**UNITED STATESSECURITIES 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 June 30, 2006**                                                                                                  |
| ** **                                                                                                                                         | ** **                                                                                    |
| **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  500 Huntsman Way  Salt Lake City, Utah 84108  (801) 584-5700                         |       | Delaware                   |       | 42-1648585                              |
|                    |       |                                                                                                       |       |                       |       |                                    |
| 333-85141               |       | Huntsman International LLC  500 Huntsman Way  Salt Lake City, Utah 84108  (801) 584-5700                   |       | Delaware                   |       | 87-0630358                              |

 

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

Large accelerated filer o                Acceleratedfiler o                Non-acceleratedfiler x

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

OnAugust 8, 2006, 221,572,172 shares of common stock of Huntsman Corporationwere outstanding and 2,728 units of membership interests of HuntsmanInternational LLC were outstanding. There is no established trading market forHuntsman International LLC’s units of membership interests. All of HuntsmanInternational LLC’s units of membership interests are held by HuntsmanCorporation.

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ThisQuarterly Report on Form 10-Q presents information for two registrants:Huntsman Corporation and Huntsman International LLC (“Huntsman International”).Huntsman International is a wholly owned subsidiary of Huntsman Corporation andis the principal operating company of Huntsman Corporation. The informationreflected in this Quarterly Report on Form 10-Q is equally applicable to bothHuntsman Corporation and Huntsman International, except where otherwise indicated.Huntsman International meets the conditions set forth in General InstructionsH(1)(a) and (b) of Form 10-Q and, to the extent applicable, is therefore filingthis form with a reduced disclosure format.

 

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**HUNTSMAN CORPORATION AND SUBSIDIARIESHUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIESQUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIODENDED JUNE 30, 2006**

**TABLE OF CONTENTS**
| 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 (Loss) (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 (Loss) (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 2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                 |   |
| ITEM  6.  | Exhibits                                                                                     |   |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

**HUNTSMAN CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In Millions, Except Share and Per Share Amounts)**
| ** **                                                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Current assets:**                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                                          |       | $                 | 200.1      |                  | $          | 142.8 |   |
| Restricted cash                                                                                                                                                                     |       | 32.9              |       | —                |       |
| Accounts  receivable (net of allowance for doubtful accounts of $35.0 and $33.7,  respectively)                                                                                     |       | 1,686.4           |       | 1,475.2               |       |
| Accounts  receivable from affiliates                                                                                                                                                |       | 14.7              |       | 7.4                   |       |
| Inventories, net                                                                                                                                                                    |       | 1,545.6           |       | 1,309.2               |       |
| Prepaid expenses                                                                                                                                                                    |       | 49.2              |       | 46.2                  |       |
| Deferred income  taxes                                                                                                                                                              |       | 45.0              |       | 31.2                  |       |
| Other current  assets                                                                                                                                                               |       | 63.7              |       | 84.0                  |       |
| **Total  current assets**                                                                                                                                                           |       | 3,637.6           |       | 3,096.0               |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Property, plant and  equipment, net                                                                                                                                                 |       | 4,646.4           |       | 4,643.2               |       |
| Investment in unconsolidated  affiliates                                                                                                                                            |       | 198.5             |       | 175.6                 |       |
| Intangible assets, net                                                                                                                                                              |       | 203.2             |       | 216.3                 |       |
| Goodwill                                                                                                                                                                            |       | 91.3              |       | 91.2                  |       |
| Deferred income taxes                                                                                                                                                               |       | 120.3             |       | 94.2                  |       |
| Notes receivable from  affiliates                                                                                                                                                   |       | —            |       | 3.0                   |       |
| Other noncurrent assets                                                                                                                                                             |       | 545.7             |       | 551.0                 |       |
| **Total  assets**                                                                                                                                                                   |       | $                 | 9,443.0    |                  | $          | 8,870.5 |   |
|                                                                                                                                                                                |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                                |       |              |       |                  |       |
| **Current liabilities:**                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                                                                                    |       | $                 | 1,134.0    |                  | $          | 1,093.5 |   |
| Accrued  liabilities                                                                                                                                                                |       | 659.2             |       | 747.2                 |       |
| Deferred income  taxes                                                                                                                                                              |       | 38.3              |       | 2.4                   |       |
| Current portion  of long-term debt                                                                                                                                                  |       | 173.4             |       | 44.6                  |       |
| **Total  current liabilities**                                                                                                                                                      |       | 2,004.9           |       | 1,887.7               |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Long-term debt                                                                                                                                                                      |       | 4,258.7           |       | 4,413.3               |       |
| Deferred income taxes                                                                                                                                                               |       | 289.3             |       | 258.3                 |       |
| Other noncurrent  liabilities                                                                                                                                                       |       | 923.2             |       | 770.2                 |       |
| **Total  liabilities**                                                                                                                                                              |       | 7,476.1           |       | 7,329.5               |       |
| ** **                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Minority interests in  common stock of consolidated subsidiaries                                                                                                                    |       | 27.7              |       | 20.4                  |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| **Commitments and contingencies  (Notes 12 and 13)**                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                                |       |              |       |                  |       |
| **Stockholders’ equity:**                                                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common stock  $0.01 par value, 1,200,000,000 shares authorized, 221,572,172 issued and  220,639,687 outstanding in 2006 and 221,200,997 issued and 220,451,484  outstanding in 2005 |       | 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                                                                                                                                                         |       | 2,792.8           |       | 2,779.8               |       |
| Unearned stock-based  compensation                                                                                                                                                  |       | (17.0             | )          | (11.8                 | )          |
| Accumulated  deficit                                                                                                                                                                |       | (1,175.3          | )          | (1,505.8              | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                      |       | 49.0              |       | (31.3                 | )          |
| **Total  stockholders’ equity**                                                                                                                                                |       | 1,939.2           |       | 1,520.6               |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                |       | $                 | 9,443.0    |                  | $          | 8,870.5 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

1

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**HUNTSMAN CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS) (UNAUDITED)(In Millions, Except Per Share Amounts)**
| ** **                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Revenues:**                                                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                   |       | $                                                   | 3,315.9    |                                              | $          | 3,278.4 |   | $ | 6,489.6 |   | $ | 6,603.0 |   |
| Related party sales                                                              |       | 28.0                                                |       | 61.1                                              |       | 42.0 |   | 85.8 |   |
| **Total revenues**                                                               |       | 3,343.9                                             |       | 3,339.5                                           |       | 6,531.6 |   | 6,688.8 |   |
| **Cost of  goods sold**                                                          |       | 2,885.7                                             |       | 2,830.1                                           |       | 5,695.0 |   | 5,590.2 |   |
| ** **                                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                |       | 458.2                                               |       | 509.4                                             |       | 836.6 |   | 1,098.6 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Operating expenses:**                                                          | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative                                              |       | 184.1                                               |       | 170.6                                             |       | 357.3 |   | 332.3 |   |
| Research and development                                                         |       | 26.0                                                |       | 25.6                                              |       | 53.3 |   | 49.9 |   |
| Other operating (income) expense                                                 |       | (96.5                                               | )          | 5.3                                               |       | (93.9 | ) | 50.0 |   |
| Restructuring, impairment and plant closing costs                                |       | 9.2                                                 |       | 18.8                                              |       | 17.0 |   | 29.2 |   |
| Total expenses                                                                   |       | 122.8                                               |       | 220.3                                             |       | 333.7 |   | 461.4 |   |
| ** **                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating  income**                                                            |       | 335.4                                               |       | 289.1                                             |       | 502.9 |   | 637.2 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Interest  expense, net                                                           |       | (94.6                                               | )          | (101.1                                            | )          | (181.4 | ) | (240.7 | ) |
| Loss on accounts  receivable securitization program                              |       | (5.3                                                | )          | (2.4                                              | )          | (8.1 | ) | (5.6 | ) |
| Equity in income  of unconsolidated affiliates                                   |       | 1.4                                                 |       | 2.9                                               |       | 2.1 |   | 5.2 |   |
| Loss on early  extinguishment of debt                                            |       | —                                              |       | (2.0                                              | )          | — |   | (235.0 | ) |
| Other income  (expense)                                                          |       | 0.4                                                 |       | (4.5                                              | )          | 0.1 |   | (0.8 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income  from continuing operations before income taxes and minority interest** | ** ** | 237.3                                               | ** ** | 182.0                                             | ** ** | 315.6 | ** ** | 160.3 | ** ** |
| ** **                                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  expense                                                              |       | (24.3                                               | )          | (29.0                                             | )          | (32.7 | ) | (61.1 | ) |
| Minority  interest in subsidiaries’ (income) loss                           |       | (0.3                                                | )          | 0.1                                               |       | (0.7 | ) | 0.1 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income  from continuing operations**                                           |       | 212.7                                               |       | 153.1                                             |       | 282.2 |   | 99.3 |   |
| Loss from  discontinued operations, net of tax of nil                            |       | (0.3                                                | )          | (40.4                                             | )          | (0.8 | ) | (43.0 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income  before extraordinary gain and accounting change**                      |       | 212.4                                               |       | 112.7                                             |       | 281.4 |   | 56.3 |   |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 50.5                                                |       | —                                            |       | 50.5 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax of $1.9         |       | —                                              |       | —                                            |       | — |   | 4.0 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Net  income**                                                                  |       | 262.9                                               |       | 112.7                                             |       | 331.9 |   | 60.3 |   |
| Preferred stock  dividends                                                       |       | —                                              |       | —                                            |       | — |   | (43.1 | ) |
| **Net  income available to common stockholders**                                 |       | $                                                   | 262.9      |                                              | $          | 112.7 |   | $ | 331.9 |   | $ | 17.2 |   |
| ** **                                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income**                                                                  |       | $                                                   | 262.9      |                                              | $          | 112.7 |   | $ | 331.9 |   | $ | 60.3 |   |
| Other  comprehensive income (loss)                                               |       | 49.3                                                |       | (105.0                                            | )          | 80.3 |   | (151.6 | ) |
| **Comprehensive  income (loss)**                                                 |       | $                                                   | 312.2      |                                              | $          | 7.7 |   | $ | 412.2 |   | $ | (91.3 | ) |

 

(continued)

2

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**Huntsman Corporation and SubsidiariesCondensed Consolidated Statements of Operations andComprehensive Income (loss) (UNaudited)—Continued(In Millions, Except Per Share Amounts)**
| ** **                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  income per share:**                                     | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from  continuing operations                               |       | $                                                   | 0.96       |                                              | $          | 0.69 |   | $ | 1.28 |   | $ | 0.25 |   |
| Loss from  discontinued operations, net of tax                   |       | —                                              |       | (0.18                                             | )          | — |   | (0.19 | ) |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.23                                                |       | —                                            |       | 0.22 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                              |       | —                                            |       | — |   | 0.02 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                       |       | $                                                   | 1.19       |                                              | $          | 0.51 |   | $ | 1.50 |   | $ | 0.08 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  shares                                         |       | 220.6                                               |       | 220.5                                             |       | 220.6 |   | 220.5 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Diluted  income per share:**                                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from  continuing operations                               |       | $                                                   | 0.91       |                                              | $          | 0.66 |   | $ | 1.21 |   | $ | 0.25 |   |
| Loss from  discontinued operations, net of tax                   |       | —                                              |       | (0.18                                             | )          | — |   | (0.19 | ) |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.22                                                |       | —                                            |       | 0.21 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                              |       | —                                            |       | — |   | 0.02 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                       |       | $                                                   | 1.13       |                                              | $          | 0.48 |   | $ | 1.42 |   | $ | 0.08 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  shares                                         |       | 233.2                                               |       | 233.0                                             |       | 233.1 |   | 220.5 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

3

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**HUNTSMAN CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in Millions)**
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                 | 331.9      |   | $ | 60.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Extraordinary  gain on the acquisition of a business, net of tax                   |       | (50.5                                             | )          | — |   |
| Cumulative  effect of change in accounting principle, net of tax                   |       | —                                            |       | (4.0 | ) |
| Equity in income  of unconsolidated affiliates                                     |       | (2.1                                              | )          | (5.2 | ) |
| Depreciation and  amortization                                                     |       | 234.5                                             |       | 249.4 |   |
| Provision for  (reversal of) losses on accounts receivable                         |       | 2.2                                               |       | (3.9 | ) |
| (Gain) loss on  disposal of assets                                                 |       | (92.4                                             | )          | 1.1 |   |
| Loss on pending  disposal of discontinued operations                               |       | —                                            |       | 36.4 |   |
| Loss on early  extinguishment of debt                                              |       | —                                            |       | 235.0 |   |
| Noncash interest  expense                                                          |       | 2.1                                               |       | 37.6 |   |
| Noncash  restructuring, impairment and plant closing costs                         |       | 12.3                                              |       | 0.1 |   |
| Deferred income  taxes                                                             |       | 18.4                                              |       | 28.1 |   |
| Net unrealized  loss on foreign currency transactions                              |       | 26.9                                              |       | 12.6 |   |
| Stock-based  compensation                                                          |       | 8.2                                               |       | 3.8 |   |
| Minority  interest in subsidiaries’ income (loss)                             |       | 0.7                                               |       | (0.1 | ) |
| Other, net                                                                         |       | (9.1                                              | )          | (14.1 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                              |       |   |   |
| Accounts receivable                                                                |       | 63.3                                              |       | 75.7 |   |
| Inventories, net                                                                   |       | 23.1                                              |       | (79.9 | ) |
| Prepaid expenses                                                                   |       | 1.3                                               |       | 27.5 |   |
| Other current assets                                                               |       | 38.6                                              |       | (7.6 | ) |
| Other noncurrent assets                                                            |       | (41.7                                             | )          | 9.2 |   |
| Accounts payable                                                                   |       | (81.8                                             | )          | (61.9 | ) |
| Accrued liabilities                                                                |       | (140.7                                            | )          | (113.2 | ) |
| Other noncurrent liabilities                                                       |       | (21.7                                             | )          | (32.0 | ) |
| **Net  cash provided by operating activities**                                     |       | 323.5                                             |       | 454.9 |   |
| ** **                                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Investing  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Capital expenditures                                                               |       | (211.3                                            | )          | (128.7 | ) |
| Acquisition of  business, net of cash acquired                                     |       | (136.0                                            | )          | — |   |
| Investment in  unconsolidated affiliates, net                                      |       | (14.4                                             | )          | (8.4 | ) |
| Proceeds from  sale of assets                                                      |       | 201.1                                             |       | 4.8 |   |
| Net proceeds  from (investment in) government securities, restricted as to use     |       | 7.2                                               |       | (40.9 | ) |
| Change in  restricted cash                                                         |       | (32.9                                             | )          | (4.6 | ) |
| **Net  cash used in investing activities**                                         |       | (186.3                                            | )          | (177.8 | ) |
| ** **                                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Financing  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net repayments  under revolving loan facilities                                    |       | (1.9                                              | )          | (53.0 | ) |
| Net repayments  on overdraft facility                                              |       | (6.2                                              | )          | — |   |
| Repayment of  long-term debt                                                       |       | (69.5                                             | )          | (1,584.1 | ) |
| Proceeds from  long-term debt                                                      |       | 22.9                                              |       | 6.2 |   |
| Call premiums  related to early extinguishment of debt                             |       | —                                            |       | (106.7 | ) |
| Repayment of  notes payable                                                        |       | (22.3                                             | )          | (14.9 | ) |
| Dividend paid to  preferred stockholders                                           |       | (7.2                                              | )          | (3.6 | ) |
| Net proceeds  from issuance of common and preferred stock                          |       | —                                            |       | 1,491.9 |   |
| Contribution  from minority shareholder                                            |       | 6.2                                               |       | 3.6 |   |
| Other, net                                                                         |       | —                                            |       | (2.6 | ) |
| **Net  cash used in financing activities**                                         |       | (78.0                                             | )          | (263.2 | ) |
| Effect of  exchange rate changes on cash                                           |       | (1.9                                              | )          | (5.9 | ) |
| Increase in cash  and cash equivalents                                             |       | 57.3                                              |       | 8.0 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 142.8                                             |       | 243.2 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                 | 200.1      |   | $ | 251.2 |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Cash paid for interest                                                             |       | $                                                 | 182.9      |   | $ | 206.8 |   |
| Cash paid for income taxes                                                         |       | 12.4                                              |       | 13.3 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(Dollars in Millions)**
| ** **                                                                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                                           |       |              |       |                  |       |
| **ASSETS**                                                                                     |       |              |       |                  |       |
| ** **                                                                                     |       |              |       |                  |       |
| **Current  assets:**                                                                           |       |              |       |                  |       |
| Cash and cash equivalents                                                                      |       | $                 | 186.2      |                  | $          | 132.5 |   |
| Restricted cash                                                                                |       | 32.9              |       | —                |       |
| Accounts receivable (net of allowance for doubtful  accounts of $35.0 and $33.7, respectively) |       | 1,686.4           |       | 1,475.2               |       |
| Accounts receivable from affiliates                                                            |       | 20.2              |       | 10.4                  |       |
| Inventories, net                                                                               |       | 1,545.6           |       | 1,309.2               |       |
| Prepaid expenses                                                                               |       | 47.4              |       | 45.9                  |       |
| Deferred income taxes                                                                          |       | 40.6              |       | 31.2                  |       |
| Other current assets                                                                           |       | 49.4              |       | 69.9                  |       |
| **Total current assets**                                                                       |       | 3,608.7           |       | 3,074.3               |       |
|                                                                                           |       |              |       |                  |       |
| Property, plant  and equipment, net                                                            |       | 4,353.8           |       | 4,336.7               |       |
| Investment in  unconsolidated affiliates                                                       |       | 198.5             |       | 175.6                 |       |
| Intangible  assets, net                                                                        |       | 208.7             |       | 222.0                 |       |
| Goodwill                                                                                       |       | 91.3              |       | 91.2                  |       |
| Deferred income  taxes                                                                         |       | 120.3             |       | 94.2                  |       |
| Notes receivable  from affiliates                                                              |       | —            |       | 3.0                   |       |
| Other noncurrent  assets                                                                       |       | 635.8             |       | 636.0                 |       |
| **Total assets**                                                                               |       | $                 | 9,217.1    |                  | $          | 8,633.0 |   |
|                                                                                           |       |              |       |                  |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                      |       |              |       |                  |       |
|                                                                                           |       |              |       |                  |       |
| **Current  liabilities:**                                                                      |       |              |       |                  |       |
| Accounts payable                                                                               |       | $                 | 1,134.0    |                  | $          | 1,092.7 |   |
| Accounts payable to affiliates                                                                 |       | 6.5               |       | 8.7                   |       |
| Accrued liabilities                                                                            |       | 643.9             |       | 732.3                 |       |
| Deferred income taxes                                                                          |       | 38.3              |       | 2.4                   |       |
| Current portion of long-term debt                                                              |       | 172.3             |       | 44.6                  |       |
| **Total current liabilities**                                                                  |       | 1,995.0           |       | 1,880.7               |       |
|                                                                                           |       |              |       |                  |       |
| Long-term debt                                                                                 |       | 4,258.7           |       | 4,413.3               |       |
| Deferred income  taxes                                                                         |       | 282.0             |       | 216.9                 |       |
| Other noncurrent  liabilities                                                                  |       | 934.8             |       | 770.0                 |       |
| **Total liabilities**                                                                          |       | 7,470.5           |       | 7,280.9               |       |
| ** **                                                                                     |       |              |       |                  |       |
| Minority  interests in common stock of consolidated subsidiaries                               |       | 27.7              |       | 20.4                  |       |
|                                                                                           |       |              |       |                  |       |
| **Commitments  and contingencies (Notes 12 and 13)**                                           |       |              |       |                  |       |
|                                                                                           |       |              |       |                  |       |
| **Members’  equity:**                                                                     |       |              |       |                  |       |
| Members’ equity, 2,728 units issued and outstanding                                       |       | 2,802.1           |       | 2,794.0               |       |
| Accumulated deficit                                                                            |       | (1,096.4          | )          | (1,384.0              | )          |
| Accumulated other comprehensive income (loss)                                                  |       | 13.2              |       | (78.3                 | )          |
| **Total members’ equity**                                                                 |       | 1,718.9           |       | 1,331.7               |       |
| **Total liabilities and members’ equity**                                                 |       | $                 | 9,217.1    |                  | $          | 8,633.0 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS) (UNAUDITED)(Dollars in Millions)**
| ** **                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Revenues:**                                                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade sales,  services and fees                                                  |       | $                                                   | 3,315.9    |                                              | $          | 3,278.4 |   | $ | 6,489.6 |   | $ | 6,603.0 |   |
| Related party  sales                                                             |       | 28.0                                                |       | 61.1                                              |       | 42.0 |   | 85.8 |   |
| **Total  revenues**                                                              |       | 3,343.9                                             |       | 3,339.5                                           |       | 6,531.6 |   | 6,688.8 |   |
| **Cost of goods sold**                                                           |       | 2,882.4                                             |       | 2,826.4                                           |       | 5,687.7 |   | 5,580.8 |   |
| ** **                                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross profit**                                                                 |       | 461.5                                               |       | 513.1                                             |       | 843.9 |   | 1,108.0 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Operating expenses:**                                                          | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative                                             |       | 183.4                                               |       | 173.5                                             |       | 355.8 |   | 330.5 |   |
| Research and  development                                                        |       | 26.0                                                |       | 25.6                                              |       | 53.3 |   | 49.9 |   |
| Other operating  (income) expense                                                |       | (96.5                                               | )          | 5.3                                               |       | (93.9 | ) | 50.0 |   |
| Restructuring,  impairment and plant closing costs                               |       | 9.2                                                 |       | 18.8                                              |       | 17.0 |   | 29.2 |   |
| Total expenses                                                                   |       | 122.1                                               |       | 223.2                                             |       | 332.2 |   | 459.6 |   |
| ** **                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income**                                                             |       | 339.4                                               |       | 289.9                                             |       | 511.7 |   | 648.4 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense, net                                                            |       | (95.7                                               | )          | (102.1                                            | )          | (183.7 | ) | (236.8 | ) |
| Loss on accounts  receivable securitization program                              |       | (5.3                                                | )          | (2.4                                              | )          | (8.1 | ) | (5.6 | ) |
| Equity in income of  unconsolidated affiliates                                   |       | 1.4                                                 |       | 2.9                                               |       | 2.1 |   | 5.2 |   |
| Loss on early  extinguishment of debt                                            |       | —                                              |       | (2.0                                              | )          | — |   | (76.0 | ) |
| Other income (expense)                                                           |       | 0.4                                                 |       | (0.9                                              | )          | 0.1 |   | (1.1 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income from continuing  operations before income taxes and minority interest** | ** ** | 240.2                                               | ** ** | 185.4                                             | ** ** | 322.1 | ** ** | 334.1 | ** ** |
| ** **                                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense                                                               |       | (65.1                                               | )          | (40.4                                             | )          | (78.8 | ) | (68.6 | ) |
| Minority interest in  subsidiaries’ (income) loss                           |       | (0.3                                                | )          | 0.1                                               |       | (0.7 | ) | 0.1 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income from continuing  operations**                                           |       | 174.8                                               |       | 145.1                                             |       | 242.6 |   | 265.6 |   |
| Loss from discontinued  operations, net of tax of nil                            |       | (0.3                                                | )          | (40.4                                             | )          | (0.8 | ) | (43.0 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Income before extraordinary  gain and accounting change**                      |       | 174.5                                               |       | 104.7                                             |       | 241.8 |   | 222.6 |   |
| Extraordinary gain on  the acquisition of a business, net of tax of nil          |       | 46.1                                                |       | —                                            |       | 46.1 |   | — |   |
| Cumulative effect of  change in accounting principle, net of tax of $1.5         |       | —                                              |       | —                                            |       | — |   | 4.2 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| **Net income**                                                                   |       | 220.6                                               |       | 104.7                                             |       | 287.9 |   | 226.8 |   |
| Other comprehensive  income (loss)                                               |       | 57.2                                                |       | (104.9                                            | )          | 91.5 |   | (155.2 | ) |
| **Comprehensive income (loss)**                                                  |       | $                                                   | 277.8      |                                              | $          | (0.2 | ) | $ | 379.4 |   | $ | 71.6 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in Millions)**
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                 | 287.9      |   | $ | 226.8 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Extraordinary  gain on the acquisition of a business, net of tax                   |       | (46.1                                             | )          | — |   |
| Cumulative  effect of change in accounting principle, net of tax                   |       | —                                            |       | (4.2 | ) |
| Equity in income  of unconsolidated affiliates                                     |       | (2.1                                              | )          | (5.2 | ) |
| Depreciation and  amortization                                                     |       | 220.9                                             |       | 236.1 |   |
| Provision for  (reversal of) losses on accounts receivable                         |       | 2.2                                               |       | (3.9 | ) |
| (Gain) loss on  disposal of assets                                                 |       | (92.4                                             | )          | 1.1 |   |
| Loss on pending  disposal of discontinued operations                               |       | —                                            |       | 36.4 |   |
| Loss on early  extinguishment of debt                                              |       | —                                            |       | 76.0 |   |
| Noncash interest  expense                                                          |       | 4.1                                               |       | 31.4 |   |
| Noncash  restructuring, impairment and plant closing costs                         |       | 12.3                                              |       | 0.1 |   |
| Deferred income  taxes                                                             |       | 64.5                                              |       | 38.3 |   |
| Net unrealized  loss on foreign currency transactions                              |       | 26.9                                              |       | 12.6 |   |
| Minority  interest in subsidiaries’ income (loss)                             |       | 0.7                                               |       | (0.1 | ) |
| Other, net                                                                         |       | 1.5                                               |       | (0.4 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                              |       |   |   |
| Accounts receivable                                                                |       | 63.3                                              |       | 75.7 |   |
| Inventories, net                                                                   |       | 23.1                                              |       | (79.9 | ) |
| Prepaid expenses                                                                   |       | (0.1                                              | )          | 28.7 |   |
| Other current assets                                                               |       | 38.6                                              |       | (7.6 | ) |
| Other noncurrent assets                                                            |       | (53.4                                             | )          | (2.7 | ) |
| Accounts payable                                                                   |       | (81.8                                             | )          | (61.9 | ) |
| Accrued liabilities                                                                |       | (141.3                                            | )          | (106.6 | ) |
| Other noncurrent liabilities                                                       |       | (10.7                                             | )          | (30.5 | ) |
| **Net  cash provided by operating activities**                                     |       | 318.1                                             |       | 460.2 |   |
| **Investing  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              |       | (211.3                                            | )          | (128.7 | ) |
| Acquisition of  business, net of cash acquired                                     |       | (136.0                                            | )          | — |   |
| Investment in  unconsolidated affiliates, net                                      |       | (14.4                                             | )          | (8.4 | ) |
| Proceeds from  sale of assets                                                      |       | 201.1                                             |       | 4.8 |   |
| Change in  restricted cash                                                         |       | (32.9                                             | )          | (4.6 | ) |
| **Net  cash used in investing activities**                                         |       | (193.5                                            | )          | (136.9 | ) |
| **Financing  Activities:**                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net repayments  under revolving loan facilities                                    |       | (1.9                                              | )          | (53.0 | ) |
| Net repayments  on overdraft facility                                              |       | (6.2                                              | )          | — |   |
| Repayment of  long-term debt                                                       |       | (69.5                                             | )          | (1,037.8 | ) |
| Proceeds from  long-term debt                                                      |       | 22.9                                              |       | 6.2 |   |
| Call premiums  related to early extinguishment of debt                             |       | —                                            |       | (65.5 | ) |
| Repayment of  notes payable                                                        |       | (20.5                                             | )          | (13.9 | ) |
| Contribution  from parent                                                          |       | —                                            |       | 837.6 |   |
| Contribution  form minority shareholder                                            |       | 6.2                                               |       | 3.6 |   |
| Other, net                                                                         |       | —                                            |       | (0.4 | ) |
| **Net  cash used in financing activities**                                         |       | (69.0                                             | )          | (323.2 | ) |
| Effect of  exchange rate changes on cash                                           |       | (1.9                                              | )          | (5.9 | ) |
| Increase  (decrease) in cash and cash equivalents                                  |       | 53.7                                              |       | (5.8 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 132.5                                             |       | 243.5 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                 | 186.2      |   | $ | 237.7 |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Cash paid for interest                                                             |       | $                                                 | 183.3      |   | $ | 206.8 |   |
| Cash paid for income taxes                                                         |       | 12.4                                              |       | 13.3 |   |

