | )          |
| **Net cash provided by (used in)  investing activities** |       | 22.4                |       | (15.1          | )          | (90.9              | )          | (29.1            | )          | (112.7                                         | )          |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| **Financing activities:**                                |       |                |       |           |       |               |       |             |       |                                           |       |
| Net borrowings under  revolving loan facilities          |       | 34.0                |       | —         |       | —             |       | —           |       | 34.0                                           |       |
| Net borrowings on  overdraft facilities                  |       | —              |       | —         |       | 8.1                |       | —           |       | 8.1                                            |       |
| Repayment of long-term  debt                             |       | (0.1                | )          | (0.2           | )          | (0.5               | )          | —           |       | (0.8                                           | )          |
| Proceeds from long-term  debt                            |       | —              |       | —         |       | 2.5                |       | —           |       | 2.5                                            |       |
| Intercompany borrowings  (repayments)                    |       | 47.2                |       | (52.2          | )          | (24.1              | )          | 29.1             |       | —                                         |       |
| Net (repayments) borrowings  on note payable             |       | (9.8                | )          | (0.4           | )          | (0.2               | )          | —           |       | (10.4                                          | )          |
| Contribution from  parent                                |       | —              |       | —         |       | 6.2                |       | —           |       | 6.2                                            |       |
| Other, net                                               |       | —              |       | (0.2           | )          | 2.2                |       | —           |       | 2.0                                            |       |
| **Net cash provided by (used in)  financing activities** |       | 71.3                |       | (53.0          | )          | (5.8               | )          | 29.1             |       | 41.6                                           |       |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| Effect of exchange rate  changes on cash                 |       | (0.6                | )          | (0.8           | )          | 0.7                |       | —           |       | (0.7                                           | )          |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| (Decrease) increase in  cash and cash equivalents        |       | (1.9                | )          | 3.8            |       | 2.2                |       | —           |       | 4.1                                            |       |
| Cash and cash  equivalents at beginning of period        |       | 10.0                |       | 7.9            |       | 114.6              |       | —           |       | 132.5                                          |       |
| Cash and cash  equivalents at end of period              |       | $                   | 8.1        |           | $          | 11.7               |       | $                | 116.8      |                                           | $          | — |   | $ | 136.6 |   |

 

42

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-lookingStatements**

Certain information set forth in this report contains “forward-lookingstatements” within the meaning of the federal securities laws. Forward-lookingstatements include statements concerning our plans, objectives, goals,strategies, future events, future revenues or performance, capitalexpenditures, financing needs, plans or intentions relating to acquisitions andother information that is not historical information. In some cases,forward-looking statements can be identified by terminology such as “believes,”“expects,” “may,” “should,” “anticipates,” or “intends” or the negative of suchterms or other comparable terminology, or by discussions of strategy. We mayalso make additional forward-looking statements from time to time. All suchsubsequent forward-looking statements, whether written or oral, by us or on ourbehalf, are also expressly qualified by these cautionary statements.

All forward-looking statements, including without limitation, management’sexamination of historical operating trends, are based upon our currentexpectations and various assumptions. Our expectations, beliefs and projectionsare expressed in good faith and we believe there is a reasonable basis forthem, but, there can be no assurance that management’s expectations, beliefsand projections will result or be achieved. All forward-looking statementsapply only as of the date made. We undertake no obligation to publicly updateor revise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

There are a number of risks and uncertainties that could cause ouractual results to differ materially from the forward-looking statementscontained in or contemplated by this report. Any forward-looking statementsshould be considered in light of the risks referenced in “Part II. Item1A. Risk Factors” below and in “Part I. Item 1A. Risk Factors” included inour Annual Report on Form 10-K.

**Overview**

**Business**

We are among theworld’s largest global manufacturers of differentiated chemical products; we alsomanufacture inorganic and commodity chemical products. Our products comprise abroad range of chemicals and formulations, which we market in more than 100countries to a diversified group of consumer and industrial customers. Ourproducts are used in a wide range of applications, including those in theadhesives, aerospace, automotive, construction products, durable andnon-durable consumer products, electronics, medical, packaging, paints andcoatings, power generation, refining, synthetic fiber, textile chemicals anddye industries. We are a leading global producer in many of our key productlines, including MDI products, amines, surfactants, epoxy-based polymerformulations, textile chemicals, dyes, maleic anhydride and titanium dioxide.Our businesses benefit from vertical integration, large production scale incertain products and proprietary manufacturing technologies, which allow us tomaintain a low-cost position. We had revenues for the three months ended March 31, 2007 and 2006 of$2,647.3 million and $2,656.7 million, respectively.

Our business isorganized around our six segments: Polyurethanes, Materials and Effects,Performance Products, Pigments, Polymers and Base Chemicals. These segments canbe divided into three broad categories: differentiated, inorganic andcommodity. Our Polyurethanes, Materials and Effects and Performance Productssegments produce differentiated products, our Pigments segment producesinorganic products and our Polymers and Base Chemicals segments producecommodity chemicals.

Growth in ourPolyurethanes and Materials and Effects segments has been driven by thecontinued substitution of other materials by our products across a broad rangeof applications, as well as by the level of global economic activity.Historically, demand for many of these products has grown at rates in excess ofGDP growth. In Polyurethanes, this growth, particularly in Asia, has recentlyresulted in improved demand and higher industry capacity utilization rates formany of our key products, including MDI.

43

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In our PerformanceProducts segment, demand for our performance specialties has generallycontinued to grow at rates in excess of GDP as overall demand is significantlyinfluenced by new product and application development. Overall demand for mostof our performance intermediates has generally been stable or improving, exceptfor ethylene glycol where industry operating rates and profitability havedeclined since 2005 due to additional capacity coming on stream. Over time,demand for maleic anhydride has generally grown at rates that slightly exceedGDP growth. However, given its dependence on the UPR market, which is heavilyinfluenced by construction end markets, maleic anhydride demand can becyclical.

Historically,demand for titanium dioxide pigments has grown at rates approximately equal toglobal GDP growth. Pigment prices have historically reflected industry-wideoperating rates but have typically lagged behind movements in these rates by upto twelve months due to the effects of product stocking and destocking bycustomers and producers, contract arrangements and seasonality. The industryexperiences some seasonality in its sales because sales of paints, the largestend use for titanium dioxide, generally peak during the spring and summer monthsin the northern hemisphere. This results in greater sales volumes in the secondand third quarters of the year.

The profitabilityof our Polymers and Base Chemicals segments has historically been cyclical innature. The industry has recently operated in an up cycle that resultedprimarily from strong demand reflecting global economic conditions and the factthat there have been no recent capacity additions in our markets. However,volatile crude oil and natural gas-based raw materials costs and a recentweakening in demand could negatively impact the profitability of our Polymersand Base Chemicals segments. In addition, the profitability of our BaseChemicals segment was negatively impacted in 2006 and will be negativelyimpacted in 2007 by the fire at our Port Arthur, Texas manufacturing plant.During 2006, we sold our U.S. butadiene and MTBE business and our European basechemicals and polymers business. On February 15, 2007, we announced thepending sale of our U.S. base chemicals and polymers business. For moreinformation, see “Note 4. Business Dispositions and Combinations—Agreementto Sell U.S. Base Chemicals and Polymers Business” to our condensedconsolidated financial statements (unaudited) included elsewhere in this report.

**Outlook**

We remain optimistic about generalglobal economic conditions in 2007.  Weexpect that our results in the second quarter of 2007 will modestly improveover those recorded in the first quarter of 2007, due primarily to the seasonalpatterns we typically experience. Furthermore, if the positive trends we are currently experiencing inmany of our businesses continue, we expect that our results in the second halfof 2007 will be stronger than the first half of 2007.

We remain committed to our strategy tospecialize our portfolio, while at the same time capitalizing on global growthopportunities.  While we see weakness inthe U.S. housing and automotive markets, we anticipate strong growth in Asiaand Europe.

**Recent Developments**

***Amendment of Senior CreditFacilities***

On April 19, 2007,we entered into an Amendment to our Senior Credit Facilities. Subject in somecases to certain conditions, the Amendment provides for improved applicableinterest rates, extends the maturity of the Dollar Term Loan to April 2014,increases the restricted payments basket for certain types of payments,eliminates certain financial covenants and increases our capacity foradditional term loan borrowings. In addition, pursuant to the Amendment, werepaid our Euro Term Loan in full. For more information, see “—Liquidity andCapital Resources—Debt and Liquidity” below.