 

**Supplemental non-cash information:**

On February 28, 2005, HMP contributed Huntsman International Holdings’senior subordinated discount notes at an accreted value of $422.8 millionto Huntsman International in exchange for equity. During the six months endedJune 30, 2006 and 2005, Huntsman Corporation contributed $8.2 million and$3.8 million, respectively, to Huntsman International related tostock-based compensation.

See accompanyingnotes to unaudited condensed consolidated financial statements.

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**HUNTSMAN CORPORATION AND SUBSIDIARIES****HUNTSMAN INTERNATIONAL LLCAND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**1.****             General**

***Certain Definitions***

“Company,” “our,” “us,”or “we” may be used to refer to Huntsman Corporation and, unless the contextotherwise requires, its subsidiaries and predecessors. Any references to our “Company,”“we,” “us” or “our” as of a date prior to October 19, 2004 (the date ofour formation) are to Huntsman Holdings, LLC and its subsidiaries (includingtheir respective predecessors). In this report, “Huntsman InternationalHoldings” refers to Huntsman International Holdings LLC (our 100% ownedsubsidiary that merged into Huntsman International LLC on August 16, 2005) and,unless the context otherwise requires, its subsidiaries; “HuntsmanInternational” refers to Huntsman International LLC (our 100% owned subsidiary)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; “Huntsman LLC” refers to HuntsmanLLC (our 100% owned subsidiary that merged into Huntsman International onAugust 16, 2005); “HPS” refers to Huntsman Polyurethanes Shanghai Ltd. (consolidatedsplitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd); “SLIC”refers to Shanghai Isocynate Investment BV (our unconsolidated manufacturingjoint venture with BASF AG and three Chinese chemical companies); “HMP” refersto HMP Equity Holdings Corporation (our 100% owned subsidiary that merged intous on March 17, 2005); and “MatlinPatterson” refers to MatlinPatterson GlobalOpportunities Partners L.P., MatlinPatterson Global Opportunities Partners(Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B, L.P.(collectively, an owner of HMP Equity Trust).

***Description of Business***

We are among the world’s largest global manufacturers of differentiatedand commodity chemical products. We manufacture a broad range of chemicalproducts and formulations, which are marketed in more than 100 countries to adiversified group of consumer and industrial customers. Our products are usedin a wide range of applications, including those in the adhesives, aerospace,automotive, construction products, durable and non-durable consumer products,electronics, medical, packaging, paints and coatings, power generation,refining, synthetic fiber industries and textile industries. We are a leadingglobal producer in many of our key product lines, including methylene diphenyldiisocyanate (“MDI”), amines, surfactants, epoxy-based polymer formulations,maleic anhydride and titanium dioxide.

***Company***

We were formed in2004 to hold, among other things, the equity interests of HuntsmanInternational, Huntsman Advanced Materials and Huntsman LLC. HuntsmanInternational was formed in 1999 to operate businesses acquired in atransaction among Huntsman International Holdings, Huntsman Specialty ChemicalsCorporation and Imperial Chemical Industries PLC (“ICI”).

In February 2005, we completed an initial public offering of commonstock and mandatory convertible preferred stock. In connection with our initialpublic offering, we completed a transaction in which our predecessor, HuntsmanHoldings, LLC, became our wholly owned subsidiary, and the existing beneficialholders of the common and preferred members interests of Huntsman Holdings, LLCreceived shares of our common stock in exchange for their interests (the “ReorganizationTransaction”). Also during 2005, we completed a series of transactions designedto simplify our consolidated group’s financing and public reporting structure,to reduce our cost of financing and to facilitate other organizationalefficiencies, including the following:

·      On August 16, 2005, Huntsman LLC mergedinto Huntsman International (the “Huntsman LLC Merger”). At that time, HuntsmanInternational Holdings also merged into Huntsman International (collectivelywith the Huntsman LLC Merger, the “Affiliate Mergers”). As a result of theHuntsman LLC Merger, Huntsman International succeeded to the assets, rights andobligations of Huntsman LLC.

8

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Huntsman International entered into supplementalindentures under which it assumed the obligations of Huntsman LLC under itsoutstanding debt securities. The Huntsman International subsidiaries thatguarantee Huntsman International’s outstanding debt securities now provideguarantees with respect to these securities, and all of Huntsman LLC’ssubsidiaries that guaranteed its debt securities continue to provide guaranteeswith respect to these debt securities. In addition, Huntsman LLC’s guarantorsubsidiaries executed supplemental indentures to guarantee all of HuntsmanInternational’s outstanding debt securities.

·      On December 20, 2005, we agreed to pay$125 million to affiliates of SISU Capital Limited and other third partiesto acquire the 9.7% of the equity of Huntsman Advanced Materials that we didnot already own. In conjunction with this acquisition, we amended our seniorsecured credit facilities and increased our existing term loan B by$350 million. We used proceeds from the increased term loan, together withapproximately $74 million of cash on hand, to acquire the equity interestin Huntsman Advanced Materials, to redeem Huntsman Advanced Materials’$250 million of outstanding 11% senior secured notes due 2010, to pay$35.6 million in call premiums plus accrued interest, and to pay otherrelated costs. We then contributed our 100% ownership interest in HuntsmanAdvanced Materials to Huntsman International (the “Huntsman Advanced MaterialsMinority Interest Transaction”).

As a result of these transactions, we now operate all of our businessesthrough Huntsman International and substantially all of our debt obligationsare obligations of Huntsman International and/or its subsidiaries.

HMP Equity Trust holds approximately 59% of our common stock. Jon M.Huntsman and Peter R. Huntsman control the voting of the shares of our commonstock held by HMP Equity Trust. However, the shares of our common stock held byHMP Equity Trust will not be voted in favor of certain fundamental corporateactions without the consent of MatlinPatterson, through its representativesDavid J. Matlin or Christopher R. Pechock, and Jon M. Huntsman and Peter R.Huntsman have agreed to cause all of the shares of our common stock held by HMPEquity Trust to be voted in favor of the election to our board of directors oftwo nominees designated by MatlinPatterson.

***Accounting for Certain Transactions***

The ReorganizationTransaction was accounted for as an exchange of shares between entities undercommon control similar to the pooling method. Our Condensed ConsolidatedFinancial Statements (Unaudited) presented herein reflect the results ofoperations and cash flows as if Huntsman Holdings, LLC and our Company werecombined for all periods presented.

The AffiliateMergers and the Huntsman Advanced Materials Minority Interest Transaction wereaccounted for as an exchange of shares between entities under common controlsimilar to the pooling method. Huntsman International’s Condensed ConsolidatedFinancial Statements (Unaudited) presented herein reflect the results ofoperations and cash flows as if Huntsman International Holdings, Huntsman LLC,Huntsman Advanced Materials and Huntsman International were combined for allperiods presented.

***HuntsmanCorporation and Huntsman International Financial Statements***

Except whereotherwise indicated, these notes relate to the Condensed Consolidated FinancialStatements (Unaudited) for each of our Company and Huntsman International. Thedifferences between our financial statements and Huntsman International’sfinancial statements relate primarily to the following:

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

·      HMPdebt that was reflected at our Company and that was repaid in 2005; and

·      thedifferent capital structures.

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***Principles of 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.

***Interim Financial Statements***

Our interimCondensed Consolidated Financial Statements (Unaudited) and HuntsmanInternational’s interim Condensed Consolidated Financial Statements (Unaudited)were prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP” or “U.S. GAAP”) and in management’sopinion, reflect all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of results of operations,financial position and cash flows for the periods presented. Results forinterim periods are not necessarily indicative of those to be expected for thefull year. These condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notes toconsolidated financial statements included in the Annual Report on Form 10-Kfor the year ended December 31, 2005 for each of our Company and HuntsmanInternational.

***Use of Estimates***

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

***Reclassifications***

Certain amounts inthe consolidated financial statements for prior periods have been reclassifiedto conform with the current presentation.

**2.****             Recently Issued Accounting Pronouncements**

We adoptedStatement of Financial Accounting Standards (“SFAS”) No. 151, *Inventory Costs—an amendment of ARB No. 43,*on January 1, 2006. SFAS No. 151requires abnormal amounts of idle facility expense, freight costs, handlingcosts and wasted material expense to be recognized as current-period charges.It also requires that allocation of fixed production overhead to the costs ofconversion be based on the normal capacity of the production facilities. Theadoption of SFAS No. 151 did not have an impact on our consolidatedfinancial statements.

We adopted SFAS No. 154, *Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3,*on January 1, 2006. SFAS No. 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change or unlessspecific transition provisions are proscribed in the accounting pronouncements.SFAS No. 154 does not change the accounting guidance for reporting acorrection of an error in previously issued financial statements or a change inaccounting estimate. We will apply this standard prospectively.

In September 2005, the Emerging Issues Task Force(“EITF”) reached a consensus on Issue No. 04-13, *Accounting for Purchase and Sales of Inventory with the SameCounterparty,* thatrequires companies to recognize an exchange of finished goods for raw materialsor work-in-process within the same line of business at fair value. All otherexchanges of inventory should be reflected at the carrying amounts. Thispronouncement is effective for

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transactionsentered into or modified after March 31, 2006. The adoption of EITF IssueNo. 04-13 did not have a significant impact on our consolidated financialstatements.

In June 2006, theEITF reached a consensus on Issue No. 06-2, *Accounting for SabbaticalLeave and Other Similar Benefits Pursuant to FASB Statement No. 43,*thatconcludes that an employee’s right to a compensated absence under a sabbaticalor other similar benefit arrangement accumulates; therefore, such benefitsshould be accrued over the required service period. This pronouncement iseffective for fiscal years beginning after December 15, 2006. We are evaluating this pronouncement to determineits impact on our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in accordance with SFAS No. 109 by prescribing arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation is effective for fiscal years beginning afterDecember 15, 2006. We are reviewing FIN 48 to determine its impact on ourconsolidated financial statements.

**3.****             Inventories**

Inventoriesconsisted of the following(dollars in millions):
|                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|--------------|------------|------------------|------------|
| ** **                        | ** ** | **2006**     | ** ** | **2005**         | ** ** |
|                              |       |         |       |             |       |
| Raw materials  and supplies       |       | $            | 340.5      |             | $          | 374.1 |   |
| Work in progress                  |       | 210.8        |       | 82.1             |       |
| Finished goods                    |       | 1,110.6      |       | 988.1            |       |
| **Total**                         |       | 1,661.9      |       | 1,444.3          |       |
|                              |       |         |       |             |       |
| LIFO reserves                     |       | (100.9       | )          | (119.7           | )          |
| Lower of cost or  market reserves |       | (15.4        | )          | (15.4            | )          |
| **Net**                           |       | $            | 1,545.6    |             | $          | 1,309.2 |   |

 

As of June 30,2006 and December 31, 2005, approximately 15% and 21%, respectively, ofinventories were recorded using the last-in, first-out cost method.

In the normalcourse of operations, we exchange raw materials with other companies. No gainsor losses are recognized on these exchanges and the net open exchange positionsare valued at our cost. The amount included in inventory under open exchangeagreements payable by us at June 30, 2006 was $1.8 million (10.9 millionpounds of feedstock and products). The amount included in inventory under openexchange agreements payable by us at December 31, 2005 was $3.8 million (8.8million pounds of feedstock and products).

**4.****             Business Disposition and Combination**

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

On June 27, 2006,we sold the assets comprising our U.S. butadiene and MTBE business operated byour Base Chemicals segment. The total sales price was approximately $262million, of which $192 million was paid at closing, while the additional $70million will be payable after the restart of our Port Arthur, Texas olefinsunit that was damaged in a fire (see “Note 16. Port Arthur, Texas Plant Fire”)and the related resumption of crude butadiene supply; provided that we achievecertain intermediate steps toward restarting the plant and that the restartoccurs within 30 months of this sale. The final purchase price also remainssubject to a customary post-closing working capital adjustment in the thirdquarter of 2006. In connection with this sale, we recognized a pre-tax gain of$90.9 million, of which $9.5 million was due to the liquidation of LIFOreserves. We expect to recognize an additional pre-tax gain of $70 million uponcompletion of the conditions referenced above.

11

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The carrying valueof the assets sold at June 27, 2006 was as follows (dollars in millions):
| **ASSETS**                          | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| Accounts and  notes receivable, net |       | $          | 67.5       |   |
| Inventories, net                    |       | 11.8       |       |
| Other current  assets               |       | 2.6        |       |
| Property, plant  and equipment, net |       | 83.2       |       |
| Other noncurrent  assets            |       | 2.0        |       |
| **Total assets**                    |       | 167.1      |       |
| **LIABILITIES**                     | ** ** | ** ** | ** ** |
| Accounts payable                    |       | 64.6       |       |
| Accrued  liabilities                |       | 0.1        |       |
| Other noncurrent  liabilities       |       | 1.3        |       |
| **Total liabilities**               |       | 66.0       |       |
| **Net  assets**                     |       | $          | 101.1      |   |

 

The results ofoperations of this business have not been classified as a discontinuedoperation under applicable accounting rules because of the expected continuingcash flows from the MTBE business we continue to operate in our Polyurethanessegment.

In connection withthe sale, we agreed to indemnify the buyer with respect to any losses resultingfrom (i) the breach of representations and warranties contained in theasset purchase agreement, (ii) any pre-sale liabilities related to thepre-sale operations of the assets sold not assumed by the buyer, and (iii) anyenvironmental liability related to the pre-sale operations of the assetssold.  We are not required to pay underthese indemnification obligations until claims against us exceed$5 million. Upon exceeding this $5 million threshold, we generallyare obligated to provide indemnification for any losses in excess of$5 million, up to a limit of $137.5 million.  We believe that there is only a remotelikelihood that we will be required to pay any material amounts under theindemnity provision.  As a result, wehave estimated that the fair value of this indemnity at the date of the closingof the sale is minimal, and accordingly, no amounts have been recorded.

***Acquisition of Textile EffectsBusiness***

On June 30, 2006,we acquired the global textile effects (“Textile Effects”) business of CibaSpecialty Chemicals Inc. for approximately $172.1 million (CHF 215 million) incash, of which $139.2 million was paid on June 30, 2006 and $32.9 million waspaid on July 3, 2006. The amount paid on July 3, 2006 was reflected inrestricted cash and accrued liabilities in the accompanying June 30, 2006condensed consolidated balance sheets (unaudited). This purchase price issubject to a post-closing working capital adjustment that is expected to befinalized in the third quarter of 2006. We acquired the Textile Effectsbusiness in order to expand our differentiated chemicals business portfolio.The operating results of Textile Effects will be consolidated with ouroperating results beginning on July 1, 2006 and will be reported with ourAdvanced Materials operations as part of our new Materials and Effects segment.

We have accountedfor the Textile Effects acquisition using the purchase method in accordancewith SFAS No. 141, *Business Combinations.*As such, we analyzed the fair value of tangible and intangible assets acquiredand liabilities assumed, and we determined that the fair value of net assetsacquired exceeded cost. Because the fair value of the acquired assets andliabilities assumed exceeded the acquisition price, the valuation of thelong-lived assets acquired was reduced to zero in accordance with SFAS No. 141.The remaining excess was recorded as an extraordinary gain, net of taxes (whichwere not applicable because the gain was recorded in purchase accounting). Thepreliminary allocation of the purchase price to the assets and liabilitiesacquired is summarized as follows (dollars in millions):

12

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|                                                                                                                    | ** ** | **Huntsman  Corporation** | ** ** | **Huntsman  International** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Acquisition  cost:                                                                                                 |       |                      |       |                        |       |
| Acquisition payment, exclusive of post-closing  working capital adjustment                                         |       | $                         | 172.1      |                        | $          | 172.1 |   |
| Estimated post-closing working capital adjustment                                                                  |       | (25.1                     | )          | (25.1                       | )          |
| Direct costs of acquisition                                                                                        |       | 4.5                       |       | 4.5                         |       |
| Total  acquisition costs                                                                                           |       | 151.5                     |       | 151.5                       |       |
|                                                                                                               |       |                      |       |                        |       |
| Fair value of  assets acquired and liabilities assumed:                                                            |       |                      |       |                        |       |
| Cash                                                                                                               |       | 7.7                       |       | 7.7                         |       |
| Accounts receivable                                                                                                |       | 251.4                     |       | 251.4                       |       |
| Inventories                                                                                                        |       | 229.6                     |       | 229.6                       |       |
| Prepaid expenses and other current assets                                                                          |       | 15.4                      |       | 15.4                        |       |
| Accounts payable                                                                                                   |       | (108.3                    | )          | (108.3                      | )          |
| Accrued liabilities                                                                                                |       | (31.2                     | )          | (31.2                       | )          |
| Short-term debt                                                                                                    |       | (5.2                      | )          | (5.2                        | )          |
| Deferred taxes                                                                                                     |       | (2.4                      | )          | (6.8                        | )          |
| Noncurrent liabilities                                                                                             |       | (155.0                    | )          | (155.0                      | )          |
| Total fair value  of net assets acquired                                                                           |       | 202.0                     |       | 197.6                       |       |
| Extraordinary gain on  the acquisition of a business – excess of fair value of net assets acquired  over cost |       | $                         | 50.5       |                        | $          | 46.1 |   |

 

This purchaseprice allocation is preliminary pending finalization of the determination ofthe fair value of assets acquired and liabilities assumed, including valuationof working capital acquired and pension and other post-retirement benefitsassumed, finalization of restructuring plans, estimates of asset retirementobligations and deferred taxes. We are assessing and formulating plans to exitcertain activities of the Textile Effects business and expect to involuntarilyterminate the employment of, or relocate, certain Textile Effects employees.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 reduction,non-cancelable lease termination costs and demolition and decommissioning costsof $56.3 million, $2.3 million and $13.6 million, respectively. We have not yetfinalized plans to exit certain business activities and may record additionalliabilities for workforce reduction, demolition and non-cancelable lease costsas these plans are finalized. We expect that it is reasonably possible thatmaterial changes to the allocation could occur and any changes to our purchaseprice allocation will be recorded as an adjustment to the extraordinary gain infuture periods.