44

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**Results of Operations**

For each of ourCompany and Huntsman International, the following tables set forth theunaudited condensed consolidated results of operations for the three monthsended March 31, 2007 and 2006 (dollars in millions):

**Huntsman Corporation**
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                                         | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Percent Change** | ** ** |
| ** **                                                                         | ** ** | **(in millions)**                               | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total revenues**                                                                 |       | $                                                    | 2,647.3    |       | $          | 2,656.7 |   | — |   |
| **Cost of  goods sold**                                                            |       | 2,240.0                                              |       | 2,262.9    |       | (1 | )% |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| **Gross  profit**                                                                  |       | 407.3                                                |       | 393.8      |       | 3 | % |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| Operating  expenses                                                                |       | 258.2                                                |       | 195.4      |       | 32 | % |
| Restructuring,  impairment and plant closing costs                                 |       | 12.2                                                 |       | 7.7        |       | 58 | % |
| **Operating  income**                                                              |       | 136.9                                                |       | 190.7      |       | (28 | )% |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| Interest  expense, net                                                             |       | (73.8                                                | )          | (86.8      | )          | (15 | )% |
| Loss on sale of  accounts receivable                                               |       | (5.4                                                 | )          | (2.3       | )          | 135 | % |
| Equity in income  of investment of unconsolidated affiliates                       |       | 2.2                                                  |       | 0.7        |       | 214 | % |
| Loss on early  extinguishment of debt                                              |       | (1.4                                                 | )          | —     |       | NM |   |
| Other expense                                                                      |       | 0.5                                                  |       | (0.3       | )          | NM |   |
| **Income  from continuing operations before income taxes and   minority interest** |       | 59.0                                                 |       | 102.0      |       | (42 | )% |
| Income tax  expense                                                                |       | (13.0                                                | )          | (15.5      | )          | (16 | )% |
| Minority  interests in subsidiaries’ income                                   |       | (0.4                                                 | )          | (0.4       | )          | — |   |
| **Income  from continuing operations**                                             |       | 45.6                                                 |       | 86.1       |       | (47 | )% |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| Loss from  discontinued operations, net of tax                                     |       | (1.4                                                 | )          | (17.1      | )          | (92 | )% |
| Extraordinary  gain on the acquisition of a business, net of tax of nil            |       | 2.4                                                  |       | —     |       | NM |   |
| **Net  income**                                                                    |       | 46.6                                                 |       | 69.0       |       | (32 | )% |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| Interest  expense, net                                                             |       | 73.8                                                 |       | 86.8       |       | (15 | )% |
| Income tax  expense from continuing operations                                     |       | 13.0                                                 |       | 15.5       |       | (16 | )% |
| Income tax  benefit from discontinued operations                                   |       | (0.6                                                 | )          | (7.1       | )          | (92 | )% |
| Depreciation and  amortization                                                     |       | 109.2                                                |       | 117.0      |       | (7 | )% |
| **EBITDA****(1)**                                                                  |       | $                                                    | 242.0      |       | $          | 281.2 |   | (14 | )% |
| ** **                                                                         |       |                                                 |       |       |       |   |   |
| Net cash (used  in) provided by operating activities                               |       | $                                                    | (30.8      | )          | $          | 80.3 |   | NM |   |
| Net cash used in  investing activites                                              |       | (99.2                                                | )          | (109.1     | )          | (9 | )% |
| Net cash provided by  financing activities                                         |       | 6.7                                                  |       | 37.0       |       | (82 | )% |

----

NM—Not Meaningful

 

45

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**Huntsman International**
| ** **                                                                        | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                                        | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Percent Change** | ** ** |
| ** **                                                                        | ** ** | **(in millions)**                               | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total revenues**                                                                |       | $                                                    | 2,647.3    |       | $          | 2,656.7 |   | — |   |
| **Cost of goods sold**                                                            |       | 2,238.5                                              |       | 2,258.9    |       | (1 | )% |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| **Gross profit**                                                                  |       | 408.8                                                |       | 397.8      |       | 3 | % |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| Operating expenses                                                                |       | 258.2                                                |       | 194.6      |       | 33 | % |
| Restructuring,  impairment and plant closing costs                                |       | 12.2                                                 |       | 7.7        |       | 58 | % |
| **Operating income**                                                              |       | 138.4                                                |       | 195.5      |       | (29 | )% |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| Interest expense, net                                                             |       | (74.2                                                | )          | (88.0      | )          | (16 | )% |
| Loss on sale of  accounts receivable                                              |       | (5.4                                                 | )          | (2.3       | )          | 135 | % |
| Equity in income of  investment of unconsolidated affiliates                      |       | 2.2                                                  |       | 0.7        |       | 214 | % |
| Loss on early  extinguishment of debt                                             |       | (1.8                                                 | )          | —     |       | NM |   |
| Other expense                                                                     |       | 0.5                                                  |       | (0.3       | )          | NM |   |
| **Income from continuing  operations before income taxes  and minority interest** |       | 59.7                                                 |       | 105.6      |       | (43 | )% |
| Income tax benefit                                                                |       | (24.2                                                | )          | (20.8      | )          | 16 | % |
| Minority interests in  subsidiaries’ income                                  |       | (0.4                                                 | )          | (0.4       | )          | — |   |
| **Income from continuing  operations**                                            |       | 35.1                                                 |       | 84.4       |       | (58 | )% |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| Loss from discontinued  operations, net of tax                                    |       | (1.4                                                 | )          | (17.1      | )          | (92 | )% |
| Extraordinary gain on  the acquisition of a business, net of tax of nil           |       | 2.4                                                  |       | —     |       | NM |   |
| **Net income**                                                                    |       | 36.1                                                 |       | 67.3       |       | (46 | )% |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| Interest expense, net                                                             |       | 74.2                                                 |       | 88.0       |       | (16 | )% |
| Income tax expense from  continuing operations                                    |       | 24.2                                                 |       | 20.8       |       | 16 | % |
| Income tax benefit from  discontinued operations                                  |       | (0.6                                                 | )          | (7.1       | )          | (92 | )% |
| Depreciation and  amortization                                                    |       | 103.5                                                |       | 110.2      |       | (6 | )% |
| **EBITDA(1)**                                                                     |       | $                                                    | 237.4      |       | $          | 279.2 |   | (15 | )% |
| ** **                                                                        |       |                                                 |       |       |       |   |   |
| Net cash (used in) provided  by operating activities                              |       | $                                                    | (33.3      | )          | $          | 75.9 |   | NM |   |
| Net cash used in  investing activites                                             |       | (102.8                                               | )          | (112.7     | )          | (9 | )% |
| Net cash provided by financing activities                                         |       | 30.0                                                 |       | 41.6       |       | (28 | )% |

----

NM—Not Meaningful

46

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For each of ourCompany and Huntsman International, the following tables set forth certainitems of (expense) income included in EBITDA (dollars in millions):

**Huntsman Corporation**

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                          |       |                                                 |       |   |   |
| Loss on early  extinguishment of debt                         |       | $                                                    | (1.4       | ) | $ | — |   |
| Loss on accounts  receivable securitization program           |       | (5.4                                                 | )          | (2.3 | ) |
| Amounts included  in discontinued operations                  |       | (0.4                                                 | )          | (8.9 | ) |
| Loss on sale of  businesses/assets, net                       |       | (1.1                                                 | )          | — |   |
| Extraordinary  gain on the acquisition of a business          |       | 2.4                                                  |       | — |   |
|                                                          |       |                                                 |       |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                 |       |   |   |
| Polyurethanes                                                 |       | —                                               |       | 2.2 |   |
| Materials and Effects                                         |       | (5.8                                                 | )          | (2.3 | ) |
| Performance Products                                          |       | (0.1                                                 | )          | (1.0 | ) |
| Pigments                                                      |       | 0.5                                                  |       | (2.5 | ) |
| Polymers                                                      |       | (6.8                                                 | )          | (3.5 | ) |
| Base Chemicals                                                |       | —                                               |       | (0.5 | ) |
| Corporate and other                                           |       | —                                               |       | (0.1 | ) |
| Total restructuring, impairment and plant closing  costs      |       | (12.2                                                | )          | (7.7 | ) |
|                                                          |       |                                                 |       |   |   |
| **Total**                                                     |       | $                                                    | (18.1      | ) | $ | (18.9 | ) |

 