The followingtables reflect our and Huntsman International’s results of operations on a proforma basis as if the Textile Effects acquisition had been completed at thebeginning of each period presented utilizing historical results for each entity(dollars in millions, except per share amounts):

**Huntsman Corporation:**
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2006**                              | ** ** | **2005**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                |       | $                                     | 3,616.8    |                                | $          | 3,621.5 |   | $ | 7,050.1 |   | $ | 7,233.5 |   |
| Income before  extraordinary gain and accounting change |       | 225.0                                 |       | 130.2                               |       | 300.5 |   | 80.6 |   |
| Net income                                              |       | 275.5                                 |       | 180.7                               |       | 351.0 |   | 135.1 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| Basic income per  share:                                |       |                                  |       |                                |       |   |   |   |   |
| Income before extraordinary gain and accounting  change |       | $                                     | 1.02       |                                | $          | 0.59 |   | $ | 1.36 |   | $ | 0.17 |   |
| Net income                                              |       | 1.25                                  |       | 0.82                                |       | 1.59 |   | 0.42 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| Diluted income  per share:                              |       |                                  |       |                                |       |   |   |   |   |
| Income before extraordinary gain and accounting change  |       | $                                     | 0.96       |                                | $          | 0.56 |   | $ | 1.29 |   | $ | 0.17 |   |
| Net income                                              |       | 1.18                                  |       | 0.78                                |       | 1.51 |   | 0.42 |   |

13

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**HuntsmanInternational:**
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2006**                              | ** ** | **2005**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                |       | $                                     | 3,616.8    |                                | $          | 3,621.5 |   | $ | 7,050.1 |   | $ | 7,233.5 |   |
| Income before  extraordinary gain and accounting change |       | 187.1                                 |       | 122.2                               |       | 260.9 |   | 246.9 |   |
| Net income                                              |       | 233.2                                 |       | 168.3                               |       | 307.0 |   | 297.2 |   |
|                                                         |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

Our net income and the net income of Huntsman International for allperiods reflects $50.5 million and $46.1 million, respectively, ofextraordinary gain on the acquisition of Textile Effects.

**5.****            ****Restructuring, Impairment and Plant ClosingCosts**

While we continuously focus on identifying opportunities to reduce ouroperating costs and maximize our operating efficiency, we have nowsubstantially completed our comprehensive global cost reduction program,referred to as “Project Coronado.” Project Coronado was a program designed toreduce our annual fixed manufacturing and selling, general and administrativecosts, as measured at 2002 levels, by $200 million. In connection withProject Coronado, we announced the closure of eight smaller, less competitivemanufacturing units in our Polyurethanes, Materials and Effects, PerformanceProducts and Pigments segments. These and other actions have resulted in thereduction of approximately 1,500 employees in these businesses since 2000.

As of June 30,2006 and December 31, 2005, accrued restructuring, impairment and plant closingcosts by type of cost and initiative consisted of the following (dollars inmillions):
| ** **                                                                | ** ** | ** **        | ** ** | ** **              | ** ** | ** **           | ** ** | **Other**         | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|----------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                | ** ** | **Workforce**     | ** ** | **Demolition and** | ** ** | **Non-cancelable**   | ** ** | **restructuring** | ** ** | ** **   | ** ** |
| ** **                                                                | ** ** | **reductions(1)** | ** ** | **decommissioning**     | ** ** | **lease costs** | ** ** | **costs**         | ** ** | **Total(3)** | ** ** |
| ** **                                                                | ** ** | ** **        | ** ** | ** **              | ** ** | ** **           | ** ** | ** **        | ** ** | ** **   | ** ** |
| Accrued  liabilities as of December 31, 2005                              |       | $                 | 54.2       |                    | $          | 5.8                  |       | $                 | 6.5        |         | $          | 11.8 |   | $ | 78.3 |   |
| Textile Effects  opening balance sheet liabilities at June 30, 2006       |       | 56.3              |       | 13.6                    |       | 2.3                  |       | —            |       | 72.2         |       |
| 2006 charges for  2003 initiatives                                        |       | 1.8               |       | —                  |       | —               |       | —            |       | 1.8          |       |
| 2006 charges for  2004 initiatives                                        |       | 3.1               |       | —                  |       | —               |       | 0.6               |       | 3.7          |       |
| 2006 charges for  2005 initiatives                                        |       | 1.8               |       | —                  |       | —               |       | —            |       | 1.8          |       |
| 2006 charges for  2006 initiatives                                        |       | 2.1               |       | —                  |       | —               |       | —            |       | 2.1          |       |
| Reversals of  reserves no longer required (2)                             |       | (2.5              | )          | (2.2                    | )          | —               |       | —            |       | (4.7         | )          |
| Partial reversal  of Advanced Materials opening balance sheet liabilities |       | (2.5              | )          | —                  |       | —               |       | —            |       | (2.5         | )          |
| 2006 payments  for 2003 initiatives                                       |       | (5.3              | )          | —                  |       | (0.1                 | )          | (0.1              | )          | (5.5         | )          |
| 2006 payments  for 2004 initiatives                                       |       | (13.4             | )          | (1.6                    | )          | (0.4                 | )          | (0.8              | )          | (16.2        | )          |
| 2006 payments  for 2005 initiatives                                       |       | (3.8              | )          | —                  |       | —               |       | (0.7              | )          | (4.5         | )          |
| 2006 payments  for 2006 initiatives                                       |       | (0.1              | )          | —                  |       | —               |       | —            |       | (0.1         | )          |
| Foreign currency  effect on reserve balance                               |       | 2.4               |       | 0.2                     |       | 0.1                  |       | —            |       | 2.7          |       |
| Accrued liabilities as  of June 30, 2006                                  |       | $                 | 94.1       |                    | $          | 15.8                 |       | $                 | 8.4        |         | $          | 10.8 |   | $ | 129.1 |   |

 

----

(1)           With the exception of liabilities recorded inconnection with business combinations, substantially all of thepositions terminated in connection with the restructuring programs wereterminated under ongoing termination benefit arrangements. Accordingly, therelated liabilities were accrued as a one-time charge to earnings in accordancewith SFAS No. 112,*Employers’Accounting for Postemployment Benefits.*The remaining accrued liabilities related to these charges of $37.8million represent workforce reductions to be paid by the end of 2011.Liabilities for workforce reductions recorded in connection with businesscombinations were accrued in accordance with EITF 95-3, *Recognition of Liabilities in Connection with aPurchase Business Combination*, and are expected to be paid through2009.

14

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(2)           Thereversal of workforce reduction reserves relates to differences between theactual payments made to employees upon termination and the original estimatesof termination payments, redeployment of employees whose positions wereoriginally expected to be terminated, changes to applicable laws andregulations, and revisions to original estimates based on information currentlyavailable.

(3)           Accruedliabilities by initiatives were as follows (dollars in millions):
|                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                        |       |              |       |                  |       |
| 2001 initiatives                            |       | $                 | 1.4        |                  | $          | 1.4 |   |
| 2003 initiatives                            |       | 20.6              |       | 28.4                  |       |
| 2004 initiatives                            |       | 32.7              |       | 47.7                  |       |
| 2005 initiatives                            |       | 8.9               |       | 11.6                  |       |
| 2006 initiatives                            |       | 73.6              |       | —                |       |
| Foreign currency  effect on reserve balance |       | (8.1              | )          | (10.8                 | )          |
| Total                                       |       | $                 | 129.1      |                  | $          | 78.3 |   |

 

Details with respect toour reserves for restructuring, impairment and plant closing costs are providedbelow by segment and initiative (dollars in millions):
| ** **                                                               | ** ** | ** **        | ** ** | **Materials and** | ** ** | **Performance** | ** ** | ** **   | ** ** | ** **   | ** ** | **Base**      | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|------------|------------|
| ** **                                                               | ** ** | **Polyurethanes** | ** ** | **Effects**            | ** ** | **Products**    | ** ** | **Pigments** | ** ** | **Polymers** | ** ** | **Chemicals** | ** ** | **Total**  | ** ** |
| ** **                                                               | ** ** | ** **        | ** ** | ** **             | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **    | ** ** | ** ** | ** ** |
| Accrued  liabilities as of December 31, 2005                             |       | $                 | 10.9       |                   | $          | 7.8             |       | $            | 25.6       |         | $          | 16.6          |       | $          | 3.4        |   | $ | 14.0 |   | $ | 78.3 |   |
| Textile Effects opening balance sheet liabilities at  June 30, 2006      |       | —            |       | 72.2                   |       | —          |       | —       |       | —       |       | —        |       | 72.2       |       |
| 2006 charges for 2003 initiatives                                        |       | —            |       | 0.2                    |       | —          |       | 1.6          |       | —       |       | —        |       | 1.8        |       |
| 2006 charges for 2004 initiatives                                        |       | 0.1               |       | 0.2                    |       | 1.0             |       | 1.9          |       | —       |       | 0.5           |       | 3.7        |       |
| 2006 charges for 2005 initiatives                                        |       | —            |       | 0.1                    |       | 0.8             |       | 0.1          |       | —       |       | 0.8           |       | 1.8        |       |
| 2006 charges for 2006 initiatives                                        |       | —            |       | 2.1                    |       | —          |       | —       |       | —       |       | —        |       | 2.1        |       |
| Reversals of reserves no longer required                                 |       | (0.3              | )          | (0.6                   | )          | (2.2            | )          | (1.0         | )          | (0.6         | )          | —        |       | (4.7       | )          |
| Partial reversal of Advanced Materials opening  balance sheet accrual    |       | —            |       | (2.5                   | )          | —          |       | —       |       | —       |       | —        |       | (2.5       | )          |
| 2006 payments for 2003 initiatives                                       |       | (1.6              | )          | (1.6                   | )          | —          |       | (2.3         | )          | —       |       | —        |       | (5.5       | )          |
| 2006 payments for 2004 initiatives                                       |       | (1.0              | )          | (0.4                   | )          | (6.1            | )          | (5.8         | )          | (0.3         | )          | (2.6          | )          | (16.2      | )          |
| 2006 payments for 2005 initiatives                                       |       | (0.1              | )          | (0.2                   | )          | (1.5            | )          | (0.1         | )          | —       |       | (2.6          | )          | (4.5       | )          |
| 2006 payments for 2006 initiatives                                       |       | —            |       | (0.1                   | )          | —          |       | —       |       | —       |       | —        |       | (0.1       | )          |
| Foreign currency effect on reserve balance                               |       | 0.5               |       | 0.3                    |       | 0.9             |       | 0.6          |       | —       |       | 0.4           |       | 2.7        |       |
| Accrued  liabilities as of June 30, 2006                                 |       | $                 | 8.5        |                   | $          | 77.5            |       | $            | 18.5       |         | $          | 11.6          |       | $          | 2.5        |   | $ | 10.5 |   | $ | 129.1 |   |
|                                                                     |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Current portion  of restructuring reserve                                |       | $                 | 3.4        |                   | $          | 19.4            |       | $            | 10.9       |         | $          | 7.6           |       | $          | 2.5        |   | $ | 9.8 |   | $ | 53.6 |   |
| Long-term portion  of restructuring reserve                              |       | 5.1               |       | 58.1                   |       | 7.6             |       | 4.0          |       | —       |       | 0.7           |       | 75.5       |       |
|                                                                     |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Estimated  additional future charges for current restructuring projects: |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Estimated additional charges within one year                             |       | $                 | —     |                   | $          | 0.5             |       | $            | 0.7        |         | $          | 1.8           |       | $          | 12.5       |   | $ | — |   | $ | 15.5 |   |
| Estimated additional charges beyond one year                        |       | —            |       | —                 |       | —          |       | 4.0          |       | 10.0         |       | —        |       | 14.0       |       |

 

Details withrespect to cash and non-cash restructuring charges for the six months endedJune 30, 2006 by initiative are provided below (dollars in millions):

15

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|                                                   | ** ** | **Cash**    | ** ** | **Non-Cash**               | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------|------------|----------------------------|------------|------------|------------|
| ** **                                        | ** ** | **Charges** | ** ** | **(Credits) Charges** | ** ** | **Total**  | ** ** |
| ** **                                        | ** ** | ** **  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| 2006 credits for  2001 initiatives                |       | $           | —     |                       | $          | (2.0       | )          | $ | (2.0 | ) |
| 2006 charges for  2003 initiatives                |       | 1.8         |       | —                     |       | 1.8        |       |
| 2006 charges for  2004 initiatives                |       | 3.7         |       | —                     |       | 3.7        |       |
| 2006 charges for  2005 initiatives                |       | 1.8         |       | 4.9                        |       | 6.7        |       |
| 2006 charges for  2006 initiatives                |       | 2.1         |       | —                     |       | 2.1        |       |
| 2006 charges for  write offs associated with fire |       | —      |       | 9.4                        |       | 9.4        |       |
| Reversals of  reserves no longer required         |       | (4.7        | )          | —                     |       | (4.7       | )          |
| Total charges                                     |       | $           | 4.7        |                       | $          | 12.3       |       | $ | 17.0 |   |

 

As of June 30,2006 and December 31, 2005, we had reserves for restructuring, impairment andplant closing costs of $129.1 million and $78.3 million, respectively.During the six months ended June 30, 2006, we recorded additional net chargesof $17.0 million (consisting of $4.7 million payable in cash and$12.3 million of non-cash charges) for workforce reductions, otherrestructuring costs associated with closure or curtailment of activities at oursmaller, less efficient manufacturing facilities and write-offs due to the fireat our Port Arthur, Texas plant. During the six months ended June 30, 2006, wemade cash payments against these reserves of $26.3 million.

During the sixmonths ended June 30, 2006, our Polyurethanes segment recorded a non-cash restructuring,impairment and plant closing credit of $2.0 million, consisting primarily of again on the sale of our Shepton Mallet, U.K. site.

During the sixmonths ended June 30, 2006, our Materials and Effects segment recorded net restructuringcharges of $2.0 million, primarily related to the realignment of the technicalorganization in Bergkamen, Germany. This realignment and other existinginitiatives are expected to result in additional restructuring charges of$0.5 million. Also during the six months ended June 30, 2006, ourMaterials and Effects segment reversed $2.5 million of reservesestablished in connection with the acquisition of our Advanced Materialsbusiness. This reserve reversal was recorded as a reduction to property, plantand equipment in accordance with EITF95-3, *Recognition of Liabilities inConnection with a Purchase Business Combination.* In addition,we recorded $72.2 million of liabilities for workforce reduction,non-cancelable lease termination costs and demolition and decommissioning costsrelated to the Textile Effects acquisition. For more information, see “Note 4.Business Disposition and Combination—Acquisition of Textile Effects Business.”

During the sixmonths ended June 30, 2006, our Polymers segment recorded a non-cash impairmentcharge of $4.9 million related to capital expenditures and turnaround costsassociated with our Australian styrenics business that was previously impaired.The long-lived assets in this business were determined to be impaired inaccordance with SFAS No. 144 and an impairment charge was recorded in 2005.Capital expenditures and turnaround costs in this business, which are necessaryto maintain operations, are also considered to be impaired immediately afterthey are incurred. Management continues to evaluate the strategic andoperational initiatives related to this business. Capital expenditures andturnaround costs related to this business are expected to result in additionalrestructuring charges of $22.5 million through 2009.

During the sixmonths ended June 30, 2006, our Base Chemicals segment recorded a non-cashcharge of $9.4 million to write off fixed assets that were destroyed andunamortized turnaround costs that will no longer be utilized as a result of thefire at our Port Arthur, Texas facility. For more information, see “Note 16.Port Arthur, Texas Plant Fire.”

16

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**6.****             Debt**

Outstandingdebt consisted of the following (dollars in millions):

**HuntsmanCorporation:**
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Senior Credit  Facilities:       |       |              |       |                  |       |
| Term Loan B                      |       | $                 | 2,056.0    |                  | $          | 2,099.3 |   |
| 2010 Secured  Notes              |       | 293.8             |       | 293.6                 |       |
| 2009 Senior  Notes               |       | 454.1             |       | 454.7                 |       |
| 2011 Senior  Floating Rate Notes |       | 100.0             |       | 100.0                 |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0             |       | 198.0                 |       |
| Subordinated  Notes              |       | 1,180.3           |       | 1,145.2               |       |
| Australian  Credit Facilities    |       | 61.6              |       | 63.8                  |       |
| HPS (China) debt                 |       | 49.7              |       | 42.6                  |       |
| Other                            |       | 38.6              |       | 60.7                  |       |
| Total debt                       |       | $                 | 4,432.1    |                  | $          | 4,457.9 |   |
|                             |       |              |       |                  |       |
| Current portion                  |       | $                 | 173.4      |                  | $          | 44.6 |   |
| Long-term  portion               |       | 4,258.7           |       | 4,413.3               |       |
|                             |       |              |       |                  |       |
| Total debt                       |       | $                 | 4,432.1    |                  | $          | 4,457.9 |   |

 

**HuntsmanInternational:**
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Senior Credit  Facilities:       |       |              |       |                  |       |
| Term Loan B                      |       | $                 | 2,056.0    |                  | $          | 2,099.3 |   |
| 2010 Secured  Notes              |       | 293.8             |       | 293.6                 |       |
| 2009 Senior  Notes               |       | 454.1             |       | 454.7                 |       |
| 2011 Senior  Floating Rate Notes |       | 100.0             |       | 100.0                 |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0             |       | 198.0                 |       |
| Subordinated  Notes              |       | 1,180.3           |       | 1,145.2               |       |
| Australian  Credit Facilities    |       | 61.6              |       | 63.8                  |       |
| HPS (China) debt                 |       | 49.7              |       | 42.6                  |       |
| Other                            |       | 37.5              |       | 60.7                  |       |
| Total debt                       |       | $                 | 4,431.0    |                  | $          | 4,457.9 |   |
|                             |       |              |       |                  |       |
| Current portion                  |       | $                 | 172.3      |                  | $          | 44.6 |   |
| Long-term  portion               |       | 4,258.7           |       | 4,413.3               |       |
| Total debt                       |       | $                 | 4,431.0    |                  | $          | 4,457.9 |   |

 

17

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***SeniorCredit Facilities***

As of June 30, 2006, our senior secured creditfacilities (“Senior Credit Facilities”) consisted of (i) a$650 million revolving facility (the “Revolving Facility”), (ii) a$1,938.8 million term loan B facility (the “Dollar Term Loan”), and(iii) a €93.4 million (approximately $117.2 million) euro termloan B facility (the “Euro Term Loan,” and collectively with the Dollar TermLoan, the “Term Loans”).

***TransactionsAffecting our Debt***

InFebruary 2005, we completed our initial public offering of common stock andmandatory convertible preferred stock that resulted in approximately $1.5billion in net proceeds, substantially all of which were used to repayindebtedness. Also during 2005, we completed a series of transactions designedto simplify our consolidated group’s financing and public reporting structure,to reduce our cost of borrowings and to facilitate other organizationalefficiencies. Specifically, on August 16, 2005, we completed the Huntsman LLCMerger and on December 20, 2005 we completed the Huntsman Advanced MaterialsMinority Interest Transaction. As a result of these transactions, we nowoperate all of our businesses through Huntsman International and substantiallyall of our debt obligations are obligations of Huntsman International and/orits subsidiaries. In connection with repayment of indebtedness, for the sixmonths ended June 30, 2005, we recorded a loss on early extinguishment of debtof $235.0 million and Huntsman International recorded a loss on earlyextinguishment of debt of $76.0 million.

OnJune 30, 2006, Huntsman International entered into an amendment to its existingSenior Credit Facilities to provide for an additional $100 million ofborrowings under the Dollar Term Loan on the same terms as its existing DollarTerm Loan (the “June 30, 2006 Amendment”). Huntsman International borrowed theadditional amounts under the Dollar Term Loan on July 14, 2006, and, on July24, 2006, it used the proceeds to redeem all of its $100 million outstandingsenior floating rate notes due 2011 at a call price of 104.0% of the aggregateprincipal amount thereof. The June 30, 2006 Amendment also modified certainother provisions in our Senior Credit Facilities, including certain financialcovenants.

OnAugust 1, 2006, we made a voluntary repayment of $50 million U.S. dollarequivalents on our Term Loans ($47.3 million on the Dollar Term Loan and €2.2million on the Euro Term Loan) with available liquidity. The amount of thisvoluntary prepayment is classified within current portion of long-term debt.

OnJuly 13, 2006, Huntsman International entered into a transaction to repurchase$37.5 million of its 9.875% senior notes due 2009 (the “2009 Senior Notes”) ata price of 105.0% of the aggregate principal amount thereof. In addition, onJuly 14, 2006, Huntsman International issued a partial redemption notice toredeem $62.5 million of the 2009 Senior Notes on August 14, 2006 at a callprice of 104.937% of the aggregate principal amount thereof. Following thisrepurchase and partial redemption, there will be $350 million aggregateprincipal amount outstanding ($353.2 million book value) of the 2009 SeniorNotes. This $100 million combined reduction of outstandings of the 2009 SeniorNotes is classified within current portion of long-term debt.

As of June 30, 2006, Huntsman International hadoutstanding $175 million 7.375% senior subordinated notes due 2015 and €135 million($169.3 million) 7.5% senior subordinated notes due 2015 (collectively,the “2015 Subordinated Notes”). The 2015 Subordinated Notes are redeemable onor after January 1, 2010 at 103.688% and 103.750%, respectively, of theprincipal amount thereof, declining ratably to par on and after January 1,2013. Under the terms of a registration rights agreement among HuntsmanInternational, the subsidiary guarantors and the initial purchasers of the 2015Subordinated Notes, we were required to complete an exchange offer for the 2015Subordinated Notes on or before September 11, 2005. Because we did not completethe exchange offer by this date, we are required to pay additional interest onthe 2015 Subordinated Notes at a rate of 0.25% per year for the first 90-dayperiod following this date, and this rate increases by an additional 0.25% foreach subsequent 90-day period, up to a maximum of 1.0%. As of June 30, 2006, wewere paying additional interest of 1.0% on the 2015 Subordinated Notes.Additional interest will cease to accrue upon the earlier of the completion ofthe exchange offer or December 17, 2006.

18

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***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 8.Securitization of Accounts Receivable”) and the indentures governing our notes.

**7.****             Derivative Instruments and HedgingActivities**

We are exposed to market risks, such as changes ininterest rates, foreign exchange rates and commodity pricing risks. From timeto time, we enter into transactions, including transactions involvingderivative instruments, to manage certain of these exposures. We manageinterest rate exposure through a program designed to reduce the impact offluctuations in variable interest rates and to meet the requirements of certainof our credit agreements.

All derivatives, whether designated in hedgingrelationships or not, are recorded on the balance sheet at fair value. If thederivative is designated as a fair value hedge, the changes in the fair valueof the derivative and the hedged item are recognized in earnings. If thederivative is designated as a cash-flow hedge, changes in the fair value of thederivative are recorded in accumulated other comprehensive income (loss), tothe extent effective, and will be recognized in the income statement when thehedged item affects earnings. We perform effectiveness assessments in order touse hedge accounting at each reporting period. For a derivative that does notqualify as a hedge, changes in fair value are recognized in earnings.

We have also participated in some derivatives thatwere classified as non-designated derivative instruments, and we hedge our netinvestment in certain European operations. Changes in the fair value of anynon-designated derivative instruments and any ineffectiveness in cash flowhedges are reported in current period earnings. Changes in the fair value ofthe hedge in the net investment of certain European operations are recorded inaccumulated other comprehensive income (loss).

We may enter into foreign currency derivativeinstruments to minimize the short-term impact of movements in foreign currencyrates. These contracts are not designated as hedges for financial reportingpurposes and are recorded at fair value. As of June 30, 2006 andDecember 31, 2005, and for the six months ended June 30, 2006 and 2005,the fair value, change in fair value, and realized gains (losses) ofoutstanding foreign currency rate hedging contracts were not significant.

The purchase price in our acquisition of TextileEffects was denominated in CHF. For more information, see “Note 4. BusinessDisposition and Combination—Acquisition of Textile Effects Business.” Inconnection with our acquisition of Textile Effects, on March 16, 2006, weentered into two foreign currency derivative instruments to limit a portion ofour currency exposure. Neither of these two options was designated as a hedgefor financial reporting purposes. On June 27, 2006 both of the options wereexercised in conjunction with the Textile Effects acquisition at a gain ofapproximately $1.3 million, which is reflected in other operating income.

**8.****             Securitization of Accounts Receivable**

Under our accounts receivable securitization program(“A/R Securitization Program”), we grant an undivided interest in certain ofour trade receivables to a qualified off-balance sheet entity (the “ReceivablesTrust”) at a discount. This undivided interest serves as security for theissuance by the Receivables Trust of commercial paper.

OnApril 18, 2006, we completed an amendment and expansion of our A/R Securitization Program (the “A/RSecuritization Program Amendment”) and added certain additional U.S.subsidiaries as additional receivables originators under the A/R SecuritizationProgram. In connection with this amendment and expansion, the Receivables Trustredeemed in full all of the €90.5 million ($109.8 million) and $85.0 million inprincipal amount of the medium-term notes outstanding under the A/RSecuritization Program. The amended A/R Securitization Program currentlyprovides for financing through a commercial paper conduit program (in both U.S.dollars and euros). We expanded the size of the commercial paper conduit programto a committed amount of approximately $500 million

19

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U.S. dollarequivalents for three years. The cost to the Receivables Trust on amounts drawnunder the commercial paper conduit are at a rate of LIBOR and/or EUROBOR, 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 continue to be accounted for as sales under the amended A/RSecuritization Program.

Inconnection with the A/R Securitization Program Amendment, the amount ofcommercial paper outstanding was initially increased to $475 million U.S.dollar equivalents. A portion of the net increase was used to fund theredemption of the medium-term notes and to repay $50 million U.S. dollarequivalents of term debt outstanding under our Senior Credit Facilities. As ofthe date of the A/R Securitization Program Amendment, the agreements governingour Senior Credit Facilities required us to prepay borrowings under our TermLoans with proceeds obtained under the A/R Securitization Program in excess of$425 million. Pursuant to the June 30, 2006 Amendment of our Senior CreditFacilities, this mandatory repayment threshold for proceeds obtained under theA/R Securitization Program was increased to $500 million.

As of June 30, 2006, the Receivables Trust hadapproximately $299.2 million in U.S. dollar equivalents in commercial paperoutstanding.

20

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**9.****             Employee Benefit Plans**

Componentsof the net periodic benefit costs for the three and six months ended June 30,2006 and 2005 were as follows (dollars in millions):

**HuntsmanCorporation:**

|                                        | ** ** | ** **                          | ** ** | ** **                       | ** ** | **Other Postretirement ** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**           | ** ** |
| ** **                             | ** ** | **Three Months Ended**    | ** ** | **Three Months Ended** | ** ** |
| ** **                             | ** ** | **June 30,**                   | ** ** | **June 30,**                | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                         | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 20.3       |                             | $          | 19.7                                |       | $ | 1.1 |   | $ | 0.8 |   |
| Interest cost                          |       | 31.7                                |       | 30.9                             |       | 2.3                                 |       | 1.9 |   |
| Expected return  on assets             |       | (37.1                               | )          | (33.4                            | )          | —                              |       | — |   |
| Amortization of  transition obligation |       | 0.4                                 |       | 0.3                              |       | —                              |       | — |   |
| Amortization of  prior service cost    |       | (1.7                                | )          | (1.5                             | )          | (0.7                                | )          | (0.5 | ) |
| Amortization of  actuarial loss        |       | 4.5                                 |       | 7.5                              |       | 0.8                                 |       | 0.9 |   |
| Settlement loss                        |       | 0.4                                 |       | —                           |       | —                              |       | — |   |
| **Net periodic benefit cost**          |       | $                                   | 18.5       |                             | $          | 23.5                                |       | $ | 3.5 |   | $ | 3.1 |   |

 

|                                        | ** ** | ** **                          | ** ** | ** **                     | ** ** | **Other Postretirement** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**         | ** ** |
| ** **                             | ** ** | **Six Months Ended**      | ** ** | **Six Months Ended** | ** ** |
| ** **                             | ** ** | **June 30,**                   | ** ** | **June 30,**              | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                       | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 40.6       |                           | $          | 39.2                          |       | $ | 2.2 |   | $ | 1.6 |   |
| Interest cost                          |       | 63.4                                |       | 61.8                           |       | 4.6                           |       | 3.8 |   |
| Expected return  on assets             |       | (74.2                               | )          | (66.8                          | )          | —                        |       | — |   |
| Amortization of  transition obligation |       | 0.8                                 |       | 0.6                            |       | —                        |       | — |   |
| Amortization of  prior service cost    |       | (3.4                                | )          | (3.0                           | )          | (1.4                          | )          | (1.0 | ) |
| Amortization of  actuarial loss        |       | 9.0                                 |       | 15.0                           |       | 1.6                           |       | 1.8 |   |
| Settlement loss                        |       | 0.8                                 |       | —                         |       | —                        |       | — |   |
| **Net  periodic benefit cost**         |       | $                                   | 37.0       |                           | $          | 46.8                          |       | $ | 7.0 |   | $ | 6.2 |   |

 

21

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**HuntsmanInternational:**
| ** **                             | ** ** | ** **                          | ** ** | ** **                             | ** ** | **Other Postretirement ** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**                 | ** ** |
| ** **                             | ** ** | **Three Months Ended**    | ** ** | **Three Months Ended ** | ** ** |
| ** **                             | ** ** | **June 30,**                   | ** ** | **June 30,**                      | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                               | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 20.3       |                                   | $          | 19.6                                |       | $ | 1.1 |   | $ | 0.8 |   |
| Interest cost                          |       | 31.7                                |       | 30.9                                   |       | 2.3                                 |       | 1.9 |   |
| Expected return  on assets             |       | (37.1                               | )          | (33.4                                  | )          | —                              |       | — |   |
| Amortization of  transition obligation |       | 0.4                                 |       | 0.3                                    |       | —                              |       | — |   |
| Amortization of  prior service cost    |       | (1.7                                | )          | (1.5                                   | )          | (0.7                                | )          | (0.5 | ) |
| Amortization of  actuarial loss        |       | 6.9                                 |       | 7.5                                    |       | 0.8                                 |       | 0.9 |   |
| Settlement loss                        |       | 0.4                                 |       | —                                 |       | —                              |       | — |   |
| **Net  periodic benefit cost**         |       | $                                   | 20.9       |                                   | $          | 23.4                                |       | $ | 3.5 |   | $ | 3.1 |   |

 
| ** **                             | ** ** | ** **                          | ** ** | ** **                     | ** ** | **Other Postretirement ** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**         | ** ** |
| ** **                             | ** ** | **Six Months Ended**      | ** ** | **Six Months Ended** | ** ** |
| ** **                             | ** ** | **June 30,**                   | ** ** | **June 30,**              | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                       | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 40.6       |                           | $          | 39.2                                |       | $ | 2.2 |   | $ | 1.6 |   |
| Interest cost                          |       | 63.4                                |       | 61.8                           |       | 4.6                                 |       | 3.8 |   |
| Expected return  on assets             |       | (74.2                               | )          | (66.8                          | )          | —                              |       | — |   |
| Amortization of  transition obligation |       | 0.8                                 |       | 0.6                            |       | —                              |       | — |   |
| Amortization of  prior service cost    |       | (3.4                                | )          | (3.0                           | )          | (1.4                                | )          | (1.0 | ) |
| Amortization of  actuarial loss        |       | 13.8                                |       | 15.0                           |       | 1.6                                 |       | 1.8 |   |
| Settlement loss                        |       | 0.8                                 |       | —                         |       | —                              |       | — |   |
| **Net  periodic benefit cost**         |       | $                                   | 41.8       |                           | $          | 46.8                                |       | $ | 7.0 |   | $ | 6.2 |   |

 

Duringthe six months ended June 30, 2006 and 2005, we made contributions to ourpension plans of $51.0 million and $48.3 million, respectively. During theremainder of 2006, we expect to contribute an additional $64.0 million to ourpension plans, exclusive of the Textile Effects pension plans.

In 2005, we changed the measurement date of ourpension and postretirement benefit plans from December 31 to November 30. Webelieve the one-month change of the measurement date is preferable because it providesus more time to review the completeness and accuracy of the actuarial benefitinformation which results in an improvement in our internal control procedures.The effect of the change in measurement date on the respective obligations andassets of the plan resulted in a cumulative effect of change in accountingprinciple credit for us and Huntsman International of $4.0 million ($0.02 perdiluted share) and $4.2 million, net of tax of $1.9 million and $1.5 million,respectively.

22

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As part of the June 30, 2006 acquisition of theTextile Effects business (see “Note 4. Business Disposition andCombination—Acquisition of Textile Effects Business”), we assumed unfundedpension and other post-employment liabilities for pension and benefit plans ina number of countries. In addition, in certain jurisdictions, assets andliabilities relating to funded pension plans have also been transferred andassumed by us. The funded plans are a mix of defined benefit and definedcontribution plans.

**10.****          Dividends on 5% Mandatory ConvertiblePreferred Stock**

Inconnection with the initial public offering of our 5% mandatory convertiblepreferred stock on February 16, 2005, we declared all dividends that willbe payable on such preferred stock from the issuance through the mandatoryconversion date, which is February 16, 2008. Accordingly, we recordeddividends payable of $43.1 million and a corresponding charge to netincome available to common stockholders during the first quarter of 2005. As ofJune 30, 2006, we had $24.4 million invested in government securities that arerestricted for satisfaction of our dividend payment obligations through themandatory conversion date. We expect to pay dividends in cash onFebruary 16, May 16, August 16 and November 16 of each yearprior to February 16, 2008. Under certain circumstances, we may not beallowed to pay dividends in cash. If this were to occur, any unpaid dividendwould be payable in shares of common stock on February 16, 2008 based onthe market value of common stock at that time.

**11.****          Other Comprehensive Income (Loss)**

Thecomponents of other comprehensive income (loss) were as follows (dollars inmillions):

**HuntsmanCorporation:**
| ** **                                                                                                                                        | ** ** | **Accumulated Other  Comprehensive Income** | ** ** | **Other Comprehensive  Income** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|
|                                                                                                                                                   | ** ** | ** **                                  | ** ** | ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                                                                                                        | ** ** | **June 30,**                           | ** ** | **December 31,**           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2006**                                    | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  translation adjustments, net of tax of $31.8 million and $31.8 million as of  June 30, 2006 and December 31, 2005, respectively |       | $                                           | 139.1      |                            | $          | 62.4 |   | $ | 49.0 |   | $ | (104.1 | ) | $ | 76.7 |   | $ | (154.8 | ) |
| Minimum pension  liability, net of tax of $32.2 million and $30.0 million as of June 30, 2006  and December 31, 2005, respectively                |       | (99.6                                       | )          | (102.1                          | )          | — |   | (2.8 | ) | 2.5 |   | (5.0 | ) |
| Other                                                                                                                                             |       | 2.2                                         |       | 1.1                             |       | 0.3 |   | 1.9 |   | 1.1 |   | 8.2 |   |
| Other  comprehensive income of unconsolidated affiliates                                                                                          |       | 7.3                                         |       | 7.3                             |       | — |   | — |   | — |   | — |   |
| Total                                                                                                                                             |       | $                                           | 49.0       |                            | $          | (31.3 | ) | $ | 49.3 |   | $ | (105.0 | ) | $ | 80.3 |   | $ | (151.6 | ) |

 

**HuntsmanInternational:**
| ** **                                                                                                                                       | ** ** | **Accumulated Other  Comprehensive Income** | ** ** | **Other Comprehensive  Income** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|
|                                                                                                                                                  | ** ** | ** **                                  | ** ** | ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                                                                                                       | ** ** | **June 30,**                           | ** ** | **December 31,**           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                                                       | ** ** | **2006**                                    | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  translation adjustments, net of tax of $13.6 million and $0.2 million as of  June 30, 2006 and December 31, 2005, respectively |       | $                                           | 157.7      |                            | $          | 69.9 |   | $ | 56.9 |   | $ | (107.7 | ) | $ | 87.8 |   | $ | (163.9 | ) |
| Minimum pension  liability, net of tax of $46.5 million and $45.4 million as of June 30, 2006  and December 31, 2005, respectively               |       | (150.8                                      | )          | (153.3                          | )          | — |   | 0.1 |   | 2.5 |   | (5.0 | ) |
| Other                                                                                                                                            |       | (1.0                                        | )          | (2.2                            | )          | 0.3 |   | 2.7 |   | 1.2 |   | 13.7 |   |
| Other  comprehensive income of unconsolidated affiliates                                                                                         |       | 7.3                                         |       | 7.3                             |       | — |   | — |   | — |   | — |   |
| Total                                                                                                                                            |       | $                                           | 13.2       |                            | $          | (78.3 | ) | $ | 57.2 |   | $ | (104.9 | ) | $ | 91.5 |   | $ | (155.2 | ) |

 

Itemsof other comprehensive income (loss) of our Company and our consolidatedaffiliates have been recorded net of tax, with the exception of the foreigncurrency translation adjustments related to subsidiaries with earningspermanently reinvested. The tax effect is determined based upon thejurisdiction where the income or loss was recognized and is net of valuationallowances that have been recorded.

23

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**12.****          Commitmentsand Contingencies**

**LegalMatters**

**Discoloration Claims**

Certainclaims have been filed against us relating to discoloration of unplasticizedpolyvinyl chloride products allegedly caused by our titanium dioxide (“DiscolorationClaims”). Substantially all of the titanium dioxide that is the subject ofthese claims was manufactured prior to our acquisition of our titanium dioxidebusiness from ICI in 1999. Net of amounts we have received from insurers andpursuant to contracts of indemnity, we have paid an aggregate of approximately$16 million in costs and settlement amounts for Discoloration Claimsthrough June 30, 2006.

Thefollowing table presents information about the number of Discoloration Claimsfor the periods 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.

 
| ** **                                | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Claims  unresolved at beginning of period |       | 2                                                       |       | 3                                                       |       |
| Claims filed  during period               |       | 0                                                       |       | 0                                                       |       |
| Claims resolved  during period            |       | 0                                                       |       | 1                                                       |       |
| Claims unresolved at  end of period       |       | 2                                                       |       | 2                                                       |       |

 

Duringthe six months ended June 30, 2005, we settled a claim for approximately $0.9million, all of which was paid by ICI. The two Discoloration Claims unresolvedas of June 30, 2006 asserted aggregate damages of approximately$64 million. An appropriate liability has been accrued for these claims.Based on our understanding of the merits of these claims and our rights undercontracts of indemnity and insurance, we do not believe that the net impact onour financial condition, results of operations or liquidity will be material.

Whileadditional Discoloration Claims may be made in the future, we cannot reasonablyestimate the amount of loss related to such claims. Although we may incuradditional costs as a result of future claims (including settlement costs),based on our history with Discoloration Claims to date, the fact thatsubstantially all of the titanium dioxide that has been the subject of theseDiscoloration Claims was manufactured and sold more than six years ago, and thefact that we have rights under contract to indemnity, including from ICI, we donot believe that any unasserted Discoloration Claims will have a materialimpact on our financial condition, results of operations, or liquidity. Basedon this conclusion and our inability to reasonably estimate our expected costswith respect to these unasserted claims, we have made no accruals in ourfinancial statements as of June 30, 2006 for costs associated with unassertedDiscoloration Claims.

**Asbestos Litigation**

Wehave been named as a “premises defendant” in a number of asbestos exposurecases, typically a claim by a non-employee of exposure to asbestos while at afacility. In the past, these cases typically have involved multiple plaintiffsbringing actions against multiple defendants, and the complaint has notindicated which plaintiffs were making claims against which defendants, whereor how the alleged injuries occurred, or what injuries each plaintiff claimed.These facts, which would be central to any estimate of probable loss, generallyhave been learned only through discovery. Recent changes in Texas tortprocedures have required many pending cases to be split into multiple cases,one for each claimant, increasing the number of pending cases reported belowfor the six months ended June 30, 2006. Nevertheless, the complaints in thesecases provide little additional information. We do not believe that theincreased number of cases resulting from the changes in Texas tort procedurereflects an increase in the number of underlying claims.

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Wherethe alleged exposure occurred prior to our ownership or operation of therelevant “premises,” the prior owners and operators generally havecontractually agreed to retain liability for, and to indemnify us against,asbestos exposure claims. This indemnification is not subject to any time ordollar amount limitations. Upon service of a complaint in one of these cases,we tender it to the prior owner or operator. None of the complaints in thesecases state the amount of damages being sought. The prior owner or operatoraccepts responsibility for the conduct of the defense of the cases and paymentof any amounts due to the claimants. In our eleven-year experience withtendering these cases, we have not made any payment with respect to any tenderedasbestos cases. We believe that the prior owners or operators have theintention and ability to continue to honor their indemnities, although wecannot assure you that they will continue to do so or that we will not beliable for these cases if they do not.

Thefollowing table presents for the period indicated certain information aboutcases for which service has been received that we have tendered to the priorowner or operator, all of which have been accepted.
| ** **                         | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 576                                                     |       | 398                                                     |       |
| Tendered during  period            |       | 962                                                     |       | 84                                                      |       |
| Resolved during  period (1)        |       | 113                                                     |       | 21                                                      |       |
| Unresolved at end of  period       |       | 1,425                                                   |       | 461                                                     |       |

 

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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 resolvesmultiple claims involving multiple defendants simultaneously, and that itconsiders the allocation of settlement amounts, if any, among defendants to beconfidential and proprietary. Consequently, we are not able to provide thenumber of cases resolved with payment by the indemnifying party or the amountof such payments.

Wehave never made any payments with respect to these cases. As of June 30, 2006,we had an accrued 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 are notable to estimate the amount or range of losses associated with such claims, wehave made no accruals with respect to unasserted asbestos exposure claims as ofJune 30, 2006.

Certaincases in which we are a “premises defendant” are not subject to indemnificationby prior owners or operators. The following table presents for the periodindicated certain information about these cases. Cases include all cases forwhich service has been received by us.
| ** **                         | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 34                                                      |       | 29                                                      |       |
| Filed during  period               |       | 16                                                      |       | 38                                                      |       |
| Resolved during  period            |       | 8                                                       |       | 1                                                       |       |
| Unresolved at end of  period       |       | 42                                                      |       | 66                                                      |       |

 

Wepaid gross settlement costs for asbestos exposure cases that are not subject toindemnification of $5,000 during each of the six months ended June 30, 2006 and2005. As of June 30, 2006, we had an accrual of $0.5 million relating to thesecases. We cannot assure you that our liability will not exceed our accruals orthat our 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

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exposure claimsmay be made against us in the future, and such claims could be material.However, because we are not able to estimate the amount or range of lossesassociated with such claims, we have made no accruals with respect tounasserted asbestos exposure claims as of June 30, 2006.

**Antitrust Matters**

Wehave been named as a defendant in putative class action antitrust suitsalleging a conspiracy to fix prices in the MDI, TDI, and polyether polyolsindustries that are now consolidated as the “Polyether Polyols” cases inmultidistrict litigation known as *In reUrethane Antitrust Litigation*, MDL No. 1616, CivilNo. 2:04-md-01616-JWL-DJW, United States District Court, District ofKansas, initial order transferring and consolidating cases filedAugust 23, 2004. Other defendants named in the Polyether Polyols cases areBayer, BASF, Dow and Lyondell. Bayer has entered into a settlement agreementwith the plaintiffs that is subject to approval by the court. Classcertification discovery is underway in these consolidated cases.

Wehave also been named as a defendant in putative class action antitrust suitsalleging a conspiracy to fix prices in the MDI, TDI, and polyether polyolsindustries filed in the Superior Court of Justice, Ontario, Canada on May 5,2006 and in Superior Court, Quebec, Canada on May 17, 2006. The otherdefendants named above in the Polyether Polyols cases are also defendants inthese Canadian cases.

Thepleadings of the plaintiffs in these antitrust suits provide few specificsabout any alleged illegal conduct of the defendants, and we are not aware ofany evidence of illegal conduct by us or any of our employees. For thesereasons, we cannot estimate the possible loss or range of loss relating tothese claims, and therefore we have not accrued a liability for these claims.Nevertheless, we could incur losses due to these claims in the future and thoselosses could be material.

Inaddition, on February 16, 2006, the Antitrust Division of the U.S.Department of Justice served us with a grand jury subpoena requestingproduction of documents relating to the businesses of TDI, MDI, polyetherpolyols and related systems. The other defendants in the Polyether Polyolscases have confirmed that they have also been served with subpoenas in thismatter. We are cooperating fully with the investigation.