**Huntsman International**
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **                                           | ** ** | ** ** |   |
| Loss on early  extinguishment of debt                         |       | $                                                    | (1.8       | ) | $ | — |   |
| Loss on accounts  receivable securitization program           |       | (5.4                                                 | )          | (2.3 | ) |
| Amounts included  in discontinued operations                  |       | (0.4                                                 | )          | (8.9 | ) |
| Loss on sale of  businesses/assets, net                       |       | (1.1                                                 | )          | — |   |
| Extraordinary  gain on the acquisition of a business          |       | 2.4                                                  |       | — |   |
|                                                          |       |                                                 |       |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                 |       |   |   |
| Polyurethanes                                                 |       | —                                               |       | 2.2 |   |
| Materials and Effects                                         |       | (5.8                                                 | )          | (2.3 | ) |
| Performance Products                                          |       | (0.1                                                 | )          | (1.0 | ) |
| Pigments                                                      |       | 0.5                                                  |       | (2.5 | ) |
| Polymers                                                      |       | (6.8                                                 | )          | (3.5 | ) |
| Base Chemicals                                                |       | —                                               |       | (0.5 | ) |
| Corporate and other                                           |       | —                                               |       | (0.1 | ) |
| Total restructuring, impairment and plant closing  costs      |       | (12.2                                                | )          | (7.7 | ) |
|                                                          |       |                                                 |       |   |   |
| **Total**                                                     |       | $                                                    | (18.5      | ) | $ | (18.9 | ) |

 

47

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----

(1)                                 EBITDAis defined as net income (loss) before interest, income taxes, depreciation andamortization. We believe that EBITDA enhances an investor’s understanding ofour financial performance and our ability to satisfy principal and interestobligations with respect to our indebtedness. However, EBITDA should not beconsidered in isolation or viewed as a substitute for net income, cash flowfrom operations or other measures of performance as defined by GAAP. Moreover,EBITDA as used herein is not necessarily comparable to other similarly titledmeasures of other companies due to potential inconsistencies in the method ofcalculation. Our management uses EBITDA to assess financial performance anddebt service capabilities. In assessing financial performance, our managementreviews EBITDA as a general indicator of economic performance compared withprior periods. Because EBITDA excludes interest, income taxes, depreciation andamortization, EBITDA provides an indicator of general economic performance thatis not affected by debt restructurings, fluctuations in interest rates oreffective tax rates, or levels of depreciation and amortization. Accordingly,our management believes this type of measurement is useful for comparinggeneral operating performance from period to period and making certain relatedmanagement decisions. EBITDA is also used by securities analysts, lenders andothers in their evaluation of different companies because it excludes certainitems that can vary widely across different industries or among companieswithin the same industry. For example, interest expense can be highly dependenton a company’s capital structure, debt levels and credit ratings. Therefore,the impact of interest expense on earnings can vary significantly amongcompanies. In addition, the tax positions of companies can vary because oftheir differing abilities to take advantage of tax benefits and because of thetax policies of the various jurisdictions in which they operate. As a result,effective tax rates and tax expense can vary considerably among companies.Finally, companies employ productive assets of different ages and utilizedifferent methods of acquiring and depreciating such assets. This can result inconsiderable variability in the relative costs of productive assets and thedepreciation and amortization expense among companies. Our management alsobelieves that our investors use EBITDA as a measure of our ability to serviceindebtedness as well as to fund capital expenditures and working capitalrequirements. Nevertheless, our management recognizes that there are materiallimitations associated with the use of EBITDA in the evaluation of our Companyas compared to net income, which reflects overall financial performance,including the effects of interest, income taxes, depreciation and amortization.EBITDA excludes interest expense. Because we have borrowed money in order tofinance our operations, interest expense is a necessary element of our costsand ability to generate revenue. Therefore, any measure that excludes interestexpense has material limitations. EBITDA also excludes taxes. Because thepayment of taxes is a necessary element of our operations, any measure thatexcludes tax expense has material limitations. Finally, EBITDA excludesdepreciation and amortization expense. Because we use capital assets,depreciation and amortization expense is a necessary element of our costs andability to generate revenue. Therefore, any measure that excludes depreciationand amortization expense has material limitations. Our management compensatesfor the limitations of using EBITDA by using it to supplement GAAP results toprovide a more complete understanding of the factors and trends affecting thebusiness than GAAP results alone. Our management also uses other metrics toevaluate capital structure, tax planning and capital investment decisions. Forexample, our management uses credit ratings and net debt ratios to evaluatecapital structure, effective tax rate by jurisdiction to evaluate tax planning,and payback period and internal rate of return to evaluate capital investments.Our management also uses trade working capital to evaluate its investment inaccounts receivable and inventory, net of accounts payable.

We believe that net income (loss) is the performance measure calculatedand presented in accordance with GAAP that is most directly comparable toEBITDA and that cash provided by operating activities is the liquidity measurecalculated and presented in accordance with GAAP that is most directlycomparable to EBITDA.

 

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For each of our Company and Huntsman International, the followingtables reconcile EBITDA to net income and to net cash provided by operations(dollars in millions):

**Huntsman Corporation**
| ** **                                                       | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                                                       | ** ** | **2007**                                             | ** ** | **2006**    | ** ** | **Change** | ** ** |
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **  |       |   |   |
| EBITDA                                                           |       | $                                                    | 242.0      |        | $          | 281.2 |   | (14 | )% |
| Depreciation and  amortization                                   |       | (109.2                                               | )          | (117.0      | )          | (7 | )% |
| Interest expense, net                                            |       | (73.8                                                | )          | (86.8       | )          | (15 | )% |
| Income tax expense from  continuing operations                   |       | (13.0                                                | )          | (15.5       | )          | (16 | )% |
| Income  tax benefit from discontinued operations                 |       | 0.6                                                  |       | 7.1         |       | (92 | )% |
| Net income                                                       |       | 46.6                                                 |       | 69.0        |       | (32 | )% |
| Extraordinary gain on  the acquisition of a business, net of tax |       | (2.4                                                 | )          | —      |       | NM |   |
| Equity in income of  investment in unconsolidated affiliates     |       | (2.2                                                 | )          | (0.7        | )          | 214 | % |
| Depreciation and  amortization                                   |       | 109.2                                                |       | 117.0       |       | (7 | )% |
| Loss (gain) on disposal  of businesses/assets                    |       | (3.2                                                 | )          | (0.2        | )          | NM |   |
| Noncash restructuring,  impairment and plant closing costs       |       | 5.8                                                  |       | 2.0         |       | 190 | % |
| Loss on early  extinguishment of debt                            |       | 1.4                                                  |       | —      |       | NM |   |
| Noncash interest                                                 |       | 1.0                                                  |       | (1.7        | )          | NM |   |
| Deferred income taxes                                            |       | 4.2                                                  |       | 7.3         |       | (42 | )% |
| Unrealized (gain) loss  on foreign currency transactions         |       | (4.8                                                 | )          | 6.7         |       | NM |   |
| Other, net                                                       |       | 11.6                                                 |       | 4.8         |       | 142 | % |
| Changes in operating  assets and liabilites                      |       | (198.0                                               | )          | (123.9      | )          | 60 | % |
| Net cash (used in) provided by operating activities              |       | $                                                    | (30.8      | )           | $          | 80.3 |   | NM |   |

----

NM—Not Meaningful

 

**Huntsman International**
| ** **                                                       | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                                                       | ** ** | **2007**                                             | ** ** | **2006**    | ** ** | **Change** | ** ** |
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** ** | ** ** |
| EBITDA                                                           |       | $                                                    | 237.4      |        | $          | 279.2 |   | (15 | )% |
| Depreciation and  amortization                                   |       | (103.5                                               | )          | (110.2      | )          | (6 | )% |
| Interest expense, net                                            |       | (74.2                                                | )          | (88.0       | )          | (16 | )% |
| Income tax expense from  continuing operations                   |       | (24.2                                                | )          | (20.8       | )          | 16 | % |
| Income  tax benefit from discontinued operations                 |       | 0.6                                                  |       | 7.1         |       | (92 | )% |
| Net income (loss)                                                |       | 36.1                                                 |       | 67.3        |       | (46 | )% |
| Extraordinary gain on the  acquisition of a business, net of tax |       | (2.4                                                 | )          | —      |       | NM |   |
| Equity in income of  investment in unconsolidated affiliates     |       | (2.2                                                 | )          | (0.7        | )          | 214 | % |
| Depreciation and  amortization                                   |       | 103.5                                                |       | 110.2       |       | (6 | )% |
| Loss (gain) on disposal  of businesses/assets                    |       | (3.2                                                 | )          | (0.2        | )          | NM |   |
| Noncash restructuring,  impairment and plant closing costs       |       | 5.8                                                  |       | 2.0         |       | 190 | % |
| Loss on early  extinguishment of debt                            |       | 1.8                                                  |       | —      |       | NM |   |
| Noncash interest                                                 |       | 1.1                                                  |       | (0.7        | )          | NM |   |
| Deferred income taxes                                            |       | 15.4                                                 |       | 12.7        |       | 21 | % |
| Unrealized (gain) loss  on foreign currency transactions         |       | (4.8                                                 | )          | 6.7         |       | NM |   |
| Other, net                                                       |       | 6.9                                                  |       | 5.0         |       | 38 | % |
| Changes in operating  assets and liabilites                      |       | (191.3                                               | )          | (126.4      | )          | 51 | % |
| Net cash (used in) provided by operating activities              |       | $                                                    | (33.3      | )           | $          | 75.9 |   | NM |   |