**Tax Dispute**

Inconnection with the audit of our income tax returns for the years ended 1998through 2001, we received a Notice of Proposed Adjustment from the InternalRevenue Service and, in 2005, we initiated an administrative appeal before theInternal Revenue Service. The potential liability and the potential reductionto our net operating losses have been reserved in our financial statements.

**Other Proceedings**

We area party to various other proceedings instituted by private plaintiffs,governmental authorities and others arising under provisions of applicablelaws, including various environmental, products liability and other laws.Except as otherwise disclosed in this report, we do not believe that theoutcome of any of these matters will have a material adverse effect on ourfinancial condition, results of operations or liquidity. For more information,see “Note 13. Environmental, Health and Safety Matters—Remediation Liabilities.”

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**13.****          Environmental, Health and Safety Matters**

***General***

We aresubject to extensive federal, state, local and foreign laws, regulations, rulesand ordinances relating to safety, pollution, protection of the environment andthe generation, 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 orpermit requirements could result in restrictions or prohibitions on plantoperations, substantial civil or criminal sanctions, as well as, under someenvironmental laws, the assessment of strict liability and/or joint and severalliability. Moreover, changes in environmental regulations could inhibit orinterrupt our operations, or require us to modify our facilities or operations.Accordingly, environmental or regulatory matters may cause us to incur significantunanticipated losses, costs or liabilities.

***Environmental, Health and Safety Systems***

We arecommitted to achieving and maintaining compliance with all applicableenvironmental, health and safety (“EHS”) legal requirements, and we havedeveloped policies and management systems that are intended to identify themultitude of EHS legal requirements applicable to our operations, enhancecompliance with applicable legal requirements, ensure the safety of ouremployees, contractors, community neighbors and customers and minimize theproduction and emission of wastes and other pollutants. Although EHS legalrequirements are constantly changing and are frequently difficult to complywith, these EHS management systems are designed to assist us in our compliancegoals while also fostering efficiency and improvement and minimizing overallrisk to us.

***EHS Capital Expenditures***

We mayincur future costs for capital improvements and general compliance under EHSlaws, including costs to acquire, maintain and repair pollution controlequipment. For the six months ended June 30, 2006 and 2005, our capitalexpenditures for EHS matters totaled $15.4 million and $15.2 million,respectively. Since capital expenditures for these matters are subject toevolving regulatory requirements and depend, in part, on the timing,promulgation and enforcement of specific requirements, we cannot provideassurance that our recent expenditures will be indicative of future amountsrequired under EHS laws.

***Remediation Liabilities***

Wehave incurred, and we may in the future incur, liability to investigate andclean up waste or contamination at our current or former facilities orfacilities operated by third parties at which we may have disposed of waste orother materials. Similarly, we may incur costs for the cleanup of wastes thatwere disposed of prior to the purchase of our businesses. Under some circumstances,the scope of our liability may extend to damages to natural resources.Specifically, under the U.S. Comprehensive Environmental Response, Compensationand Liability Act of 1980, as amended (“CERCLA”), and similar state laws, acurrent or former owner or operator of real property may be liable forremediation costs regardless of whether the release or disposal of hazardoussubstances was in compliance with law at the time it occurred, and a currentowner or operator may be liable regardless of whether it owned or operated thefacility at the time of the release. In addition, under the U.S. ResourceConservation and Recovery Act of 1976, as amended (“RCRA”), and similar statelaws, we may be required to remediate contamination originating from our propertiesas a condition to our hazardous waste permit. For example, our Odessa, PortArthur and Port Neches facilities in Texas are the subject of ongoingremediation requirements under RCRA authority. In many cases, our potentialliability arising from historical contamination is based on operations andother events occurring prior to our ownership of the relevant facility. Inthese situations, we frequently obtained an indemnity agreement from the priorowner addressing remediation liabilities arising from pre-closing conditions.We have successfully exercised our rights under these contractual covenants fora number of sites, and where

 

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applicable,mitigated our ultimate remediation liability. We cannot assure you, however,that all of such matters will be subject to indemnity or that our existingindemnities will be sufficient to cover our liabilities for such matters.

Someof our manufacturing sites have an extended history of industrial chemicalmanufacturing and use, including on-site waste disposal. We are aware of soil,groundwater and surface water contamination from past operations at some of oursites, and we may find contamination at other sites in the future. Based onavailable information and the indemnification rights we believe are likely tobe available, 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.

Wehave been notified by third parties of claims against us or our subsidiariesfor cleanup liabilities at approximately 12 former facilities and third partysites, including but not limited to sites listed under CERCLA. Based on currentinformation and past experience at other CERCLA sites, we do not expect any ofthese third party claims to result in a material liability to us.

***Environmental Reserves***

Wehave established financial reserves relating to anticipated environmentalcleanup obligations, 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 approximately $16 million and$25 million for environmental liabilities as of June 30, 2006 andDecember 31, 2005, respectively. Of these amounts, approximately $7 millionand $7 million are classified as accrued liabilities on our condensedconsolidated balance sheets as of June 30, 2006 and December 31, 2005,respectively, and approximately $9 million and $18 million are classifiedas other noncurrent liabilities on our condensed consolidated balance sheets asof June 30, 2006 and December 31, 2005, respectively. In certain cases,our remediation liabilities are payable over periods of up to 30 years. Wemay incur losses for environmental remediation in excess of the amountsaccrued; however, we are not able to estimate the amount or range of suchpotential excess.

***Regulatory Developments***

Underthe European Union (“EU”) Integrated Pollution Prevention and Control Directive(“IPPC”), 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, resultsof operations or cash flows.

InOctober 2003, the European Commission (“EC”) adopted a proposal for a new EUregulatory framework for chemicals. Under this proposed new regulation called “REACH”(Registration, Evaluation and Authorization of Chemicals), companies thatmanufacture or import more than one ton of a chemical substance per year wouldbe required to register such manufacture or import in a central database;isolated intermediates would also need to be registered. On November 17, 2005,the European Parliament completed its first reading of the EC-drafted REACHlegislation. Ministers from EU’s 25 member states (sitting as the Council)finalized their own position on the text on December 13, 2005, paving the wayfor final agreement between Parliament and the Council in late 2006 and forREACH to become law in early 2007. As proposed, substance registration underREACH would require the

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development ofextensive data, depending on the volumes imported or manufactured, whereas datarequirements are less onerous for isolated intermediates. An “OSOR” (onesubstance one registration) rule would require importers and manufacturers of acommon substance to work in consortia and submit a single registration. Wherewarranted by a risk assessment, specified uses of some hazardous substances maybe restricted. Additionally, the use of substances with specific hazards wouldrequire an authorization limited in time, pending their substitution. Ascurrently envisioned, REACH would take effect in three primary stages overeleven years following the final effective date (assuming final approval). Theregistration, evaluation and authorization phases would require us to makeexpenditures and resource commitments in order to, for example, developinformation technology tools, generate data, prepare and submit dossiers forsubstance registration, participate in consortia, obtain legal advice, andreformulate products if necessary. The impacts of REACH on the chemicalindustry and on us are not completely quantifiable at this time because manyparameters of the program are still in development.

***MTBE Developments***

Weproduce MTBE, an oxygenate that is blended with gasoline to reduce vehicle airemissions and to enhance the octane rating of gasoline. Existing or future litigationor legislative initiatives restricting the use of MTBE in gasoline may subjectus or our products to environmental liability or materially adversely affectour sales and costs. Because MTBE hascontaminated some water supplies, its use has become controversial inthe U.S. and elsewhere and may be substantially curtailed or eliminated in thefuture by legislation or regulatory action. For example, about 25 states,including California, New York and Connecticut, have adopted rules thatprohibit or restrict the use of MTBE in gasoline sold in those states.

In addition, theEnergy Policy Act of 2005 has substantially curtailed the market for MTBE inthe U.S. by mandating increased use of renewable fuels and eliminating theoxygenate requirement for reformulated gasoline established by the 1990 CleanAir Act Amendments. As a result, the U.S. Environmental Protection Agencyannounced that starting in May 2006, it would no longer specify the oxygencontent for clean-burning gasoline in smog-afflicted areas, easing airpollution regulations that had resulted in MTBE being added to fuel sold inthose areas.

As aresult of these developments, we currently market, either directly or throughthird parties, MTBE to customers located outside the U.S. for use as a gasolineadditive, which may produce a lower level of cash flow than the sale of MTBE inthe U.S. We may also elect to use all or a portion of our precursor TBA toproduce saleable products other than MTBE. If we opt to produce products otherthan 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 the sale of MTBE.

Anumber of lawsuits have been filed, primarily against gasoline manufacturers,marketers and distributors, by persons seeking to recover damages allegedlyarising from the presence of MTBE in groundwater. While we have not been namedas a defendant in any litigation concerning the environmental effects of MTBE,we cannot provide assurances that we will not be involved in any suchlitigation or that such litigation will not have a material adverse effect onour business, results of operations and financial condition. However, because we are not able to estimatethe amount or range of losses that would be associated with such litigation, wehave made no accruals with respect to unasserted claims concerning theenvironmental effects of MTBE as of June 30, 2006.

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**14.****          Other Operating (Income) Expense**

Otheroperating (income) expense consisted of the following (dollars in millions):

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gain on sale of  business/assets        |       | $                                | (92.4      | )                              | $          | — |   | $ | (92.4 | ) | $ | — |   |
| Foreign exchange  losses                |       | 0.7                              |       | 0.8                            |       | 1.8 |   | 38.6 |   |
| Insurance  recovery                     |       | (8.8                             | )          | —                         |       | (8.8 | ) | — |   |
| Other, net                              |       | 4.0                              |       | 4.5                            |       | 5.5 |   | 11.4 |   |
| Total other  operating (income) expense |       | $                                | (96.5      | )                              | $          | 5.3 |   | $ | (93.9 | ) | $ | 50.0 |   |

 

**15.****          Stock-Based Compensation Plans**

Underthe Huntsman Stock Incentive Plan (the “Stock Incentive Plan”), a plan approvedby stockholders, we may grant non-qualified stock options, incentive stockoptions, stock appreciation rights, restricted stock, phantom stock,performance awards and other stock-based awards to our employees and directorsand to employees and directors of our subsidiaries, provided that incentivestock options may be granted solely to employees. The terms of the grants arefixed at the grant date. As of June 30, 2006, 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 over a three-year period.

Thecompensation cost for the Stock Incentive Plan was $4.7 million and$2.8 million for the three months ended June 30, 2006 and 2005,respectively, and $8.2 million and $3.8 million for the six monthsended June 30, 2006 and 2005, respectively. The total income tax benefitrecognized in the statement of operations for stock-based compensationarrangements was nil for each of the three and six months ended June 30, 2006and 2005.

Thefair value of each stock option award is estimated on the date of grant usingthe Black-Scholes valuation model that uses the assumptions noted in thefollowing table. Because we became a publicly-held company in February 2005,expected volatilities are based on implied volatilities from the stock ofcomparable companies and other factors. The expected term of options granted isestimated based on the contractual term of the instruments and employees’expected exercise and post-vesting employment termination behavior. Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve in effect at the time of grant.
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend yield                                            |       | 0                                | %          | 0                              | %          | 0 | % | 0 | % |
| Expected  volatility                                      |       | 23.1                             | %          | 22.4                           | %          | 23.1 | % | 22.4 | % |
| Risk-free  interest rate                                  |       | 5.1                              | %          | 3.9                            | %          | 4.6 | % | 3.9 | % |
| Expected life of stock  options granted during the period |       | 6.6 years                        |       | 6.6 years                      |       | 6.6 years |   | 6.6 years |   |

 

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**StockOptions**

Asummary of stock option activity under the Stock Incentive Plan as of June 30,2006 and changes during the six months then ended is presented below:
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **(000)**  | ** ** | ** **                                 | ** ** | **(Years)**                                         | ** ** | **($000)**                          | ** ** |
| Outstanding at  January 1, 2006 |       | 2,579      |       | $                                          | 22.56      |                                                |       |                                |       |   |
| Granted                         |       | 1,670      |       | 20.49                                      |       |                                                |       |                                |       |
| Exercised                       |       | —     |       | —                                     |       |                                                |       |                                |       |
| Forfeited                       |       | (70        | )          | 21.50                                      |       |                                                |       |                                |       |
| Outstanding at  June 30, 2006   |       | 4,179      |       | 21.75                                      |       | 9.09                                                |       | —                              |       |
| Exercisable at June 30,  2006   |       | 760        |       | 22.99                                      |       | 8.62                                                |       | —                              |       |
|                                 |            |            |            |                                            |            |                                                     |            |                                     |            |  |

 

Theweighted-average grant-date fair value of stock options granted during the sixmonths ended June 30, 2006 was $7.28 per option. As of June 30, 2006, there was$21.1 million of total unrecognized compensation cost related to nonvestedstock option arrangements granted under the Stock Incentive Plan. That cost isexpected to be recognized over a weighted-average period of approximately 2.1years. No option awards were exercised during the six months ended June 30,2006 or 2005.

**Nonvestedshares**

Nonvestedshares granted under the Stock Incentive Plan consist of restricted stock,which is accounted for as an equity award, 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 June 30, 2006 and changesduring the six 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, 2006 |       | 737                    |       | $                                                       | 22.99      |   | 33 |   | $ | 23.00 |   |
| Granted                       |       | 462                    |       | 20.49                                                   |       | 24 |   | 20.50 |   |
| Vested                        |       | (246                   | )          | 22.99                                                   |       | (11 | ) | 23.00 |   |
| Forfeited                     |       | (9                     | )          | 23.00                                                   |       | — |   | — |   |
| Nonvested at June 30,  2006   |       | 944                    |       | 21.77                                                   |       | 46 |   | 21.72 |   |
|                               |            |                        |            |                                                         |            |  |  |  |  |  |  |

 

As ofJune 30, 2006, there was $17.7 million of total unrecognized compensationcost related to nonvested share compensation arrangements granted under theStock Incentive Plan. That cost is expected to be recognized over aweighted-average period of approximately 2.1 years. The total fair valueof shares that vested during the six months ended June 30, 2006 and 2005 was$5.9 million and nil, respectively.

**16.****          PortArthur, Texas Plant Fire**

On April 29, 2006, our Port Arthur, Texas olefinsmanufacturing plant experienced a major fire. With the exception of cyclohexaneoperations at the site which were restarted on June 9, 2006, the remainingoperations at the site remain shutdown. While we are continuing to assess theimpact of the fire, it appears that the damage is significant and, while noassurances can be made, preliminary indications are that we would expect torestart the unit early in the second quarter of 2007. None of our otherJefferson County, Texas manufacturing sites were damaged.

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During the second quarter of 2006, we recognized netlosses due to the fire of $10.0 million (after recording probableinsurance recoveries of $4.2 million) for the write-off of damaged assetsand costs to respond and clean up the facility after the fire, $9.4 million ofwhich was included in restructuring, impairment and plant closing costs and $0.6 millionof which was recorded as cost of sales in the accompanying condensedconsolidated statements of operations (unaudited). We may recognize additionallosses in the future as we complete our assessment of damages.

The Port Arthur facility, also known as the LightOlefins Unit, is part of our Base Chemicals segment and has an annualproduction capacity of 1.4 billion pounds of ethylene, or about 30% of ourglobal ethylene capacity. It also has an annual capacity of 800 million poundsof propylene, 680 million pounds of cyclohexane and 460 million pounds ofbenzene.

We carry normal and customary insurance coverage forproperty damage and business interruption. With respect to coverage for thisoutage, the deductible for property damage is $10 million, while businessinterruption coverage does not apply for the first 60 days. During the secondquarter of 2006, we recorded a receivable of $4.2 million for anticipatedinsurance recoveries of the amount of losses incurred over $10 million.Insurance recoveries in excess of losses incurred will be accounted for as gaincontingencies in accordance with SFAS No. 5, *Accountingfor Contingencies*, and therefore will not be recorded and recognizedin income until earned and realized.

**17.****          Income Taxes**

We use the asset and liability method of accountingfor income taxes. Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial and tax reporting purposes. We evaluate deferred tax assets todetermine whether it is more likely than not that they will be realized.Valuation allowances have been established against a material portion of ournet deferred tax assets due to the uncertainty of realization. Valuationallowances are reviewed each period on a tax jurisdiction by jurisdiction basisto analyze whether there is sufficient positive or negative evidence to supporta change in judgment about the realizability of the related deferred taxassets.

Due tothe complexities of the Textile Effects acquisition and the currentunavailability of critical information regarding projected results by taxjurisdiction, we are currently unable to make a reliable estimate of theeffective tax rate associated with the business. Therefore, we have excludedTextile Effects from our estimated annual effective tax rate for this quarter.The impact of Textile Effects on our annual effective tax rate will be includedin our future calculations.

***Huntsman Corporation***

Incometax expense was $24.3 million and $32.7 million for the three and six monthsended June 30, 2006, respectively, and $29.0 million and $61.1 million for thesame periods in 2005, respectively. Our tax obligations are affected by the mixof income and losses in the tax jurisdictions in which we operate.

Our effective income tax rates were 10% for the threeand six months ended June 30, 2006, and 16% and 38% for the three and sixmonths ended June 30, 2005, respectively. Excluding the impacts of the $90.9million gain on the sale of our U.S. butadiene and MTBE business, the $10million of uninsured loss due to the fire at our Port Arthur, Texas plant andan insurance recovery of $8.8 million in the second quarter of 2006, oureffective income tax rates would have been 15% and 13% for the three and sixmonths ended June 30, 2006, respectively. Excluding the impact of the charge in2005 for loss on early extinguishment of debt of $235 million, which is notbenefited for tax purposes because of valuation allowances on net deferred taxassets, our effective income tax rates would have been 16% and 15% for thethree and six months ended June 30, 2005, respectively. These effective taxrates are lower than the U.S. statutory rate of 35% primarily due to our mix ofearnings in tax jurisdictions where no tax expense is provided due to therelease of valuation allowances, as well as earnings in tax jurisdictions withlower statutory rates.

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***Huntsman International***

Incometax expense was $65.1 million and $78.8 million for the three and six monthsended June 30, 2006, respectively, and $40.4 million and $68.6 million for thesame periods in 2005, respectively. Our tax obligations are affected by the mixof income and losses in the tax jurisdictions in which we operate.

Oureffective income tax rates were 27% and 24% for the three and six months endedJune 30, 2006, respectively, and 22% and 21% for the three and six months endedJune 30, 2005, respectively. Excluding the impacts of the $90.9 million gain onthe sale of our U.S. butadiene and MTBE business, the $10 million of uninsuredloss due to the fire at our Port Arthur, Texas plant and an insurance recoveryof $8.8 million in the second quarter of 2006, our effective income tax rateswould have been 24% and 22% for the three and six months ended June 30, 2006,respectively. Excluding the impact of the charge in 2005 for loss on earlyextinguishment of debt of $76 million, which is not benefited for tax purposesbecause of valuation allowances on net deferred tax assets, our effectiveincome tax rates would have been 24% and 17% for the three and six months endedJune 30, 2005, respectively. These effective tax rates are lower than the U.S.statutory rate of 35% primarily due to our mix of earnings in tax jurisdictionswhere no tax expense is provided due to the release of valuation allowances, aswell as earnings in tax jurisdictions with lower statutory rates.

Additionally,on August 16, 2005, we completed the Affiliate Mergers. Prior to the AffiliateMergers, Huntsman International Holdings, including Huntsman International, wastreated as a partnership for U.S. federal income tax purposes and, as such, wasgenerally not subject to U.S. income tax but rather such income was taxeddirectly to its owners. After the Affiliate Mergers, Huntsman International istreated as a corporate subsidiary and is subject to U.S. income tax. Therefore,Huntsman International’s tax expense for the periods ended June 30, 2006 andJune 30, 2005 are not comparable.

**18.****          Discontinued Operations**

OnJuly 6, 2005, we sold our toluene di-isocyanate (“TDI”) business. The saleinvolved the transfer of our TDI customer list and sales contracts. Wediscontinued the use of our remaining TDI assets. TDI has been accounted for asa discontinued operation under SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.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** | ** ** | **Six Months** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                     | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                     | ** ** | **2006**              | ** ** | **2005**            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                           |       |                  |       |                |       |   |   |   |   |
| Revenues                                       |       | $                     | —     |                | $          | 9.8 |   | $ | — |   | $ | 23.4 |   |
| Costs and  expenses                            |       | (0.3                  | )          | (13.8               | )          | (0.8 | ) | (30.0 | ) |
| Loss on pending  disposal                      |       | —                | ** ** | (36.4               | )          | — |   | (36.4 | ) |
| Operating loss                                 |       | (0.3                  | )          | (40.4               | )          | (0.8 | ) | (43.0 | ) |
| Income tax  expense                            |       | —                |       | —              |       | — |   | — |   |
| Loss from discontinued  operations, net of tax |       | $                     | (0.3       | )                   | $          | (40.4 | ) | $ | (0.8 | ) | $ | (43.0 | ) |

 

Weexpect to incur approximately $0.8 million of additional costs related to theTDI transaction through the first quarter of 2007. The TDI business is reportedin our Polyurethanes segment in our accompanying Condensed ConsolidatedFinancial Statements (Unaudited).

**19.****          Net Income (Loss) per Share**

Basicincome (loss) per share excludes dilution and is computed by dividing net income(loss) available to common stockholders by the weighted average number ofshares outstanding during the period. Diluted income (loss) per share reflectspotential dilution and is computed by dividing net income (loss) available tocommon

33

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stockholders bythe weighted average number of shares outstanding during the period, increasedby the number of additional shares that would have been outstanding if thepotential dilutive units had been exercised or converted.

Inconnection with our Reorganization Transaction and initial public offering ofcommon stock on February 16, 2005, we issued 203,604,545 shares of commonstock. On March 14, 2005, we issued 16,846,939 shares of common stock inexchange for warrants issued by HMP (the “HMP Warrants”). Also onFebruary 16, 2005, we issued 5,750,000 shares of 5% mandatory convertiblepreferred stock. This preferred stock is convertible into between 10,162,550shares and 12,499,925 shares of our common stock, subject to anti-dilutionadjustments, depending on the average market price of our common stock over the20 trading-day period ending on the third trading day prior to conversion. Allshare and per share data reflected in our Condensed Consolidated FinancialStatements (Unaudited) have been retroactively restated to give effect to theshares issued in connection with the Reorganization Transaction, the initialpublic offering of common stock and the exchange of the HMP Warrants onMarch 14, 2005, as if such shares had been issued at the beginning of theperiod. As a result of the declaration of dividends on our mandatoryconvertible preferred stock in the first quarter of 2005, per share results forthe periods ended June 30, 2006 and 2005 are not comparable.