----

NM—Not Meaningful

49

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**Three Months Ended March 31, 2007 Compared withThree Months Ended March 31, 2006**

For the three monthsended March 31, 2007, we had net income of $46.6 million on revenues of$2,647.3 million, compared with net income of $69.0 million on revenues of$2,656.7 million for the 2006 period. For the three months ended March 31,2007, Huntsman International had net income of $36.1 million on revenues of$2,647.3 million, compared with net income of $67.3 million on revenues of$2,656.7 million for the 2006 period. The decrease of $22.4 million in our netincome and the decrease of $31.2 million in Huntsman International’s net incomewere the result of the following items:

·                  Revenuesfor the three months ended March 31, 2007 decreased by $9.4 million as comparedwith the 2006 period due principally to lower sales volumes in our BaseChemicals segment. This was partially offset by higher sales volumes in ourMaterials and Effects, Performance Products, Polyurethanes, Polymers, andPigments segments, and higher average selling prices in our Materials andEffects, Pigments and Base Chemicals segments. For more information, see “—SegmentAnalysis” below.

·                  Ourgross profit and the gross profit of Huntsman International for the threemonths ended March 31, 2007 increased by $13.5 million and $11.0 million, or 3%and 3%, respectively, as compared with the 2006 period. This increase in grossprofit was primarily due to increases in our Materials and Effects segment,mainly as a result of the Textiles Effects Acquisition on June 30, 2006, and increasesin our Performance Products segment. These increases were partially offset bydecreases in gross profit in our Polyurethanes, Polymers, Pigments, and BaseChemicals segments. For more information, see “—Segment Analysis” below.

·                  Ouroperating expenses and the operating expenses of Huntsman International for thethree months ended March 31, 2007 increased by $62.8 million and $63.6 million,respectively, as compared with the 2006 period. The increase was primarily dueto the Textile Effects Acquisition on June 30, 2006, and certain costs relatedto the pending U.S. Petrochemicals Disposition partially offset by a reductionin operating expenses as a result of the sale of our U.S. butadiene and MTBEbusiness on June 27, 2006.

·                  Restructuring,impairment and plant closing costs for the three months ended March 31, 2007increased to $12.2 million from $7.7 million in the 2006 period. For moreinformation concerning restructuring activities, see “Note 6. Restructuring,Impairment and Plant Closing Costs” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report.

·                  Our net interest expense and the netinterest expense of Huntsman International for the three months endedMarch 31, 2007 decreased by $13.0 million and $13.8 million, or 15% and 16%,respectively, as compared with the 2006 period. This decrease was primarily dueto lower average debt balances which resulted from the repayment of debt andfrom lower average interest rates.

·                  Ourincome tax expense decreased by $2.5 million to an expense of $13.0 million forthe three months ended March 31, 2007 as compared with an expense of $15.5million for the same period in 2006. Huntsman International’s income taxexpense increased by $3.4 million to an expense of $24.2 million for the threemonths ended March 31, 2007 as compared with an expense of $20.8 million forthe same period in 2006. Our tax obligations are affected by the mix of incomeand losses in the tax jurisdictions in which we operate. Our tax expensedecreased largely due to decreased pre tax income. Huntsman International’s taxexpense increased while pre-tax income decreased largely due to income injurisdictions where we are projected to no longer have a valuation allowance,net increases in operating losses in jurisdictions which do not record a taxbenefit and net increases in operating income in jurisdictions which record atax expense.

·                  Lossfrom discontinued operations decreased by $15.7 million for the three months endedMarch 31, 2007 as compared with the same period in 2006. The loss from discontinued operations representsthe operating results and loss on disposal of our European base chemicals andpolymers business and our 

50

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TDI business. For moreinformation, see “Note 3. Discontinued Operations” to our condensedconsolidated financial statements (unaudited) included elsewhere in thisreport.

·                  OnJune 30, 2006 we completed the Textile Effects Acquisition. Because the fairvalue of the acquired assets and liabilities assumed exceeded the acquisitionprice, the values of all long-lived assets were reduced to zero and we recordedan extraordinary gain on the acquisition of this business in 2006. During thethree months ended March 31, 2007, we adjusted the preliminary purchase priceallocation and recorded an extraordinary gain on the acquisition of $2.4million. For more information, see “Note 4. Business Dispositions andCombinations—Textile Effects Acquisition” to our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

**Segment Analysis**

Thefollowing table sets forth the revenues and EBITDA for each of our operatingsegments (dollars in millions):
| ** **                  | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                  | ** ** | **2007**                                             | ** ** | **2006**    | ** ** | **Change** | ** ** |
| **Revenues**                | ** ** | ** **                                           |       | ** **  |       |   |   |
| Polyurethanes               |       | $                                                    | 840.0      |        | $          | 809.1 |   | 4 | % |
| Materials and  Effects      |       | 589.6                                                |       | 323.1       |       | 82 | % |
| Performance  Products       |       | 551.9                                                |       | 509.9       |       | 8 | % |
| Pigments                    |       | 270.2                                                |       | 258.8       |       | 4 | % |
| Polymers                    |       | 411.3                                                |       | 423.5       |       | (3 | )% |
| Base Chemicals              |       | 132.6                                                |       | 447.3       |       | (70 | )% |
| Eliminations                |       | (148.3                                               | )          | (115.0      | )          | 29 | % |
| **Total**                   |       | $                                                    | 2,647.3    |        | $          | 2,656.7 |   | — |   |
| ** **                  |       |                                                 |       |        |       |   |   |
| **Huntsman  Corporation**   |       |                                                 |       |        |       |   |   |
|                        |       |                                                 |       |        |       |   |   |
| **Segment  EBITDA**         |       |                                                 |       |        |       |   |   |
| Polyurethanes               |       | $                                                    | 118.3      |        | $          | 159.2 |   | (26 | )% |
| Materials and  Effects      |       | 57.1                                                 |       | 34.9        |       | 64 | % |
| Performance  Products       |       | 72.1                                                 |       | 50.9        |       | 42 | % |
| Pigments                    |       | 23.5                                                 |       | 33.3        |       | (29 | )% |
| Polymers                    |       | 10.8                                                 |       | 35.2        |       | (69 | )% |
| Base Chemicals              |       | (0.5                                                 | )          | 14.8        |       | NM |   |
| Corporate and  other        |       | (39.3                                                | )          | (47.1       | )          | (17 | )% |
| **Total**                   |       | $                                                    | 242.0      |        | $          | 281.2 |   | (14 | )% |
|                        |       |                                                 |       |        |       |   |   |
| **Huntsman  International** |       |                                                 |       |        |       |   |   |
|                        |       |                                                 |       |        |       |   |   |
| **Segment  EBITDA**         |       |                                                 |       |        |       |   |   |
| Polyurethanes               |       | $                                                    | 118.3      |        | $          | 159.2 |   | (26 | )% |
| Materials and  Effects      |       | 57.1                                                 |       | 34.9        |       | 64 | % |
| Performance  Products       |       | 72.1                                                 |       | 50.9        |       | 42 | % |
| Pigments                    |       | 23.5                                                 |       | 33.3        |       | (29 | )% |
| Polymers                    |       | 10.8                                                 |       | 35.2        |       | (69 | )% |
| Base Chemicals              |       | (0.5                                                 | )          | 14.8        |       | NM |   |
| Corporate and  other        |       | (43.9                                                | )          | (49.1       | )          | (11 | )% |
| **Total**                   |       | $                                                    | 237.4      |        | $          | 279.2 |   | (15 | )% |

----

NM—Not Meaningful

 

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***Polyurethanes***

For the threemonths ended March 31, 2007, Polyurethanes segment revenues increased by $30.9million, or 4%, as compared with the 2006 period. This increase was primarily aresult of higher overall sales volumes. The overall sales volume increase wasdue to a 5% increase in MDI sales volumes, partially offset by reduced MTBEsales volumes. The increase in MDI sales volumes was driven by strong demand ininsulation-related applications, primarily in Europe and Asia where mildweather and the continued drive for improved insulation both contributed toincreased sales. Average MDI selling prices in the three months ended March 31,2007 increased by 2% as compared with the same period in 2006 primarily due tothe strength of the major European currencies versus the U.S. dollar. In localcurrencies, average MDI selling prices were lower due to some pricing pressuresand the sector mix in Asia and Europe. Average MTBE selling prices during thethree months ended March 31, 2007 declined sharply as compared with the 2006period, primarily as a result of legislation which has effectively eliminatedthe use of MTBE in the U. S.

For the threemonths ended March 31, 2007, Polyurethanes segment EBITDA decreased by $40.9million, or 26%, as compared with the 2006 period. Segment EBITDA decreasedprimarily on lower MTBE margins, which decreased on lower average sellingprices and increased raw material costs. Segment EBITDA was also negativelyimpacted by lower MDI margins which resulted from higher costs.

***Materials and Effects***

Materials andEffects segment revenues for the three months ended March 31, 2007 increased by$266.5 million, or 82%, as compared with the same period in 2006. Thisincrease is primarily due to the Textile Effects Acquisition on June 30, 2006.The textile effects business contributed $242.7 million of revenue for thethree months ended March 31, 2007, while advanced materials revenues for thesame period increased by $23.8 million, or 7%, as compared with the 2006period. The increase in advanced materials revenues resulted from a 10%increase in average selling prices, partially offset by a 2% decrease insales volumes. Average selling prices increased due to successful priceincrease initiatives across most of our major markets and regions, a favorableproduct mix and the positive impact of currency fluctuations as the U.S. dollarweakened against the relevant European currencies.

Materials andEffects segment EBITDA was $57.1 million for the three months ended March 31,2007, an increase of 64%, as compared with segment EBITDA of $34.9 million forthe same period in 2006. Segment EBITDA increased primarily as a result of theTextile Effects Acquisition on June 30, 2006. The textile effects businesscontributed $13.1 million to segment EBITDA for the three months ended March31, 2007, while segment EBITDA resulting from advanced materials operationsincreased by $9.1 million, or 26%, as compared with the same period in 2006 asa result of higher margins on increased sales. In addition, during the three monthsended March 31, 2007 and 2006, our Materials and Effects segment recordedrestructuring and plant closing charges of $5.8 million and $2.3 million,respectively. For more information concerning restructuring activities, see “Note6. Restructuring, Impairment and Plant Closing Costs” to our condensedconsolidated financial statements (unaudited) included elsewhere in thisreport.

***Performance Products***

For the threemonths ended March 31, 2007, Performance Products revenues increased by $42.0million, or 8%, as compared with the 2006 period. Sales volumes increased 10%,with 4% of the volume increase mainly due to strong sales in our performancespecialties and European intermediates businesses and 6% of the volume increasedue to additional ethylene by-product sales. Average selling prices decreased2% on lower pricing in some of our intermediate products, driven by lower rawmaterial prices, partially offset by a favorable foreign currency impact due tothe weakening of the U.S. dollar against the relevant European currencies.

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For the threemonths ended March 31, 2007, Performance Products segment EBITDA increased by$21.2 million, or 42%, as compared with the 2006 period. The increase insegment EBITDA resulted primarily from higher sales volumes and improvedmargins, which increased on lower raw material costs.

***Pigments***

For the three monthsended March 31, 2007, Pigments segment revenues increased by $11.4 million, or4%, as compared with the 2006 period. This increase resulted principally from a3% increase in average selling prices and a 2% increase in sales volumes.Average selling prices increased primarily in Europe because of favorableforeign currency exchange impacts on selling prices as the U.S. dollar weakenedagainst the relevant European currencies, offset by decreases in local currencyselling prices in the European and North American regions. Sales volumesincreased primarily due to strong customer demand in Latin America, Middle Eastand Africa.

Pigments segmentEBITDA for the three months ended March 31, 2007 decreased by $9.8 million, or29%, as compared with the 2006 period. Pigments segment EBITDA was lowerprimarily due to lower local currency selling prices noted above and lowerproduction volumes due to unplanned downtime at our Greatham, UK facility.

***Polymers***

For the three months ended March 31, 2007, Polymers revenues decreasedby $12.2 million, or 3%,as compared with the 2006 period, mainly due to an 8% decrease in averageselling prices which resulted from lower feedstock and energy costs, offset inpart by a 5% increase in sales volumes.

For the three months ended March 31, 2007, Polymers segment EBITDAdecreased by $24.4 million,or 69%, as compared with the 2006period. This decrease in Polymers segment EBITDA resulted primarily from lowermargins, driven primarily by lower average selling prices. During the threemonths ended March 31, 2007 and 2006, our Polymers segment recordedrestructuring, impairment and plant closing charges of $6.8 million and $3.5 million, respectively. For more informationconcerning restructuring activities, see “Note 6. Restructuring, Impairment andPlant Closing Costs” to our condensed consolidated financial statements(unaudited) included elsewhere in this report.

***Base Chemicals***

The operating results of our European base chemicals and polymersbusiness is classified as discontinued operations and, accordingly, therevenues of this business are excluded from the Base Chemicals segment revenuesfor all periods presented. The EBITDA of our European base chemicals andpolymers business is included in the Base Chemicals segment EBITDA for thethree months ended March 31, 2006.

For the threemonths ended March 31, 2007, Base Chemicals revenues decreased by $314.7 million,or 70%, as compared with the 2006 period. This decrease was mainly due to a 71%decrease in sales volumes. The sales volume decrease was driven principally bythe June 27, 2006 sale of the U.S. butadiene and MTBE business, whichcontributed revenues of $197.4 in the first quarter of 2006. Additionally,sales volumes of olefins decreased by 56% as compared with the same period in2006 as a result of the fire at our Port Arthur, Texas manufacturing plant. Formore information on the Port Arthur fire, see “Note 16. Casualty Losses andInsurance Recoveries—Port Arthur, Texas Plant Fire” to our condensedconsolidated financial statements (unaudited) included elsewhere in thisreport.

For the threemonths ended March 31, 2007, Base Chemicals segment EBITDA decreased by $15.3million as compared with the 2006 period. This was primarily due to the June27, 2006 sale of the U.S. butadiene and MTBE business, the sale of the Europeanbase chemicals and polymers business on December 29, 2006, and the decrease inthe sales volumes of olefins as a result of the fire at our Port Arthur, Texasmanufacturing plant. Segment EBITDA from our discontinued European basechemicals and polymers business was a loss of $1.6 million and a loss of $6.9million for the three months ended March 31, 2007 and 2006, respectively.

53

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***Corporate and Other - Huntsman Corporation***

Corporate and other items include unallocatedcorporate overhead, foreign exchange gains and losses, loss on accountsreceivable securitization program, loss on the early extinguishment of debt,other non-operating income and expense, minority interest in subsidiaries’(income) loss and extraordinary gain on acquisition of a business. For thethree months ended March 31, 2007, EBITDA from corporate and other itemsimproved by $7.8 millionto a loss of $39.3 million from aloss of $47.1 million for the2006 period. The improvement primarily resulted from a $2.4 millionextraordinary gain related to the Textile Effects Acquisition,$2.3 million in lower unallocated pension costs and lower unallocatedgeneral and administrative costs.

***Corporate and Other - Huntsman International***

Corporate and other items include unallocatedcorporate overhead, foreign exchange gains and losses, loss on accountsreceivable securitization program, loss on the early extinguishment of debt,other non-operating income and expense, minority interest in subsidiaries’ (income)loss and extraordinary gain on acquisition of a business. For the three monthsended March 31, 2007, EBITDA from corporate and other items improved by $5.2million to a loss of $43.9million from a loss of $49.1 million for the 2006 period. The improvementprimarily resulted from a $2.4 million extraordinary gain related to theTextile Effects Acquisition and lower unallocated general and administrativecosts.

**LIQUIDITY AND CAPITAL RESOURCES**

The following is a discussion of our liquidity andcapital resources. Pursuant to General Instructions H(1)(a) and (b) ofForm 10-Q, Huntsman International is filing this report with a reduceddisclosure format.

**Cash**

Net cash (used in) provided by operating activities for the three monthsended March 31, 2007 and 2006 was $(30.8) million and $80.3 million, respectively. The decrease in cashprovided by operations was primarily attributable to a decrease in operatingincome and a greater increase in net working capital during the first quarterof 2007, as described in “Results of Operations” above.

Net cash used in investing activities for the three months ended March31, 2007 and 2006 was $99.2 million and $109.1million, respectively. During the three monthsended March 31, 2007 and 2006, we invested $105.2 million and $104.1 million, respectively, in capitalexpenditures.