Basicand diluted income (loss) per share is calculated as follows (in millions,except share amounts):

 
| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic  and diluted income from continuing operations available to common  stockholders (numerator):** |       |                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from  continuing operations                                                                      |       | $                                               | 212.7      |                                          | $          | 153.1 |   | $ | 282.2 |   | $ | 99.3 |   |
| Preferred stock  dividends                                                                              |       | —                                          |       | —                                        |       | — |   | (43.1 | ) |
| Income from  continuing operations available to common stockholders                                     |       | $                                               | 212.7      |                                          | $          | 153.1 |   | $ | 282.2 |   | $ | 56.2 |   |
| **Basic  and diluted income available to common stockholders (numerator):**                             |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                                                              |       | $                                               | 262.9      |                                          | $          | 112.7 |   | $ | 331.9 |   | $ | 60.3 |   |
| Preferred stock  dividends                                                                              |       | —                                          |       | —                                        |       | — |   | (43.1 | ) |
| Net income  available to common stockholders                                                            |       | $                                               | 262.9      |                                          | $          | 112.7 |   | $ | 331.9 |   | $ | 17.2 |   |
| **Shares  (denominator):**                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares outstanding                                                                     |       | 220,639,403                                     |       | 220,451,484                                   |       | 220,597,624 |   | 220,451,484 |   |
| Dilutive  securities:                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Preferred stock conversion                                                                              |       | 12,499,925                                      |       | 12,499,925                                    |       | 12,499,925 |   | — |   |
| Stock-based awards                                                                                      |       | 15,355                                          |       | 3,721                                         |       | 5,869 |   | 34,041 |   |
| Total dilutive shares  outstanding assuming conversion                                                  |       | 233,154,683                                     |       | 232,955,130                                   |       | 233,103,418 |   | 220,485,525 |   |

 

Additionalstock-based awards of 4,666,495 and 3,028,721 weighted average equivalentshares of stock were outstanding during the three months ended June 30, 2006and 2005, respectively, and additional stock-based awards of 4,526,394 and2,302,638 weighted average equivalent shares of stock were outstanding duringthe six months ended June 30, 2006 and 2005, respectively. In addition, thepreferred stock would have converted into 12,499,925 shares of common stock forthe six months ended June 30, 2005. However, these stock-based awards and thepreferred stock conversion were not included in the computation of dilutedearnings per share because the effect would be anti-dilutive.

34

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**20.****          Operating Segment Information**

Wereport our operations through six operating segments: Polyurethanes, Materialsand Effects, Performance Products, Pigments, Polymers and Base Chemicals.

Themajor products of each reportable operating segment are as follows:

 
| Segment                   | ** ** | **Products**                                                                                                                                                                                                                |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Polyurethanes             |       | MDI, TPU, polyols, aniline, propylene oxide and MTBE  (1)                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                        |
| Materials and Effects     |       | Epoxy resin compounds, cross-linkers, matting  agents, curing agents, epoxy, acrylic and polyurethane-based adhesives,  tooling resins and stereolithography tooling resins, hybrid thermosets,  textile chemicals and dyes |
|                      |       |                                                                                                                                                                                                                        |
| Performance Products |       | Amines, surfactants, linear alkylbenzene, maleic  anhydride, other performance chemicals, glycols, and technology licenses                                                                                                  |
|                      |       |                                                                                                                                                                                                                        |
| Pigments                  |       | Titanium dioxide                                                                                                                                                                                                            |
|                      |       |                                                                                                                                                                                                                        |
| Polymers                  |       | Ethylene (produced at the Odessa, Texas facilities  primarily for internal use), polyethylene, polypropylene, expandable  polystyrene, styrene and other polymers                                                           |
|                      |       |                                                                                                                                                                                                                        |
| Base Chemicals            |       | Olefins (primarily ethylene and propylene),  butadiene (2), MTBE (2), benzene, cyclohexane and paraxylene                                                                                                                   |

 

----

(1)                                 Thepropylene oxide/MTBE operations in our Polyurethanes segment were not includedin the sale of our U.S. butadiene and MTBE business (operated in our BaseChemicals segment). For more information, see “Note 4. Business Disposition andCombination—Sale of U.S. Butadiene and MTBE Business.”

(2)                                 OnJune 27, 2006, we sold our U.S. butadiene and MTBE business operated in ourBase Chemicals segment. For more information, see “Note 4. Business Dispositionand Combination—Sale of U.S. Butadiene and MTBE Business.”

Salesbetween segments are generally recognized at external market prices and areeliminated in consolidation. We use EBITDA to measure the financial performanceof our global business units and for reporting the results of our operatingsegments. This measure includes all operating items relating to the businesses.The EBITDA of operating segments excludes items that principally apply to our Companyas a whole. The revenues and EBITDA for each of our reportable operatingsegments are as follows (dollars in millions):

35

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|                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net  Sales:**       |       |                                                |       |                                              |       |   |   |   |   |
| Polyurethanes         |       | $                                                   | 925.1      |                                              | $          | 894.7 |   | $ | 1,734.2 |   | $ | 1,774.6 |   |
| Materials and Effects |       | 320.7                                               |       | 310.5                                             |       | 627.9 |   | 622.0 |   |
| Performance Products  |       | 520.1                                               |       | 534.3                                             |       | 1,010.4 |   | 1,055.0 |   |
| Pigments              |       | 276.0                                               |       | 267.7                                             |       | 534.8 |   | 530.9 |   |
| Polymers              |       | 453.8                                               |       | 408.2                                             |       | 893.2 |   | 821.8 |   |
| Base Chemicals        |       | 1,070.8                                             |       | 1,110.9                                           |       | 2,161.4 |   | 2,297.9 |   |
| Eliminations          |       | (222.6                                              | )          | (186.8                                            | )          | (430.3 | ) | (413.4 | ) |
| Total                 |       | $                                                   | 3,343.9    |                                              | $          | 3,339.5 |   | $ | 6,531.6 |   | $ | 6,688.8 |   |

 

**HuntsmanCorporation:**

 
| **Segment EBITDA****(1):**     |   |   |   |   |   |   |   |   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Polyurethanes                  |   | $      | 180.5  |   | $      | 155.6  |   | $      | 339.7  |   | $ | 341.3 |   |
| Materials and Effects          |   | 33.9   |   | 45.2   |   | 68.8   |   | 94.2   |   |
| Performance Products           |   | 73.7   |   | 65.6   |   | 119.3  |   | 132.5  |   |
| Pigments                       |   | 31.8   |   | 24.6   |   | 65.1   |   | 63.9   |   |
| Polymers                       |   | 31.7   |   | 32.5   |   | 66.9   |   | 77.4   |   |
| Base Chemicals                 |   | 141.9  |   | 81.5   |   | 162.0  |   | 243.1  |   |
| Corporate and other (2)   |   | 5.8    |   | (38.7  | )      | (41.3  | )      | (339.0 | )      |
| Total                          |   | $      | 499.3  |   | $      | 366.3  |   | $      | 780.5  |   | $ | 613.4 |   |
|                           |   |   |   |   |   |   |   |   |   |
| Segment EBITDA  (1)            |   | $      | 499.3  |   | $      | 366.3  |   | $      | 780.5  |   | $ | 613.4 |   |
| Interest expense               |   | (94.6  | )      | (101.1 | )      | (181.4 | )      | (240.7 | )      |
| Income tax  expense (3)        |   | (24.3  | )      | (29.0  | )      | (32.7  | )      | (63.0  | )      |
| Depreciation and  amortization |   | (117.5 | )      | (123.5 | )      | (234.5 | )      | (249.4 | )      |
| Net income                     |   | $      | 262.9  |   | $      | 112.7  |   | $      | 331.9  |   | $ | 60.3 |   |

 

**Huntsman International:**

 
|                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Segment  EBITDA****(1):**    |       |                                                |       |                                              |       |   |   |   |   |
| Polyurethanes                  |       | $                                                   | 180.5      |                                              | $          | 155.6 |   | $ | 339.7 |   | $ | 341.3 |   |
| Materials and Effects          |       | 33.9                                                |       | 45.2                                              |       | 68.8 |   | 94.2 |   |
| Performance Products           |       | 73.7                                                |       | 65.6                                              |       | 119.3 |   | 132.5 |   |
| Pigments                       |       | 31.8                                                |       | 24.6                                              |       | 65.1 |   | 63.9 |   |
| Polymers                       |       | 31.7                                                |       | 32.5                                              |       | 66.9 |   | 77.4 |   |
| Base Chemicals                 |       | 141.9                                               |       | 81.5                                              |       | 162.0 |   | 243.1 |   |
| Corporate and other (2)        |       | (1.4                                                | )          | (40.6                                             | )          | (50.5 | ) | (182.6 | ) |
| Total                          |       | $                                                   | 492.1      |                                              | $          | 364.4 |   | $ | 771.3 |   | $ | 769.8 |   |
|                           |       |                                                |       |                                              |       |   |   |   |   |
| Segment EBITDA  (1)            |       | $                                                   | 492.1      |                                              | $          | 364.4 |   | $ | 771.3 |   | $ | 769.8 |   |
| Interest expense               |       | (95.7                                               | )          | (102.1                                            | )          | (183.7 | ) | (236.8 | ) |
| Income tax  expense (3)        |       | (65.1                                               | )          | (40.4                                             | )          | (78.8 | ) | (70.1 | ) |
| Depreciation and  amortization |       | (110.7                                              | )          | (117.2                                            | )          | (220.9 | ) | (236.1 | ) |
| Net income                     |       | $                                                   | 220.6      |                                              | $          | 104.7 |   | $ | 287.9 |   | $ | 226.8 |   |

 

----

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

(2)                                 EBITDAfrom corporate and other items includes unallocated corporate overhead, loss onearly extinguishment of debt, loss on accounts receivable securitizationprogram, unallocated foreign exchange

36

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gains or losses, other non-operating income (expense), cumulativeeffect of change in accounting principle and extraordinary gain on theacquisition of a business.

(3)                                 Includesa tax expense of $1.9 million and $1.5 million for our Company and HuntsmanInternational, respectively, for the six months ended June 30, 2005 on thecumulative effect of change in accounting principle.

**22.****          Condensed Consolidating Financial Statementsof Huntsman International**

Thefollowing unaudited condensed consolidating financial statements of HuntsmanInternational present, in separate columns, financial information for thefollowing: Huntsman International LLC (on a parent-only basis), with itsinvestment in subsidiaries recorded under the equity method; the guarantors ofHuntsman International’s debt on a combined, and where appropriate,consolidated basis; and non-guarantor subsidiaries on a combined, and whereappropriate, consolidated basis. Additional columns present eliminatingadjustments and consolidated totals as of June 30, 2006 and December 31, 2005and for the three and six months ended June 30, 2006 and 2005. There are nocontractual restrictions limiting transfers of cash from Huntsman International’sguarantors to Huntsman International. Each of Huntsman International’sguarantors is 100% owned by Huntsman International and has fully andunconditionally guaranteed Huntsman International’s notes on a joint andseveral basis.

37

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFJUNE 30, 2006**

**(Dollars in Millions)**

 
| ** **                                      | ** ** | **Parent Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **ASSETS**                                      |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Current assets:**                             |       |                    |       |           |       |               |       |             |       |                                           |       |
| Cash and cash  equivalents                      |       | $                       | 18.9       |           | $          | 2.9                |       | $                | 164.4      |                                           | $          | — |   | $ | 186.2 |   |
| Restricted cash                                 |       | —                  |       | —         |       | 32.9               |       |             |       | 32.9                                           |       |
| Accounts  receivable, net                       |       | 59.6                    |       | 201.0          |       | 1,425.8            |       | —           |       | 1,686.4                                        |       |
| Accounts  receivable from affiliates            |       | 541.5                   |       | 2,013.0        |       | 515.6              |       | (3,049.9         | )          | 20.2                                           |       |
| Inventories, net                                |       | 142.9                   |       | 380.3          |       | 1,024.8            |       | (2.4             | )          | 1,545.6                                        |       |
| Prepaid expenses                                |       | 3.8                     |       | 4.8            |       | 38.9               |       | (0.1             | )          | 47.4                                           |       |
| Deferred income  taxes                          |       | 45.4                    |       | —         |       | 9.8                |       | (14.6            | )          | 40.6                                           |       |
| Other current  assets                           |       | 2.0                     |       | 5.0            |       | 51.2               |       | (8.8             | )          | 49.4                                           |       |
| **Total  current assets**                       |       | 814.1                   |       | 2,607.0        |       | 3,263.4            |       | (3,075.8         | )          | 3,608.7                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Property, plant and  equipment, net             |       | 546.7                   |       | 1,267.9        |       | 2,536.1            |       | 3.1              |       | 4,353.8                                        |       |
| Investment in  affiliates                       |       | 4,397.9                 |       | 2,404.3        |       | 88.4               |       | (6,692.1         | )          | 198.5                                          |       |
| Intangible assets, net                          |       | 158.1                   |       | (5.8           | )          | 56.4               |       | —           |       | 208.7                                          |       |
| Goodwill                                        |       | —                  |       | 88.0           |       | 7.4                |       | (4.1             | )          | 91.3                                           |       |
| Deferred income taxes                           |       | 3.9                     |       | 19.9           |       | 111.1              |       | (14.6            | )          | 120.3                                          |       |
| Notes receivable from  affiliates               |       | 2,548.1                 |       | 2,038.0        |       | —             |       | (4,586.1         | )          | —                                         |       |
| Other noncurrent assets                         |       | 73.9                    |       | 131.0          |       | 430.9              |       | —           |       | 635.8                                          |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total  assets**                               |       | $                       | 8,542.7    |           | $          | 8,550.3            |       | $                | 6,493.7    |                                           | $          | (14,369.6 | ) | $ | 9,217.1 |   |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**       |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Current liabilities:**                        |       |                    |       |           |       |               |       |             |       |                                           |       |
| Accounts payable                                |       | $                       | 90.6       |           | $          | 253.8              |       | $                | 789.6      |                                           | $          | — |   | $ | 1,134.0 |   |
| Accounts payable  to affiliates                 |       | 2,092.3                 |       | 292.5          |       | 671.5              |       | (3,049.8         | )          | 6.5                                            |       |
| Accrued  liabilities                            |       | 142.7                   |       | 136.4          |       | 373.6              |       | (8.8             | )          | 643.9                                          |       |
| Deferred income  taxes                          |       | 8.3                     |       | 19.8           |       | 24.8               |       | (14.6            | )          | 38.3                                           |       |
| Current portion  of long-term debt              |       | 150.3                   |       | 8.3            |       | 13.7               |       | —           |       | 172.3                                          |       |
| **Total  current liabilities**                  |       | 2,484.2                 |       | 710.8          |       | 1,873.2            |       | (3,073.2         | )          | 1,995.0                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Long-term debt                                  |       | 4,159.7                 |       | 2,517.8        |       | 2,167.3            |       | (4,586.1         | )          | 4,258.7                                        |       |
| Deferred income taxes                           |       | 35.0                    |       | 46.1           |       | 215.5              |       | (14.6            | )          | 282.0                                          |       |
| Other noncurrent  liabilities                   |       | 144.9                   |       | 196.6          |       | 594.3              |       | (1.0             | )          | 934.8                                          |       |
| **Total  liabilities**                          |       | 6,823.8                 |       | 3,471.3        |       | 4,850.3            |       | (7,674.9         | )          | 7,470.5                                        |       |
| ** **                                      |       |                    |       |           |       |               |       |             |       |                                           |       |
| Minority interests                              |       | —                  |       | 123.4          |       | 22.4               |       | (118.1           | )          | 27.7                                           |       |
| **Members’ equity:**                       |       |                    |       |           |       |               |       |             |       |                                           |       |
| Members’ equity                            |       | 2,802.1                 |       | 3,953.1        |       | 1,596.4            |       | (5,549.5         | )          | 2,802.1                                        |       |
| Subsidiary  preferred stock                     |       | —                  |       | 73.5           |       | 1.4                |       | (74.9            | )          | —                                         |       |
| (Accumulated  deficit) retained earnings        |       | (1,096.4                | )          | 748.6          |       | 104.2              |       | (852.8           | )          | (1,096.4                                       | )          |
| Accumulated  other comprehensive income (loss)  |       | 13.2                    |       | 180.4          |       | (81.0              | )          | (99.4            | )          | 13.2                                           |       |
| **Total  members’ equity**                 |       | 1,718.9                 |       | 4,955.6        |       | 1,621.0            |       | (6,576.6         | )          | 1,718.9                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total liabilities and members’  equity** |       | $                       | 8,542.7    |           | $          | 8,550.3            |       | $                | 6,493.7    |                                           | $          | (14,369.6 | ) | $ | 9,217.1 |   |

 

38

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFDECEMBER 31, 2005**

**(Dollars in Millions)**

 
| ** **                                      | ** ** | **Parent Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **ASSETS**                                      |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Current  assets:**                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Cash and cash equivalents                       |       | $                       | 10.0       |           | $          | 7.9                |       | $                | 114.6      |                                           | $          | — |   | $ | 132.5 |   |
| Accounts receivable, net                        |       | 88.6                    |       | 537.5          |       | 849.1              |       | —           |       | 1,475.2                                        |       |
| Accounts receivable from affiliates             |       | 523.4                   |       | 1,035.6        |       | 479.5              |       | (2,028.1         | )          | 10.4                                           |       |
| Inventories, net                                |       | 129.7                   |       | 428.0          |       | 753.2              |       | (1.7             | )          | 1,309.2                                        |       |
| Prepaid expenses                                |       | 3.6                     |       | 28.9           |       | 27.7               |       | (14.3            | )          | 45.9                                           |       |
| Deferred income taxes                           |       | 45.5                    |       | —         |       | 0.3                |       | (14.6            | )          | 31.2                                           |       |
| Other current assets                            |       | 27.7                    |       | 1.7            |       | 49.1               |       | (8.6             | )          | 69.9                                           |       |
| **Total current assets**                        |       | 828.5                   |       | 2,039.6        |       | 2,273.5            |       | (2,067.3         | )          | 3,074.3                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Property, plant  and equipment, net             |       | 559.3                   |       | 1,383.8        |       | 2,390.4            |       | 3.2              |       | 4,336.7                                        |       |
| Investment in  affiliates                       |       | 3,521.8                 |       | 2,253.7        |       | 65.7               |       | (5,665.6         | )          | 175.6                                          |       |
| Intangible  assets, net                         |       | 170.4                   |       | (3.8           | )          | 55.4               |       | —           |       | 222.0                                          |       |
| Goodwill                                        |       | —                  |       | 88.0           |       | 7.3                |       | (4.1             | )          | 91.2                                           |       |
| Deferred income  taxes                          |       | —                  |       | 19.9           |       | 88.9               |       | (14.6            | )          | 94.2                                           |       |
| Notes receivable  from affiliates               |       | 2,204.1                 |       | 1,810.3        |       | 3.0                |       | (4,014.4         | )          | 3.0                                            |       |
| Other noncurrent  assets                        |       | 90.1                    |       | 142.1          |       | 403.8              |       | —           |       | 636.0                                          |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total assets**                                |       | $                       | 7,374.2    |           | $          | 7,733.6            |       | $                | 5,288.0    |                                           | $          | (11,762.8 | ) | $ | 8,633.0 |   |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **LIABILITIES AND MEMBERS’ EQUITY**        |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Current  liabilities:**                       |       |                    |       |           |       |               |       |             |       |                                           |       |
| Accounts payable                                |       | $                       | 78.7       |           | $          | 429.1              |       | $                | 584.9      |                                           | $          | — |   | $ | 1,092.7 |   |
| Accounts payable to affiliates                  |       | 1,214.8                 |       | 282.9          |       | 539.3              |       | (2,028.3         | )          | 8.7                                            |       |
| Accrued liabilities                             |       | 188.3                   |       | 185.0          |       | 382.0              |       | (23.0            | )          | 732.3                                          |       |
| Deferred income taxes                           |       | —                  |       | 19.9           |       | (2.9               | )          | (14.6            | )          | 2.4                                            |       |
| Current portion of long-term debt               |       | 20.3                    |       | 9.6            |       | 14.7               |       | —           |       | 44.6                                           |       |
| **Total current liabilities**                   |       | 1,502.1                 |       | 926.5          |       | 1,518.0            |       | (2,065.9         | )          | 1,880.7                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Long-term debt                                  |       | 4,358.1                 |       | 2,134.6        |       | 1,935.0            |       | (4,014.4         | )          | 4,413.3                                        |       |
| Deferred income  taxes                          |       | 45.5                    |       | 0.3            |       | 185.7              |       | (14.6            | )          | 216.9                                          |       |
| Other noncurrent  liabilities                   |       | 136.8                   |       | 202.2          |       | 431.5              |       | (0.5             | )          | 770.0                                          |       |
| **Total liabilities**                           |       | 6,042.5                 |       | 3,263.6        |       | 4,070.2            |       | (6,095.4         | )          | 7,280.9                                        |       |
| ** **                                      |       |                    |       |           |       |               |       |             |       |                                           |       |
| Minority  interests                             |       | —                  |       | 84.7           |       | 15.6               |       | (79.9            | )          | 20.4                                           |       |
| **Members’  equity:**                      |       |                    |       |           |       |               |       |             |       |                                           |       |
| Members’ equity                            |       | 2,794.0                 |       | 3,821.1        |       | 1,302.0            |       | (5,123.1         | )          | 2,794.0                                        |       |
| Subsidiary preferred stock                      |       | —                  |       | 73.4           |       | 1.4                |       | (74.8            | )          | —                                         |       |
| (Accumulated deficit) retained earnings         |       | (1,384.0                | )          | 421.6          |       | 8.5                |       | (430.1           | )          | (1,384.0                                       | )          |
| Accumulated other comprehensive (loss) income   |       | (78.3                   | )          | 69.2           |       | (109.7             | )          | 40.5             |       | (78.3                                          | )          |
| **Total members’ equity**                  |       | 1,331.7                 |       | 4,385.3        |       | 1,202.2            |       | (5,587.5         | )          | 1,331.7                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total  liabilities and members’ equity** |       | $                       | 7,374.2    |           | $          | 7,733.6            |       | $                | 5,288.0    |                                           | $          | (11,762.8 | ) | $ | 8,633.0 |   |

 

39

----

 

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**THREEMONTHS ENDED JUNE 30, 2006**