Net cash provided by financing activities for the three months endedMarch 31, 2007 was $6.7millionas compared with $37.0 million in the 2006 period. This decrease in netcash provided by financing activities is mainly a result of a voluntaryrepayment in 2007 on our term loans under our Senior Credit Facilities of $75.0million and a repayment in full of our remaining 10.125% subordinated notes due2009 of $150.1 million with proceeds of our offering of 7.875%subordinated notes due 2014 of $151.7 million. Also, we paid dividends on ourcommon stock of $22.1 million during the three months ended March 31, 2007.During the three months ended March 31, 2007, we increased net borrowingsunder our Revolving Facility by $59.7 million.

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**Changes in Financial Condition**

Thefollowing information summarizes our working capital position as of March 31,2007 and December 31, 2006 (dollars in millions):
| ** **                         | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006 ** | ** ** | **Increase  (Decrease) ** | ** ** | **Percent  Change ** | ** ** |
|------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
|                               |       |                           |       |                              |       |                           |       |                      |       |
| Cash and cash  equivalents         |       | $                              | 143.5      |                              | $          | 263.2                          |       | $                         | (119.7     | ) | (45 | )% |
| Accounts  receivable, net          |       | 1,400.8                        |       | 1,257.3                           |       | 143.5                          |       | 11                        | %          |
| Inventories, net                   |       | 1,581.8                        |       | 1,520.1                           |       | 61.7                           |       | 4                         | %          |
| Prepaid expenses                   |       | 46.2                           |       | 55.7                              |       | (9.5                           | )          | (17                       | )%         |
| Deferred income  taxes             |       | 62.9                           |       | 64.6                              |       | (1.7                           | )          | (3                        | )%         |
| Other current  assets              |       | 170.5                          |       | 175.7                             |       | (5.2                           | )          | (3                        | )%         |
| Total current  assets              |       | 3,405.7                        |       | 3,336.6                           |       | 69.1                           |       | 2                         | %          |
|                               |       |                           |       |                              |       |                           |       |                      |       |
|                               |       |                           |       |                              |       |                           |       |                      |       |
| Accounts payable                   |       | 1,116.9                        |       | 1,018.2                           |       | 98.7                           |       | 10                        | %          |
| Accrued  liabilities               |       | 821.6                          |       | 857.6                             |       | (36.0                          | )          | (4                        | )%         |
| Deferred income  taxes             |       | 8.1                            |       | 9.4                               |       | (1.3                           | )          | (14                       | )%         |
| Current portion  of long-term debt |       | 178.8                          |       | 187.9                             |       | (9.1                           | )          | (5                        | )%         |
| Total current  liabilities         |       | 2,125.4                        |       | 2,073.1                           |       | 52.3                           |       | 3                         | %          |
| Working capital                    |       | $                              | 1,280.3    |                              | $          | 1,263.5                        |       | $                         | 16.8       |   | 1 | % |

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NM—Not Meaningful

Our working capital increased by $16.8million as a result of the net impact of thefollowing significant changes:

·                  Thedecrease in cash and cash equivalents of $119.7 million resulted from thematters identified in the Consolidated Statements of Cash Flows contained in ourcondensed consolidated financial statements (unaudited) included elsewhere in this report.

·                  Theincrease in accounts receivable, net of $143.5 million is primarily due toincreased revenues during the first quarter of 2007 compared with the fourthquarter of 2006.

·                  Inventoriesincreased $61.7 million dueprimarily to increases in inventory volumes in anticipation of plantturnarounds and inspections and certain textile effects plant closures.

·                  Thedecrease in prepaid expenses of $9.5 million was mainly attributable to the amortization of prepaid insurance.

·                  Accountspayable increased by $98.7 millionprimarily attributable to higher inventories.

·                  Accruedliabilities decreased by $36.0 milliondue primarily to lower income and other taxes payable, payroll, accruedinterest and rebate accruals.

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**Debt and Liquidity**

***Subsidiary Debt***

Withthe exception of our guarantees of certain debt of our Chinese joint venturesand certain indebtedness incurred from time to time to finance certaininsurance premiums, we have no direct debt or guarantee obligations.Substantially all of our debt has been incurred by our subsidiaries (primarilyHuntsman International); such debt is non-recourse to us and we have nocontractual obligation to fund our subsidiaries’ respective operations.

***Transactions  Affecting our Senior Credit Facilities***

As of March 31, 2007, our Senior Credit Facilitiesconsisted of (i) a $650 million Revolving Facility, (ii) a$1,543.4 million Dollar Term Loan, and (iii) a €70.7 million($94.2 million) Euro Term Loan. As of March 31, 2007, there were $109.0million borrowings outstanding under our Revolving Facility, and we had $45.5million in U.S. dollarequivalents of letters of credit and bank guarantees issued and outstandingunder our Revolving Facility.

We have recently completedthe following transactions relating to our Senior Credit Facilities:

·                  OnJanuary 16, 2007, we made a voluntary repayment of $75.0 million U.S.dollar equivalents on our term loans with available liquidity.

·                  On April 19,2007, we entered into an Amendment to our Senior Credit Facilities. Pursuant tothe Amendment, the maturity of the Dollar Term Loan was extended to April 2014and the loan amount was increased to $1,640.0 million. We used the increasedamount to repay, in full, the Euro Term Loan.

As of March 31, 2007, borrowings under the Revolving Facility andDollar Term Loan bore interest at LIBOR plus 1.75%. The Amendment made nochanges to the applicable interest rate of the Revolving Facility. However,pursuant to the Amendment, the applicable interest rate of the Dollar Term Loanis currently set at LIBOR plus 1.75%, subject to a reduction to LIBOR plus1.50% upon achieving certain secured leverage ratio thresholds defined in theAmendment. The Amendment contains one financial covenant, which is applicableonly to the Revolving Facility, and this covenant is only in effect when loansor letters of credit are outstanding under the Revolving Facility. TheAmendment, among other things, also increases the restricted payments basketfor certain types of payments, and, subject to certain conditions, increasesour capacity for additional term loan borrowings. The Amendment provides forcontinuing customary restrictions and limitations on our ability to incurliens, incur additional debt, merge or sell assets, make certain restrictedpayments, prepay other indebtedness, make investments or engage in transactionswith affiliates, and it contains other customary default provisions.

***OtherTransactions Affecting our Debt***

We have alsocompleted the following other transactions relating to our debt:

·                  On or aboutFebruary 28, 2007, we completed a direct private placement of $147.0million in aggregate principal amount of dollar denominated 7.875% seniorsubordinated notes due November 15, 2014. These notes were issued at apremium of 104% of principal amount for a yield of 7.01% and were issued underthe same indenture and are of the same series as an original placement ofdollar denominated notes issued by us in November 2006. We used the netproceeds of $151.7 million to redeem all (approximately €114 million) ofour remaining outstanding euro denominated 10.125% senior subordinated notesdue 2009, which were called for redemption on March 27, 2007 at a call priceof 101.688% plus accrued interest.

·                  Our Australiansubsidiaries which maintain credit facilities that are non-recourse to usreceived commitment letters from their existing credit facility provider withrespect to the renewal of the existing 

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facilities on substantially the same terms. Thecommitment letters are binding, subject to customary provisions for finaldocumentation, legal due diligence and other customary matters. Under the termsof the newly committed facilities, interest will be charged at a rate of theAustralian index rate plus a margin of 2.4%, and the maturity will be extendedfor three years to approximately May 2010. The aggregate outstanding balance asof March 31, 2007 under the Australian facilities is A$59.3 million ($47.9 million,of which $3.6 million is classified as current portion of long term debt).

**Compliance with Covenants**

Our management believes that we are in compliancewith the covenants contained in the agreements governing the Senior CreditFacilities, the A/R Securitization Program and the indentures governing ournotes.

**Short-Term and Long-Term Liquidity**

We depend upon our creditfacilities and other debt instruments to provide liquidity for our operationsand working capital needs. As of March 31, 2007, we had $674.2 million ofcombined cash and combined unused borrowing capacity, consisting of $143.5million in cash, $495.5 million in availability under our Revolving Facility,$2.6 million attributable to our European overdraft facility and$32.6 million in availability under our A/R Securitization Program. Ourliquidity decreased during the first quarter by $213.5 million from $887.7 asof December 31, 2006 to $674.2 as of March 31, 2007. This decrease wasprimarily attributed to a net increase in certain working capital components, includingan increase of $61.7 million in inventories, of $143.5 million inreceivables, partially offset by an increase of $62.7 million in accountspayable and accrued liabilities. For more information, see “—Changes inFinancial Condition” above. In addition, during the first quarter, we made avoluntary repayment of $75.0 million U.S. dollar equivalents on our Term fromavailable liquidity.

We anticipatethat, going forward, our liquidity will be impacted as follows:

·                    Asa result of the U.K. Petrochemicals Disposition, availability under the A/RSecuritization Program is being negatively impacted during certain periods ofthe year when our receivables are seasonally low, such as near year-end andlate summer. We anticipate this impact to be approximately $60 million duringsuch periods; for example, at December 31, 2006, our capacity under theA/R Securitization Program was limited to approximately $446 million, howeveras of March our capacity has increased to $489.3 million and will likelycontinue to increase into the early summer. As a result of the pending U.S.Petrochemicals Disposition discussed in more detail below, we anticipate thatour capacity under the A/R Securitization Program will further decrease byapproximately $100 million to $150 million.

·                    Inconnection with the U.K. Petrochemicals Disposition, we agreed to make paymentsto SABIC of approximately $35 million (£18 million) related to the transfer ofpension plan assets and liabilities. We accrued this liability in connectionwith the sale transaction and expect to fund the obligation in the secondquarter of 2007. The final sales price of the U.K. Petrochemicals Dispositionis also subject to adjustments relating to working capital and investment inthe LDPE plant currently under construction in Wilton U.K. We have provided anadequate provision relating to these adjustments and expect to resolve theworking capital adjustments in the second quarter of 2007.

·                    Asa result of the fire damage at our Port Arthur, Texas facility that occurred onApril 29, 2006, we have received and anticipate receiving additionalsettlements of insurance claims, as well as incurring significant expendituresto rebuild the facility. See “Note 16. Casualty Losses and InsuranceRecoveries—Port Arthur, Texas Plant Fire” to our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

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·                    Inconnection with the sale of our U.S. butadiene and MTBE business, $70 millionof the purchase price will be payable to us after the restart of our PortArthur, Texas facility that was damaged by fire and the related resumption ofcrude butadiene supply, provided that we achieve certain intermediate stepstoward restarting the facility within 30 months of the sale. See “Note 16.Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire” to ourcondensed consolidated financial statements (unaudited) included elsewhere inthis report.

·                    InApril 2007, we finalized the working capital settlement related to the TextileEffects Acquisition. As of March 31, 2007, we had recorded a receivable for theworking capital settlement of $26.9 million related to the Textile EffectsAcquisition. We expect the working capital settlement amounts to be collectedduring second quarter of 2007.

·                    Underthe agreement with respect to the Pending U.S. Petrochemicals Dispositions,Flint Hills Resources will acquire our U.S. base chemicals and polymersmanufacturing assets for approximately $456 million in cash, plus the value ofinventory on the date of closing (approximately $248 million at March 31,2007). We will retain other elements of working capital, including accountsreceivable, accounts payable and certain accrued liabilities which will beliquidated for cash in the ordinary course of business following the closing.Subject to customary regulatory approvals and other closing conditions, thetransaction is expected to close by the fourth quarter of 2007, following therestart of our Port Arthur, Texas olefins manufacturing facility. For moreinformation, see “Note 16. Casualty Losses and Insurance Recoveries—PortArthur, Texas Plant Fire” to our condensed consolidated financial statements(unaudited) included elsewhere in this report. We expect to use the netproceeds from this transaction to repay secured debt and to replenish liquidityfor the expected reduction in our A/R Securitization Program capacity as notedabove.

·                    Inthe event that the Port Arthur, Texas olefins manufacturing facility is notoperating at a specified performance level by August 15, 2007, Flint HillsResources has the option to close on its purchase of the U.S. polymers businessseparate from the purchase of the U.S. base chemicals business. See “Note 4. Business Dispositions and Combinations—Agreement to Sell U.S. BaseChemicals and Polymers Business” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report. If Flint HillsResources exercises the Polymers Purchase Option, the U.S. polymers businesspurchase price will be $150 million, plus the value of associated inventory,and we will amend the asset purchase agreement to facilitate the separateclosing of the U.S. base chemicals business for the remaining $306 millionof sales price, plus the value of associated inventory. We currently expectthat the Port Arthur, Texas olefins manufacturing facility may not achieve thespecified performance level by August 15, 2007.

We believe our currentliquidity, together with funds generated by our businesses, is sufficient tomeet the short-term and long-term needs of our businesses, including fundingoperations, making capital expenditures and servicing our debt obligations inthe ordinary course.

**Capital Expenditures**

We incurred capital expenditures of $131.1 million for the threemonths ended March 31, 2007, of which $105.2 million was paid in cash and$25.9 million was included in accounts payable at the period end. Duringthe three months ended March 31, 2006, we incurred capital expenditures of$104.1 million. The increase in capital expenditures was primarilyattributable to the rebuild of our olefins manufacturing facility in PortArthur, Texas of approximate $44 million during the first quarter 2007.

Excluding capitalexpenditures relating to the fire damage at our Port Arthur, Texas facility, weexpect to spend approximately $550 million on capital projects in 2007. Weexpect to finance our capital expenditure commitments through a combination ofcash flows from operations and financing arrangements. We currently estimatethat we will incur approximately $100 million of total capital expendituresrelated to the rebuild of our Port Arthur, Texas facility during 2007, of whichapproximately $44 million has been spent in the first quarter 2007. Inaddition, we currently estimate that total repair and maintenance expenses and startup costs associated with 

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the fire damage will beapproximately $65 million during 2007, of which approximately $12 million hasbeen spent during the first quarter 2007.

**Off-Balance Sheet Arrangements**

***Receivables Securitization***

Fora discussion of our A/R Securitization Program, see “Note 9. Securitization of Accounts Receivable” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report.

***Financing of Chinese MDI Facilities***

OnSeptember 19, 2003, our unconsolidated Chinese joint venture, SLIC,obtained secured financing for the construction of production facilities. SLICobtained various committed loans in the aggregate amount of approximately$230 million in U.S. dollar equivalents. As of March 31, 2007, there were$87.7 million and RMB 1,095 million ($141.8 million) in outstandingborrowings under these facilities. The interest rate on these facilities isLIBOR plus 0.48% for U.S. dollar borrowings and 90% of the Peoples Bank ofChina rate for RMB borrowings. The loans are secured by substantially all theassets of SLIC and will be paid in 16 semiannual installments, beginning onJune 30, 2007. We unconditionally guarantee 35% of any amounts due andunpaid by SLIC under the loans described above (except for a $1.5 millionVAT facility which is not guaranteed). Our guarantee remains in effect untilSLIC has commenced production of at least 70% of capacity for at least30 days and achieved a debt service coverage ratio of at least 1:1. SLICcommenced operations in the third quarter of 2006.

**Restructuring,Impairment and Plant Closing Costs**

For a discussion of restructuring, impairment and plant closing costs,see “Note 6. Restructuring, Impairment and Plant Closing Costs” to ourcondensed consolidated financial statements (unaudited) included elsewhere inthis report.

**Legal Proceedings**

For a discussionof legal proceedings, see “Note 13. Commitments and Contingencies—Legal Matters”to our condensed consolidated financial statements (unaudited) includedelsewhere in this report and incorporated herein by reference.

**Environmental,Health and Safety Matters**

For adiscussion of environmental, health and safety matters, see “Note 14.Environmental, Health and Safety Matters” to our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

**Recently Issued AccountingPronouncements**

For a discussion ofrecently issued accounting pronouncements, see “Note 2. Recently IssuedAccounting Pronouncements” toour condensed consolidated financial statements (unaudited) included elsewherein this report.

**Critical Accounting Policies**

There have been nochanges in the first quarter of 2007 with respect to our critical accountingpolicies as presented in Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in our Annual Report onForm 10-K for the year ended December 31, 2006.

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed tomarket risks, such as changes in interest rates, foreign exchange rates andcommodity pricing risks. From time to time, we enter into transactions,including transactions involving derivative instruments, to manage certain ofthese exposures.

In conjunctionwith our first quarter 2007 redemption of the remaining 10.125% eurodenominated subordinated notes due 2009 discussed in “Note 7. Debt” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report, and in aneffort to maintain approximately the same amount of euro denominated debtexposure, on March 27, 2007 we entered into a cross currency rate interest rateswap pursuant to which we have agreed to swap $152.6 million of LIBOR floatingrate debt payments for €115.9 million of EURIBOR floating rate debt payments.On maturity, August 15, 2012, we are required to pay principal of €115.9million and will receive principal of $152.6 million. During the life of thisswap, we will receive floating rate interest (LIBOR) in dollars and we will payfloating rate interest (EURIBOR) in euros. This swap is currently notdesignated as a hedge for financial reporting purposes.