**(Dollars in Millions)**

 
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales, services and fees                                                   |       | $                   | 369.4      |           | $          | 1,164.5              |       | $                | 1,782.0    |                                           | $          | — |   | $ | 3,315.9 |   |
| Related party sales                                                              |       | 67.6                |       | 81.8           |       | 215.9                |       | (337.3           | )          | 28.0                                           |       |
| **Total  revenues**                                                              |       | 437.0               |       | 1,246.3        |       | 1,997.9              |       | (337.3           | )          | 3,343.9                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of  goods sold**                                                          |       | 347.9               |       | 1,085.9        |       | 1,785.1              |       | (336.5           | )          | 2,882.4                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                |       | 89.1                |       | 160.4          |       | 212.8                |       | (0.8             | )          | 461.5                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  expenses:**                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| Selling, general and administrative                                              |       | 58.5                |       | 28.5           |       | 96.7                 |       | (0.3             | )          | 183.4                                          |       |
| Research and development                                                         |       | 8.9                 |       | 7.4            |       | 9.7                  |       | —           |       | 26.0                                           |       |
| Other operating expense (income)                                                 |       | 15.5                |       | (106.2         | )          | (5.8                 | )          | —           |       | (96.5                                          | )          |
| Restructuring, impairment and plant closing costs                                |       | 0.1                 |       | 10.4           |       | (1.3                 | )          | —           |       | 9.2                                            |       |
| **Total expenses (income)**                                                      |       | 83.0                |       | (59.9          | )          | 99.3                 |       | (0.3             | )          | 122.1                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  income**                                                            |       | 6.1                 |       | 220.3          |       | 113.5                |       | (0.5             | )          | 339.4                                          |       |
| Interest  expense, net                                                           |       | (51.3               | )          | (3.8           | )          | (40.6                | )          | —           |       | (95.7                                          | )          |
| Gain (loss) on  accounts receivable securitization program                       |       | 4.2                 |       | (6.4           | )          | (3.1                 | )          | —           |       | (5.3                                           | )          |
| Equity in income  of subsidiaries and unconsolidated affiliates                  |       | 260.9               |       | 75.8           |       | 1.4                  |       | (336.7           | )          | 1.4                                            |       |
| Other (expense)  income                                                          |       | (1.3                | )          | 5.3            |       | 0.6                  |       | (4.2             | )          | 0.4                                            |       |
| **Income  from continuing operations before income taxes and minority interest** |       | 218.6               |       | 291.2          |       | 71.8                 |       | (341.4           | )          | 240.2                                          |       |
| Income tax  expense                                                              |       | (2.2                | )          | (41.5          | )          | (21.4                | )          | —           |       | (65.1                                          | )          |
| Minority  interest in subsidiaries’ income                                  |       | —              |       | (28.3          | )          | (0.3                 | )          | 28.3             |       | (0.3                                           | )          |
| **Income  from continuing operations**                                           |       | 216.4               |       | 221.4          |       | 50.1                 |       | (313.1           | )          | 174.8                                          |       |
| Loss from discontinued  operations, net of tax of nil                            |       | (0.3                | )          | —         |       | —               |       | —           |       | (0.3                                           | )          |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 4.5                 |       | —         |       | 41.6                 |       | —           |       | 46.1                                           |       |
| **Net income**                                                                   |       | $                   | 220.6      |           | $          | 221.4                |       | $                | 91.7       |                                           | $          | (313.1 | ) | $ | 220.6 |   |

 

40

----

 

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2006**

**(Dollars in Millions)**

 
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales, services and fees                                                   |       | $                   | 716.4      |           | $          | 2,394.0              |       | $                | 3,379.2    |                                           | $          | — |   | $ | 6,489.6 |   |
| Related party sales                                                              |       | 126.7               |       | 162.4          |       | 441.2                |       | (688.3           | )          | 42.0                                           |       |
| **Total  revenues**                                                              |       | 843.1               |       | 2,556.4        |       | 3,820.4              |       | (688.3           | )          | 6,531.6                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of  goods sold**                                                          |       | 671.1               |       | 2,248.8        |       | 3,453.5              |       | (685.7           | )          | 5,687.7                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                |       | 172.0               |       | 307.6          |       | 366.9                |       | (2.6             | )          | 843.9                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  expenses:**                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| Selling, general and administrative                                              |       | 119.1               |       | 54.4           |       | 182.8                |       | (0.5             | )          | 355.8                                          |       |
| Research and development                                                         |       | 20.3                |       | 14.1           |       | 18.9                 |       | —           |       | 53.3                                           |       |
| Other operating expense (income)                                                 |       | 24.1                |       | (115.1         | )          | (2.9                 | )          | —           |       | (93.9                                          | )          |
| Restructuring, impairment and plant closing costs                                |       | —              |       | 11.3           |       | 5.7                  |       | —           |       | 17.0                                           |       |
| **Total expenses (income)**                                                      |       | 163.5               |       | (35.3          | )          | 204.5                |       | (0.5             | )          | 332.2                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  income**                                                            |       | 8.5                 |       | 342.9          |       | 162.4                |       | (2.1             | )          | 511.7                                          |       |
| Interest  expense, net                                                           |       | (100.5              | )          | (7.1           | )          | (76.1                | )          | —           |       | (183.7                                         | )          |
| Gain (loss) on  accounts receivable securitization program                       |       | 6.3                 |       | (7.1           | )          | (7.3                 | )          | —           |       | (8.1                                           | )          |
| Equity in income  of subsidiaries and unconsolidated affiliates                  |       | 374.5               |       | 86.4           |       | 2.1                  |       | (460.9           | )          | 2.1                                            |       |
| Other (expense)  income                                                          |       | (1.3                | )          | 5.3            |       | 0.3                  |       | (4.2             | )          | 0.1                                            |       |
| **Income  from continuing operations before income taxes and minority interest** |       | 287.5               |       | 420.4          |       | 81.4                 |       | (467.2           | )          | 322.1                                          |       |
| Income tax  expense                                                              |       | (3.3                | )          | (49.6          | )          | (25.9                | )          | —           |       | (78.8                                          | )          |
| Minority  interest in subsidiaries’ income                                  |       | —              |       | (38.4          | )          | (0.6                 | )          | 38.3             |       | (0.7                                           | )          |
| **Income  from continuing operations**                                           |       | 284.2               |       | 332.4          |       | 54.9                 |       | (428.9           | )          | 242.6                                          |       |
| Loss from  discontinued operations, net of tax of nil                            |       | (0.8                | )          |           |       |                 |       |             |       | (0.8                                           | )          |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 4.5                 |       | —         |       | 41.6                 |       | —           |       | 46.1                                           |       |
| **Net income**                                                                   |       | $                   | 287.9      |           | $          | 332.4                |       | $                | 96.5       |                                           | $          | (428.9 | ) | $ | 287.9 |   |

 

41

----

 

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**THREEMONTHS ENDED JUNE 30, 2005**

**(Dollarsin Millions)**

 
| ** **                                                                                           | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                                        |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales, services and fees                                                                       |       | $                   | 370.9      |           | $          | 1,205.6              |       | $                | 1,701.9    |                                           | $          | — |   | $ | 3,278.4 |   |
| Related party sales                                                                                  |       | 74.7                |       | 94.7           |       | 270.2                |       | (378.5           | )          | 61.1                                           |       |
| **Total  revenues**                                                                                  |       | 445.6               |       | 1,300.3        |       | 1,972.1              |       | (378.5           | )          | 3,339.5                                        |       |
| ** **                                                                                           |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of  goods sold**                                                                              |       | 365.8               |       | 1,131.0        |       | 1,707.8              |       | (378.2           | )          | 2,826.4                                        |       |
|                                                                                                 |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                                    |       | 79.8                |       | 169.3          |       | 264.3                |       | (0.3             | )          | 513.1                                          |       |
| ** **                                                                                           |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  expenses:**                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| Selling, general and administrative                                                                  |       | 42.6                |       | 41.7           |       | 89.4                 |       | (0.2             | )          | 173.5                                          |       |
| Research and development                                                                             |       | 9.6                 |       | 6.7            |       | 9.3                  |       | —           |       | 25.6                                           |       |
| Other operating expense (income)                                                                     |       | 15.3                |       | 13.4           |       | (23.4                | )          | —           |       | 5.3                                            |       |
| Restructuring, impairment and plant closing  (credits) costs                                         |       | (0.2                | )          | 1.1            |       | 17.9                 |       | —           |       | 18.8                                           |       |
| **Total expenses**                                                                                   |       | 67.3                |       | 62.9           |       | 93.2                 |       | (0.2             | )          | 223.2                                          |       |
| ** **                                                                                           |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  income**                                                                                |       | 12.5                |       | 106.4          |       | 171.1                |       | (0.1             | )          | 289.9                                          |       |
| Interest  expense, net                                                                               |       | (55.5               | )          | (10.9          | )          | (35.7                | )          | —           |       | (102.1                                         | )          |
| Gain (loss) on  accounts receivable securitization program                                           |       | 6.4                 |       | (0.9           | )          | (7.9                 | )          | —           |       | (2.4                                           | )          |
| Equity in income  of subsidiaries and unconsolidated affiliates                                      |       | 176.9               |       | 7.4            |       | 2.9                  |       | (184.3           | )          | 2.9                                            |       |
| Loss on early  extinguishment of debt                                                                |       | (2.0                | )          | —         |       | —               |       | —           |       | (2.0                                           | )          |
| Other expense                                                                                        |       | (0.1                | )          | —         |       | (0.8                 | )          | —           |       | (0.9                                           | )          |
| **Income  from continuing operations before income taxes and minority interest**                     |       | 138.2               |       | 102.0          |       | 129.6                |       | (184.4           | )          | 185.4                                          |       |
| Income tax  benefit (expense)                                                                        |       | 7.1                 |       | (8.0           | )          | (39.5                | )          | —           |       | (40.4                                          | )          |
| Minority  interest in subsidiaries’ income                                                      |       | (0.2                | )          | (9.5           | )          | (0.3                 | )          | 10.1             |       | 0.1                                            |       |
| **Income  from continuing operations**                                                               |       | 145.1               |       | 84.5           |       | 89.8                 |       | (174.3           | )          | 145.1                                          |       |
| Loss from  discontinued operations (including loss on pending disposal of $36.4), net of  tax of nil |       | (40.4               | )          | —         |       | —               |       | —           |       | (40.4                                          | )          |
| **Net income**                                                                                       |       | $                   | 104.7      |           | $          | 84.5                 |       | $                | 89.8       |                                           | $          | (174.3 | ) | $ | 104.7 |   |

 

42

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2005**

**(Dollarsin Millions)**

 
| ** **                                                                                          | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales,  services and fees                                                                     |       | $                   | 709.0      |           | $          | 2,407.8              |       | $                | 3,486.2    |                                           | $          | — |   | $ | 6,603.0 |   |
| Related party  sales                                                                                |       | 159.9               |       | 165.6          |       | 538.6                |       | (778.3           | )          | 85.8                                           |       |
| **Total revenues**                                                                                  |       | 868.9               |       | 2,573.4        |       | 4,024.8              |       | (778.3           | )          | 6,688.8                                        |       |
| ** **                                                                                          |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of goods sold**                                                                              |       | 697.6               |       | 2,215.5        |       | 3,444.5              |       | (776.8           | )          | 5,580.8                                        |       |
|                                                                                                |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross profit**                                                                                    |       | 171.3               |       | 357.9          |       | 580.3                |       | (1.5             | )          | 1,108.0                                        |       |
| ** **                                                                                          |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating expenses:**                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| Selling, general  and administrative                                                                |       | 73.3                |       | 79.6           |       | 178.0                |       | (0.4             | )          | 330.5                                          |       |
| Research and  development                                                                           |       | 18.5                |       | 13.3           |       | 18.1                 |       | —           |       | 49.9                                           |       |
| Other operating  expense                                                                            |       | 24.5                |       | 18.9           |       | 6.6                  |       | —           |       | 50.0                                           |       |
| Restructuring,  impairment and plant closing (credits) costs                                        |       | (0.2                | )          | 4.4            |       | 25.0                 |       | —           |       | 29.2                                           |       |
| **Total  expenses**                                                                                 |       | 116.1               |       | 116.2          |       | 227.7                |       | (0.4             | )          | 459.6                                          |       |
| ** **                                                                                          |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating income**                                                                                |       | 55.2                |       | 241.7          |       | 352.6                |       | (1.1             | )          | 648.4                                          |       |
| Interest expense, net                                                                               |       | (127.9              | )          | (32.6          | )          | (76.3                | )          | —           |       | (236.8                                         | )          |
| Gain (loss) on accounts  receivable securitization program                                          |       | 9.7                 |       | (1.6           | )          | (13.7                | )          | —           |       | (5.6                                           | )          |
| Equity in income of  subsidiaries and unconsolidated affiliates                                     |       | 393.7               |       | 198.4          |       | 5.2                  |       | (592.1           | )          | 5.2                                            |       |
| Loss on early  extinguishment of debt                                                               |       | (76.0               | )          | —         |       | —               |       | —           |       | (76.0                                          | )          |
| Other income (expense)                                                                              |       | 0.1                 |       | —         |       | (1.2                 | )          | —           |       | (1.1                                           | )          |
| **Income from continuing  operations before income taxes and minority interest**                    |       | 254.8               |       | 405.9          |       | 266.6                |       | (593.2           | )          | 334.1                                          |       |
| Income tax benefit  (expense)                                                                       |       | 15.3                |       | (16.2          | )          | (67.7                | )          | —           |       | (68.6                                          | )          |
| Minority interest in  subsidiaries’ income (loss)                                              |       | (0.3                | )          | (26.1          | )          | (0.5                 | )          | 27.0             |       | 0.1                                            |       |
| **Income from continuing  operations**                                                              |       | 269.8               |       | 363.6          |       | 198.4                |       | (566.2           | )          | 265.6                                          |       |
| Loss from discontinued  operations (including loss on pending disposal of $36.4), net of tax of nil |       | (43.0               | )          | —         |       | —               |       | —           |       | (43.0                                          | )          |
| **Income before accounting change**                                                                 |       | 226.8               |       | 363.6          |       | 198.4                |       | (566.2           | )          | 222.6                                          |       |
| Cumulative effect of  change in accounting principle, net of tax of $1.5                            |       | —              |       | —         |       | 4.2                  |       | —           |       | 4.2                                            |       |
| **Net income**                                                                                      |       | $                   | 226.8      |           | $          | 363.6                |       | $                | 202.6      |                                           | $          | (566.2 | ) | $ | 226.8 |   |

 

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2006**

**(Dollarsin Millions)**

 
| ** **                                               | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net  cash provided (used in) by operating activities** |       | $                   | 797.3      |           | $          | (403.9             | )          | $                | (69.9      | )                                              | $          | (5.4 | ) | $ | 318.1 |   |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| **Investing  activities:**                               |       |                |       |           |       |               |       |             |       |                                           |       |
| Capital  expenditures                                    |       | (13.6               | )          | (27.0          | )          | (170.7             | )          | —           |       | (211.3                                         | )          |
| Acquisition of  business, net of cash acquired           |       | (5.8                | )          | —         |       | (130.2             | )          | —           |       | (136.0                                         | )          |
| Investment in  affiliates, net                           |       | (405.2              | )          | (7.5           | )          | (14.1              | )          | 412.4            |       | (14.4                                          | )          |
| Proceeds from  sale of assets                            |       | —              |       | 192.7          |       | 8.4                |       | —           |       | 201.1                                          |       |
| Change in  restricted cash                               |       | —              |       | —         |       | (32.9              | )          | —           |       | (32.9                                          | )          |
| **Net  cash (used in) provided by investing activities** |       | (424.6              | )          | 158.2          |       | (339.5             | )          | 412.4            |       | (193.5                                         | )          |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| **Financing  activities:**                               |       |                |       |           |       |               |       |             |       |                                           |       |
| Net repayments  under revolving loan facilities          |       | —              |       | —         |       | (1.9               | )          | —           |       | (1.9                                           | )          |
| Net borrowings  on overdraft facility                    |       | —              |       | —         |       | (6.2               | )          | —           |       | (6.2                                           | )          |
| Repayment of  long-term debt                             |       | (50.1               | )          | (0.6           | )          | (18.8              | )          | —           |       | (69.5                                          | )          |
| Intercompany  (repayments) borrowings                    |       | (291.2              | )          | 249.1          |       | 454.5              |       | (412.4           | )          | —                                         |       |
| Proceeds from  long-term debt                            |       | —              |       | —         |       | 22.9               |       | —           |       | 22.9                                           |       |
| Repayment of  notes payable                              |       | (19.6               | )          | (0.9           | )          | —             |       | —           |       | (20.5                                          | )          |
| Contribution  from minority shareholder                  |       | —              |       | —         |       | 6.2                |       | —           |       | 6.2                                            |       |
| Dividends paid                                           |       | —              |       | (5.4           | )          | —             |       | 5.4              |       | —                                         |       |
| Other, net                                               |       | (2.7                | )          | (0.7           | )          | 3.4                |       | —           |       | —                                         |       |
| **Net  cash (used in) provided by financing activities** |       | (363.6              | )          | 241.5          |       | 460.1              |       | (407.0           | )          | (69.0                                          | )          |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| Effect of  exchange rate changes on cash                 |       | (0.2                | )          | (0.8           | )          | (0.9               | )          | —           |       | (1.9                                           | )          |
|                                                     |       |                |       |           |       |               |       |             |       |                                           |       |
| Increase  (decrease) in cash and cash equivalents        |       | 8.9                 |       | (5.0           | )          | 49.8               |       | —           |       | 53.7                                           |       |
| Cash and cash  equivalents at beginning of period        |       | 10.0                |       | 7.9            |       | 114.6              |       | —           |       | 132.5                                          |       |
| Cash and cash  equivalents at end of period              |       | $                   | 18.9       |           | $          | 2.9                |       | $                | 164.4      |                                           | $          | — |   | $ | 186.2 |   |

 

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2005**

**(Dollarsin Millions)**

 
| ** **                                                   | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net  cash (used in) provided by operating activities**     |       | $                   | (24.1      | )              | $          | 229.8              |       | $                | 254.5      |                                           | $          | — |   | $ | 460.2 |   |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Investing  activities:**                                   |       |                |       |           |       |               |       |             |       |                                           |       |
| Capital  expenditures                                        |       | (16.5               | )          | (21.7          | )          | (90.5              | )          | —           |       | (128.7                                         | )          |
| Investment in  affiliates, net                               |       | —              |       | 0.7            |       | (9.1               | )          | —           |       | (8.4                                           | )          |
| Proceeds from  sale of assets                                |       | 4.6                 |       | —         |       | 0.2                |       | —           |       | 4.8                                            |       |
| Change in  restricted cash                                   |       | (0.4                | )          | (4.2           | )          | —             |       | —           |       | (4.6                                           | )          |
| **Net  cash used in investing activities**                   |       | (12.3               | )          | (25.2          | )          | (99.4              | )          | —           |       | (136.9                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Financing  activities:**                                   |       |                |       |           |       |               |       |             |       |                                           |       |
| Net (repayments)  borrowings under revolving loan facilities |       | (62.1               | )          | —         |       | 9.1                |       | —           |       | (53.0                                          | )          |
| Repayment of  long-term debt                                 |       | (1,036.3            | )          | (0.6           | )          | (0.9               | )          | —           |       | (1,037.8                                       | )          |
| Intercompany  borrowings (repayments)                        |       | 372.2               |       | (184.8         | )          | (187.4             | )          | —           |       | (0.0                                           | )          |
| Proceeds from  long-term debt                                |       | 6.2                 |       | —         |       | —             |       | —           |       | 6.2                                            |       |
| Call premiums  related to early extinguishment of debt       |       | (65.5               | )          | —         |       | —             |       | —           |       | (65.5                                          | )          |
| Repayment of  notes payable                                  |       | (13.5               | )          | (0.7           | )          | 0.3                |       | —           |       | (13.9                                          | )          |
| Contribution  from parent                                    |       | 837.6               |       | —         |       | —             |       | —           |       | 837.6                                          |       |
| Contribution  from minority shareholder                      |       | —              |       | —         |       | 3.6                |       | —           |       | 3.6                                            |       |
| Other, net                                                   |       | (0.2                | )          | (0.2           | )          | —             |       | —           |       | (0.4                                           | )          |
| **Net  cash provided by (used in) financing activities**     |       | 38.4                |       | (186.3         | )          | (175.3             | )          | —           |       | (323.2                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Effect of exchange  rate changes on cash                     |       | (0.4                | )          | —         |       | (5.5               | )          | —           |       | (5.9                                           | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Increase  (decrease) in cash and cash equivalents            |       | 1.6                 |       | 18.3           |       | (25.7              | )          | —           |       | (5.8                                           | )          |
| Cash and cash  equivalents at beginning of period            |       | 7.3                 |       | 14.0           |       | 222.2              |       | —           |       | 243.5                                          |       |
| Cash and cash  equivalents at end of period                  |       | $                   | 8.9        |           | $          | 32.3               |       | $                | 196.5      |                                           | $          | — |   | $ | 237.7 |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION 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 inthe Annual Report on Form 10-K of each of our Company and HuntsmanInternational.

**Overview**

**Business**

We are among the world’s largest global manufacturers of differentiatedand commodity chemical products. We manufacture a broad range of chemicalproducts and formulations, which we market in more than 100 countries to adiversified group of consumer and industrial customers. Our products are usedin a wide range of applications, including those in the adhesives, aerospace,automotive, construction products, durable and non-durable consumer products,electronics, medical, packaging, paints and coatings, power generation,refining and synthetic fiber industries. We are a leading global producer inmany of our key product lines, including MDI, amines, surfactants, epoxy-basedpolymer formulations, maleic anhydride and titanium dioxide. Ouradministrative, research and development and manufacturing operations areprimarily conducted at the 78 facilities that we own or lease. Our facilitiesare located in 24 countries and we employ approximately 15,000 associatesworldwide. Our businesses benefit from significant vertical integration, largeproduction scale and proprietary manufacturing technologies, which allow us tomaintain a low-cost position. We had revenues for the six months ended June 30,2006 and 2005 of $6,531.6 million and $6,688.8 million, respectively.

Our business is organized around our six segments: Polyurethanes,Materials and Effects, Performance Products, Pigments, Polymers and BaseChemicals. These segments can be divided into two broad categories:differentiated and commodity. Our Polyurethanes, Materials and Effects andPerformance Products segments produce differentiated products, and ourPigments, Polymers and Base Chemicals segments produce commodity chemicals.Among our commodity products, our Pigments business, while cyclical, isinfluenced largely by seasonal demand patterns in the coatings industry.Certain products in our Polymers segment also follow different trends thanpetrochemical commodities as a result of our niche marketing strategy for suchproducts that focuses on supplying customized formulations. Nevertheless, eachof our six operating segments is impacted to some degree by economicconditions, prices of raw materials and global supply and demand pressures.

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Growth in our Polyurethanes and Materials and Effects segments has beendriven by the continued substitution of other materials by our products acrossa broad range of applications, as well as the level of global economicactivity. Historically, demand for many of these products has grown at rates inexcess of GDP growth. In Polyurethanes, this growth, particularly in Asia, hasrecently resulted in improved demand and higher industry capacity utilizationrates for many of our key products, including MDI.