In conjunctionwith the Amendment as discussed in “Note 7. Debt” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report, and in aneffort to maintain approximately the same amount of euro denominated debtexposure, on April 19, 2007 we entered into a cross currency rate interest rateswap pursuant to which we have agreed to swap $95.8 million of LIBOR floatingrate debt payments for €70.7 million of EURIBOR floating rate debt payments. Onmaturity, April 19, 2010, we are required to pay principal of €70.7 million andwill receive principal of $95.8 million. During the life of this swap, we willreceive floating rate interest (LIBOR) in dollars and we will pay floating rateinterest (EURIBOR) in euros. This swap was designated as a hedge of a netinvestment for financial reporting purposes.

From time to time,we review our non-U.S. dollar denominated debt and swaps to determine theappropriate amounts designated as hedges. As of March 31, 2007, we havedesignated approximately €421 million of debt as a net investment hedge. As ofMarch 31, 2007, we had approximately €1,097 million in net euro assets.

**ITEM 4.CONTROLS AND PROCEDURES**

Our management,with the participation of our chief executive officer and chief financialofficer, has evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2007.Based on this evaluation, our chief executive officer and chief financialofficer have concluded that, as of March 31, 2007, our disclosure controls andprocedures were effective, in that they ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act is(1) recorded, processed, summarized and reported within the time periodsspecified in the Commission’s rules and forms, and (2) accumulated andcommunicated to our management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

As we havepreviously reported, as of December 31, 2006, we had a material weaknessin the financial reporting process related to the accounting for a complex,non-routine transaction. In response, we made the following changes to ourinternal control over financial reporting during the quarter ended March 31,2007 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act):

·                  Wereorganized our accounting department to ensure that accounting management withappropriate technical expertise, skills and knowledge with respect to complex,non-routine transactions are directly involved in the review and accountingevaluation of such transactions and that such personnel are directly involvedin determining how such transactions are accounted for in our financialstatements;

·                  Ourinternal audit department now reviews the accounting of all material, complexand non-routine transactions; and

·                  Wehave taken steps to properly document and evidence the reviews performed bymanagement and our internal audit department.

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**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

**Environmental Enforcement Proceedings**

On occasion, wereceive notices of violation, enforcement and other complaints from regulatoryagencies alleging non-compliance with applicable EHS laws. Based on currentlyavailable information and our past experience, we do not believe that theresolution of any pending or threatened environmental enforcement proceedingswill have a material impact on our financial condition, results of operationsor cash flows.

During the firstquarter of 2006, we disclosed to the TCEQ that our Conroe, Texas facility hasbeen out of compliance with HAP regulations. On August 25, 2006, the TCEQissued a Notice of Enforcement and on October 20, 2006 issued a proposedpenalty of approximately $0.1 million. Subsequently, because of mitigatingfactors, we reached an agreement with TCEQ staff to settle the case forconsiderably less than $0.1 million. The settlement agreement is awaitingapproval of the TCEQ.

In May 2003,the State of Texas settled an air enforcement case with us relating to our PortArthur plant. Under the settlement, we are required to pay a civil penalty of$7.5 million over more than four years, undertake environmental monitoringprojects totaling about $1.5 million in costs and pay $0.4 million in attorneys’fees to the Texas Attorney General. As of March 31, 2007, we have paid $5.5million toward the penalty and $0.4 million for attorneys’ fees. The monitoringprojects are underway and on schedule. We do not anticipate that thissettlement will have a material adverse effect on our financial condition,results of operations or cash flows.

On April 29,2006, there was a release of hydrocarbons followed by a significant fire in theethylene refrigeration area of our Base Chemicals Light Olefins Unit located inPort Arthur, Texas. See “Note 16. Casualty Losses and Insurance Recoveries—PortArthur, Texas, Plant Fire.” There were no fatalities or serious injuries fromthe fire. An incident investigation team was formed immediately. The cause ofthe fire was determined to be a sudden rupture of a pipeline which had beenweakened by undetected external corrosion. The TCEQ has proposed, and we haveaccepted, a penalty of approximately $0.1 million for alleged excessiveenvironmental releases occurring as a consequence of the fire. The settlementis awaiting approval of the TCEQ.

**Other Legal Proceedings**

For a discussionof other legal proceedings, see “Note 13. Commitments and Contingencies—LegalMatters” and “Note 14. Environmental, Health and Safety Matters—RemediationLiabilities” to our condensed consolidated financial statements (unaudited)included elsewhere in this report and incorporated herein by reference.

**ITEM 1A. RISK FACTORS**

For information regardingrisk factors, see “Part I. Item 1A. Risk Factors,” in our Annual Report on Form10-K for the year ended December 31, 2006 and as follows:

***Existing or future litigation or legislative initiativesrestricting the use of MTBE in gasoline may subject us or our products toenvironmental liability, materially reduce our sales and/or materially increaseour costs.***

We produce MTBE,an oxygenate that is blended with gasoline to reduce vehicle air emissions andto enhance the octane rating of gasoline. Existing or future litigation orlegislative initiatives restricting the use of MTBE in gasoline may subject usor our products to environmental liability or materially adversely affect oursales and costs. Because MTBE has contaminated some water supplies, its use hasbecome controversial in the U.S. and elsewhere, and its use has been effectivelyeliminated in the U.S. market.

As a result ofthese developments, we currently market, either directly or through thirdparties, MTBE to customers located outside the U.S. for use as a gasolineadditive, which has produced a lower level of cash flow than the previous saleof MTBE in the U.S. We may also elect to use all or a portion of our precursorTBA to produce saleable products other than MTBE. If we opt to produce productsother than MTBE, necessary modifications to our facilities will require significantcapital expenditures and the sale of such other products may produce a lowerlevel of cash flow than that historically produced from the sale of MTBE.

Numerouscompanies, including refiners, manufacturers and sellers of gasoline, as wellas manufacturers of MTBE, have been named as defendants in approximately 150cases currently pending in U.S. courts that allege MTBE contamination ingroundwater. We were recently named for the first time as a defendant in eightof those lawsuits. The plaintiffs in the MTBE groundwater contamination casesgenerally seek compensatory damages, punitive damages, injunctive relief, suchas monitoring and abatement, and attorney fees. We currently have insufficientinformation to meaningfully assess our potential exposure in these cases. It ispossible that we could be named as a defendant in additional existing or futureMTBE contamination cases. We cannot provide assurances that adverse resultsagainst us in existing or future MTBE contamination cases will not have amaterial adverse effect on our business, results of operations and financialposition.

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**ITEM 6.EXHIBITS**
| 2.1    |   | Asset Purchase Agreement dated February 15,  2007 among Flint Hills Resources, LLC, Huntsman International LLC,  Huntsman Petrochemical Corporation, Huntsman International Chemicals  Corporation, Huntsman Polymers Holdings Corporation, Huntsman Expandable  Polymers Company, LLC, Huntsman Polymers Corp. and Huntsman Chemical  Company of Canada, Inc. (incorporated by reference to Exhibit 2.1  of our current report on Form 8-K filed on February 20, 2007) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrants have dulycaused this report to be signed on their behalf by the undersigned thereuntoduly authorized.

Dated: May 7, 2007
|        |   | HUNTSMAN CORPORATION       |                                                                                                                            |     |
|--------|--------|----------------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
|   |   | HUNTSMAN INTERNATIONAL LLC |                                                                                                                            |     |
|   |   |                       |                                                                                                                            |     |
|   |   | By:                        | /s/ J. KIMO ESPLIN                                                                                                              |     |
|   |   | * *                   | *J. Kimo Esplin Executive Vice President and Chief  Financial Officer   (Authorized Signatory and Principal Financial Officer)* | * * |
|   |   |                       |                                                                                                                            |     |
|   |   | By:                        | /s/ L. RUSSELL HEALY                                                                                                            |     |
|   |   | * *                   | *L. Russell Healy Vice President and Controller  (Authorized Signatory and Principal Accounting Officer)*                       | * * |
|        |        |                            |                                                                                                                                 |          |  |

 

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**EXHIBITINDEX**
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |   | Asset Purchase Agreement dated February 15,  2007 among Flint Hills Resources, LLC, Huntsman International LLC,  Huntsman Petrochemical Corporation, Huntsman International Chemicals  Corporation, Huntsman Polymers Holdings Corporation, Huntsman Expandable  Polymers Company, LLC, Huntsman Polymers Corp. and Huntsman Chemical  Company of Canada, Inc. (incorporated by reference to Exhibit 2.1  of our current report on Form 8-K filed on February 20, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        |

 

 

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