In our Performance Products segment, demand for our performancespecialties has generally continued to grow at rates in excess of GDP asoverall demand is significantly influenced by new product and applicationdevelopment. Overall demand for most of our performance intermediates hasgenerally been stable or improving, but excess surfactant manufacturingcapacity in Europe and a decline in the use of LAB in new detergentformulations have continued to impair our ability to increase prices inresponse to higher raw material costs. EG industry operating rates andprofitability have declined during 2005 and during the first half of 2006 dueto additional capacity coming on stream.

Historically, demand for titanium dioxide pigments has grown at ratesapproximately equal to global GDP growth. Pigment prices have historicallyreflected industry-wide operating rates but have typically lagged behindmovements in these rates by up to twelve months due to the effects of productstocking and destocking by customers and producers, contract arrangements andseasonality. The industry experiences some seasonality in its sales becausesales of paints, the largest end use for titanium dioxide, generally peakduring the spring and summer months in the northern hemisphere. This results ingreater sales volumes in the second and third quarters of the year.

The profitability of our Polymers and Base Chemicals segments hashistorically been cyclical in nature. The industry has recently operated in anup cycle that resulted primarily from strong demand reflecting global economicconditions and the fact that there have been no recent North American orEuropean capacity additions. However, volatile crude oil and natural gas-basedraw materials costs and a recent weakening in demand could negatively impactthe profitability of our Polymers and Base Chemicals segments. In addition, theprofitability of Base Chemicals segment will be negatively impacted in 2006 and2007 by the fire at our Port Arthur, Texas manufacturing plant. For moreinformation, see “—Recent Developments—Fire Damage at Port Arthur, TexasFacility” below.

As previouslyannounced, we are evaluating strategic options for our business. Thisevaluation may lead to the sale of certain of our Base Chemicals or Polymersassets or a spin off of these segments and is consistent with the sale of ourU.S. butadiene and MTBE business operated in our Base Chemicals segmentdiscussed in “—Recent Developments” below. While we continue to make progressin this regard, we can give no assurance that we will sell or spin off our BaseChemicals and Polymers segments. However, if a transaction occurs, we currentlybelieve that it is more likely to be a sale or series of sales than a spin off.

**Outlook**

In the secondquarter of 2006, we experienced stronger global demand for most of ourproducts, particularly in our differentiated businesses. For example, MDI salesvolumes improved by 16% in the second quarter of 2006 as compared to the firstquarter. In addition, the profitability of our Performance Products segmentimproved across all major product lines, and, as we anticipated, strongerpricing dramatically improved margins in Europe for our Base Chemicalsproducts. Nevertheless, we remain concerned about high and volatile rawmaterial and energy costs and the potential impact they may have on globalmacroeconomic conditions.

We continue to work toward our previously announced goals of reducingour indebtedness and increasing our focus on our differentiated businesses.During the six months ended June 30, 2006, we had net repayments under our debtarrangements of $77.6 million and our cash and cash equivalents increased by$57.3 million and was available for further debt reduction. The successfulsale of our U.S. butadiene and MTBE business (see “—Recent Developments—Sale ofU.S. Butadiene and MTBE Business” below) and the acquisition of the TextileEffects business (see “—Recent Developments—Acquisition of Textile EffectsBusiness” below) are significant steps in our strategy to expand ourdifferentiated businesses. Accordingly, we believe that, at present, ouroverall

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business is less dependent on the sale of commodityproducts than it has ever been before, and we expect that we will beincreasingly less dependent on revenues derived from the sale of commodityproducts in the future.

Production at ourMDI plant near Shanghai, China operated by HPS, our consolidated subsidiary,was commissioned on June 30, 2006 and the plant has commenced production. Weexpect production at the MNB, aniline and crude MDI plants operated by SLIC,our unconsolidated joint venture, to commence in August 2006. These world-scalefacilities strengthen our ability to service our customers in the criticalChinese market and will support the significant demand growth that we believethis region will continue to experience.

Our operations inNorth America have been negatively impacted by the fire damage at our PortArthur, Texas manufacturing facility. For more information, see “—RecentDevelopments—Fire Damage at Port Arthur, Texas Facility” below. We intend torebuild our Port Arthur, Texas plant and, although no assurances can be made,based on preliminary indications, anticipate restarting the plant early in the secondquarter of 2007. Until the restart, however, we expect the profitability of ourBase Chemicals operations in North America will continue to be negativelyimpacted.

**RecentDevelopments**

**Saleof  U.S. Butadiene and MTBE Business**

On June 27, 2006,we sold the assets comprising our U.S. butadiene and MTBE business operated byour Base Chemicals segment. The total sales price was approximately $262million, of which $192 million was paid at closing, while the additional $70million will be payable after the restart of our Port Arthur, Texas olefinsunit that was damaged in a fire (see “— Fire Damage at Port Arthur, TexasFacility” below) and the related resumption of crude butadiene supply; providedthat we achieve certain intermediate steps toward restarting the plant and thatthe restart occurs within 30 months of this sale. The final purchase price alsoremains subject to a customary post-closing working capital adjustment in thethird quarter of 2006. In connection with this sale, we recognized a pre-taxgain of $90.9 million. We expect to recognize an additional pre-tax gain of $70million upon completion of the conditions referenced above.

**Acquisition of Textile Effects Business**

On June 30, 2006,we acquired the Textile Effects business from Ciba Specialty Chemicals Inc. forapproximately $172.1 million (CHF 215 million) in cash, of which $139.2 millionwas paid on June 30, 2006 and $32.9 million was paid on July 3, 2006. Thepurchase price is subject to a post-closing working capital adjustment that is expectedto be finalized in the third quarter of 2006. We acquired the Textile Effectsbusiness in order to expand our differentiated chemicals business portfolio.The operating results of Textile Effects will be consolidated with ouroperating results beginning on July 1, 2006 and will be reported with ourAdvanced Materials operations as part of our new Materials and Effects segment.

**Fire Damage at Port Arthur, TexasFacility**

On April 29, 2006,our Port Arthur, Texas olefins and aromatics manufacturing plant with an annualcapacity of 1.4 billion pounds of ethylene, 800 million pounds of propylene,680 million pounds of cyclohexane and 460 million pounds of benzene experienceda major fire. With the exception of the cyclohexane operations which were restartedon June 9, 2006, the operations at this facility remain shut down. With respectto certain of our contractual obligations for certain products we have declaredforce majeure. For the second quarter 2006, we estimate that lost profits dueto business interruption reduced our pre-tax income by approximately $47.1million. In addition, we incurred $9.4 million in charges to write offlong-lived assets as a result of the fire. We also incurred approximately $4.8million in other charges associated with the fire and accrued anticipatedrecoveries from our insurance of $4.2 million.

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We intend torebuild the damaged unit. Mechanical inspection, detailed engineering,preparation of a final project scope and estimates to rebuild are nearcompletion and, although no assurances can be made, preliminary indications arethat we would expect to be in a position to restart the unit early in thesecond quarter of 2007. We carry normal and customary insurance coverage, subjectto deductibles, which for this case are $10 million for property damage and 60days for business interruption.

With respect toproperty damage resulting from the fire, based on preliminary inspection andreview, we estimate that the costs to repair and replace damaged equipment willbe approximately $110 million. While we can provide no assurances, we expect torecover all property damage expenses in excess of the $10 million deductible inaccordance with our insurance policies. With respect to lost profits, which areestimated to be $47.1 million during the quarter ended June 30, 2006(substantially all of which falls within the 60-day deductible period), whilewe can provide no assurances, we expect to recover all additional lost profitsresulting from the fire in accordance with our insurance policies.

**Amendmentof Senior Credit Facilities, Redemptions of Notes and Other Financing Matters**

OnJune 30, 2006, Huntsman International entered into an amendment to the existingSenior Credit Facilities to provide for an additional $100 million ofborrowings under the Dollar Term Loan on the same terms as its existing DollarTerm Loan. Huntsman International borrowed the additional amounts under theDollar Term Loan on July 14, 2006, and, on July 24, 2006, it used the proceedsto redeem all of its $100 million outstanding senior floating rate notes due2011 at a call price of 104.0% of the aggregate principal amount thereof. TheJune 30, 2006 Amendment also modified certain other provisions in the SeniorCredit Facilities, including certain financial covenants. Interest on theexisting Dollar Term Loan accrues at LIBOR plus 1.75% compared with LIBOR plus7.25% on the floating rate notes that were redeemed.

On August 1, 2006,we made a voluntary repayment of $50 million U.S. dollar equivalents on TermLoans ($47.3 million on the Dollar Term Loan and €2.2 million on the Euro TermLoan) with available liquidity.

On July 13, 2006,Huntsman International entered into a transaction to repurchase $37.5 millionof its 9.875% 2009 Senior Notes at a price of 105.0% of the aggregate principalamount thereof. In addition, on July 14, 2006, Huntsman International issued apartial redemption notice to redeem $62.5 million of the 2009 Senior Notes onAugust 14, 2006 at a call price of 104.937% of the aggregate principal amountthereof. Following this repurchase and partial redemption, there will be $350million aggregate principal amount outstanding ($353.2 million book value) ofthe 2009 Senior Notes.

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**Resultsof Operations**

For each of our Companyand Huntsman International, the following tables set forth the unauditedcondensed consolidated results of operations for the three and six months endedJune 30, 2006 and 2005 (dollars in millions):

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Six Months Ended** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|--------------------------------|------------|-------------|------------|
| ** **                                                                       | ** ** | **June 30,**                | ** ** | **Percent** | ** ** | **June 30,**              | ** ** | **Percent** | ** ** |
| **Huntsman Corporation**                                                    | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                     | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| **Revenues**                                                                     |       | $                                | 3,343.9    |        | $          | 3,339.5                        |       | —      |       | $ | 6,531.6 |   | $ | 6,688.8 |   | (2 | )% |
| **Cost of  goods sold**                                                          |       | 2,885.7                          |       | 2,830.1     |       | 2                              | %          | 5,695.0     |       | 5,590.2 |   | 2 | % |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| **Gross  profit**                                                                |       | 458.2                            |       | 509.4       |       | (10                            | )%         | 836.6       |       | 1,098.6 |   | (24 | )% |
| Operating  expenses                                                              |       | 113.6                            |       | 201.5       |       | (44                            | )%         | 316.7       |       | 432.2 |   | (27 | )% |
| Restructuring,  impairment and plant closing costs                               |       | 9.2                              |       | 18.8        |       | (51                            | )%         | 17.0        |       | 29.2 |   | (42 | )% |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| **Operating  income**                                                            |       | 335.4                            |       | 289.1       |       | 16                             | %          | 502.9       |       | 637.2 |   | (21 | )% |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Interest  expense, net                                                           |       | (94.6                            | )          | (101.1      | )          | (6                             | )%         | (181.4      | )          | (240.7 | ) | (25 | )% |
| Loss on accounts  receivable securitization program                              |       | (5.3                             | )          | (2.4        | )          | 121                            | %          | (8.1        | )          | (5.6 | ) | 45 | % |
| Equity in income  of unconsolidated affiliates                                   |       | 1.4                              |       | 2.9         |       | (52                            | )%         | 2.1         |       | 5.2 |   | (60 | )% |
| Loss on early  extinguishment of debt                                            |       | —                           |       | (2.0        | )          | NM                             |       | —      |       | (235.0 | ) | NM |   |
| Other income  (expense)                                                          |       | 0.4                              |       | (4.5        | )          | NM                             |       | 0.1         |       | (0.8 | ) | NM |   |
| ** **                                                                       | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from continuing operations before income taxes and minority interest** | ** ** | 237.3                            | ** ** | 182.0       | ** ** | 30                             | %          | 315.6       | ** ** | 160.3 | ** ** | 97 | % |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Income tax  expense                                                              |       | (24.3                            | )          | (29.0       | )          | (16                            | )%         | (32.7       | )          | (61.1 | ) | (46 | )% |
| Minority  interest in subsidiaries’ (income) loss                           |       | (0.3                             | )          | 0.1         |       | NM                             |       | (0.7        | )          | 0.1 |   | NM |   |
| **Income  from continuing operations**                                           |       | 212.7                            |       | 153.1       |       | 39                             | %          | 282.2       |       | 99.3 |   | 184 | % |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Loss from  discontinued operations, net of tax of nil                            |       | (0.3                             | )          | (40.4       | )          | 99                             | %          | (0.8        | )          | (43.0 | ) | 98 | % |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 50.5                             |       | —      |       | NM                             |       | 50.5        |       | — |   | NM |   |
| Cumulative effect  of change in accounting principle, net of tax of $1.9         |       | —                           |       | —      |       | NM                             |       | —      |       | 4.0 |   | NM |   |
| **Net  income**                                                                  |       | 262.9                            |       | 112.7       |       | 133                            | %          | 331.9       |       | 60.3 |   | 450 | % |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Interest  expense, net                                                           |       | 94.6                             |       | 101.1       |       | (6                             | )%         | 181.4       |       | 240.7 |   | (25 | )% |
| Income tax  expense (1)                                                          |       | 24.3                             |       | 29.0        |       | (16                            | )%         | 32.7        |       | 63.0 |   | (48 | )% |
| Depreciation and  amortization                                                   |       | 117.5                            |       | 123.5       |       | (5                             | )%         | 234.5       |       | 249.4 |   | (6 | )% |
| **EBITDA(2)**                                                                    |       | $                                | 499.3      |        | $          | 366.3                          |       | 36          | %          | $ | 780.5 |   | $ | 613.4 |   | 27 | % |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Net cash  provided by operating activities                                       |       |                             |       |        |       |                           |       | 323.5       |       | 454.9 |   | (29 | )% |
| Net cash used in  investing activities                                           |       |                             |       |        |       |                           |       | (186.3      | )          | (177.8 | ) | 5 | % |
| Net cash used in  financing activities                                           |       |                             |       |        |       |                           |       | (78.0       | )          | (263.2 | ) | (70 | )% |

 

----

NM—Not Meaningful

50

----

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Six Months Ended** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|--------------------------------|------------|-------------|------------|
| ** **                                                                       | ** ** | **June 30,**                | ** ** | **Percent** | ** ** | **June 30,**              | ** ** | **Percent** | ** ** |
| **Huntsman International**                                                  | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                     | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                                                       | ** ** | ** **                       |       |        | ** ** |                           |       |        |       |   |   |   |   |
| **Revenues**                                                                     |       | $                                | 3,343.9    |        | $          | 3,339.5                        |       | —      |       | $ | 6,531.6 |   | $ | 6,688.8 |   | (2 | )% |
| **Cost of  goods sold**                                                          |       | 2,882.4                          |       | 2,826.4     |       | 2                              | %          | 5,687.7     |       | 5,580.8 |   | 2 | % |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| **Gross  profit**                                                                |       | 461.5                            |       | 513.1       |       | (10                            | )%         | 843.9       |       | 1,108.0 |   | (24 | )% |
| Operating  expenses                                                              |       | 112.9                            |       | 204.4       |       | (45                            | )%         | 315.2       |       | 430.4 |   | (27 | )% |
| Restructuring,  impairment and plant closing costs                               |       | 9.2                              |       | 18.8        |       | (51                            | )%         | 17.0        |       | 29.2 |   | (42 | )% |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| **Operating  income**                                                            |       | 339.4                            |       | 289.9       |       | 17                             | %          | 511.7       |       | 648.4 |   | (21 | )% |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Interest expense,  net                                                           |       | (95.7                            | )          | (102.1      | )          | (6                             | )%         | (183.7      | )          | (236.8 | ) | (22 | )% |
| Loss on accounts  receivable securitization program                              |       | (5.3                             | )          | (2.4        | )          | 121                            | %          | (8.1        | )          | (5.6 | ) | 45 | % |
| Equity in income  of unconsolidated affiliates                                   |       | 1.4                              |       | 2.9         |       | (52                            | )%         | 2.1         |       | 5.2 |   | (60 | )% |
| Loss on early  extinguishment of debt                                            |       | —                           |       | (2.0        | )          | NM                             |       | —      |       | (76.0 | ) | NM |   |
| Other income  (expense)                                                          |       | 0.4                              |       | (0.9        | )          | NM                             |       | 0.1         |       | (1.1 | ) | NM |   |
| ** **                                                                       | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from continuing operations before income taxes and minority interest** | ** ** | 240.2                            | ** ** | 185.4       | ** ** | 30                             | %          | 322.1       | ** ** | 334.1 | ** ** | (4 | )% |
| ** **                                                                       |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Income tax  expense                                                              |       | (65.1                            | )          | (40.4       | )          | 61                             | %          | (78.8       | )          | (68.6 | ) | 15 | % |
| Minority  interests in subsidiaries’ (income) loss                          |       | (0.3                             | )          | 0.1         |       | NM                             |       | (0.7        | )          | 0.1 |   | NM |   |
| **Income  from continuing operations**                                           |       | 174.8                            |       | 145.1       |       | 20                             | %          | 242.6       |       | 265.6 |   | (9 | )% |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Loss from  discontinued operations, net of tax of nil                            |       | (0.3                             | )          | (40.4       | )          | (99                            | )%         | (0.8        | )          | (43.0 | ) | (98 | )% |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 46.1                             |       | —      |       | NM                             |       | 46.1        |       | — |   | NM |   |
| Cumulative  effect of change in accounting principle, net of tax of $1.5         |       | —                           |       | —      |       | NM                             |       | —      |       | 4.2 |   | NM |   |
| **Net  income**                                                                  |       | 220.6                            |       | 104.7       |       | 111                            | %          | 287.9       |       | 226.8 |   | 27 | % |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Interest  expense, net                                                           |       | 95.7                             |       | 102.1       |       | (6                             | )%         | 183.7       |       | 236.8 |   | (22 | )% |
| Income tax  expense (1)                                                          |       | 65.1                             |       | 40.4        |       | 61                             | %          | 78.8        |       | 70.1 |   | 12 | % |
| Depreciation and  amortization                                                   |       | 110.7                            |       | 117.2       |       | (6                             | )%         | 220.9       |       | 236.1 |   | (6 | )% |
| **EBITDA(2)**                                                                    |       | $                                | 492.1      |        | $          | 364.4                          |       | 35          | %          | $ | 771.3 |   | $ | 769.8 |   | — |   |
|                                                                             |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Net cash  provided by operating activities                                       |       |                             |       |        |       |                           |       | 318.1       |       | 460.2 |   | (31 | )% |
| Net cash used in  investing activities                                           |       |                             |       |        |       |                           |       | (193.5      | )          | (136.9 | ) | 41 | % |
| Net cash used in  financing activities                                           |       |                             |       |        |       |                           |       | (69.0       | )          | (323.2 | ) | (79 | )% |

 

----

NM—Not Meaningful

51

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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):

 
| ** **                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Huntsman Corporation**                                 | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Loss on early  extinguishment of debt                         |       | $                                                   | —     |                                              | $          | (2.0 | ) | $ | — |   | $ | (235.0 | ) |
| Loss on accounts  receivable securitization program           |       | (5.3                                                | )          | (2.4                                              | )          | (8.1 | ) | (5.6 | ) |
| Loss on  discontinued operations                              |       | (0.3                                                | )          | (40.4                                             | )          | (0.8 | ) | (43.0 | ) |
| Cumulative  effect of change in accounting principle          |       | —                                              |       | —                                            |       | — |   | 5.9 |   |
| Gain on sale of  business/assets                              |       | 92.4                                                |       | —                                            |       | 92.4 |   | — |   |
| Insurance  recoveries                                         |       | 8.8                                                 |       | —                                            |       | 8.8 |   | — |   |
| Extraordinary  gain on the acquisition of business            |       | 50.5                                                |       | —                                            |       | 50.5 |   | — |   |
|                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                |       |                                              |       |   |   |   |   |
| Polyurethanes                                                 |       | —                                              |       | (2.2                                              | )          | 2.2 |   | (4.1 | ) |
| Materials and Effects                                         |       | 0.3                                                 |       | 0.6                                               |       | (2.0 | ) | 0.6 |   |
| Performance Products                                          |       | 1.4                                                 |       | (0.3                                              | )          | 0.4 |   | (1.3 | ) |
| Pigments                                                      |       | (0.1                                                | )          | (14.4                                             | )          | (2.6 | ) | (17.3 | ) |
| Polymers                                                      |       | (0.8                                                | )          | (1.0                                              | )          | (4.3 | ) | (2.9 | ) |
| Base Chemicals - Port Arthur outage                           |       | (9.4                                                | )          | —                                            |       | (9.4 | ) | — |   |
| Base Chemicals - other                                        |       | (0.7                                                | )          | (1.6                                              | )          | (1.3 | ) | (4.3 | ) |
| Corporate and other                                           |       | 0.1                                                 |       | 0.1                                               |       | — |   | 0.1 |   |
| Total restructuring, impairment and plant closing costs       |       | (9.2                                                | )          | (18.8                                             | )          | (17.0 | ) | (29.2 | ) |
| **Total**                                                     |       | $                                                   | 136.9      |                                              | $          | (63.6 | ) | $ | 125.8 |   | $ | (306.9 | ) |

 
| ** **                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Huntsman International**                               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Loss on early  extinguishment of debt                         |       | $                                                   | —     |                                              | $          | (2.0 | ) | $ | — |   | $ | (76.0 | ) |
| Loss on accounts  receivable securitization program           |       | (5.3                                                | )          | (2.4                                              | )          | (8.1 | ) | (5.6 | ) |
| Loss on  discontinued operations                              |       | (0.3                                                | )          | (40.4                                             | )          | (0.8 | ) | (43.0 | ) |
| Cumulative  effect of change in accounting principle          |       | —                                              |       | —                                            |       | — |   | 5.7 |   |
| Gain on sale of  business/assets                              |       | 92.4                                                |       | —                                            |       | 92.4 |   | — |   |
| Insurance  recoveries                                         |       | 8.8                                                 |       | —                                            |       | 8.8 |   | — |   |
| Extraordinary  gain on the acquisition of business            |       | 46.1                                                |       | —                                            |       | 46.1 |   | — |   |
|                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                |       |                                              |       |   |   |   |   |
| Polyurethanes                                                 |       | —                                              |       | (2.2                                              | )          | 2.2 |   | (4.1 | ) |
| Materials and Effects                                         |       | 0.3                                                 |       | 0.6                                               |       | (2.0 | ) | 0.6 |   |
| Performance Products                                          |       | 1.4                                                 |       | (0.3                                              | )          | 0.4 |   | (1.3 | ) |
| Pigments                                                      |       | (0.1                                                | )          | (14.4                                             | )          | (2.6 | ) | (17.3 | ) |
| Polymers                                                      |       | (0.8                                                | )          | (1.0                                              | )          | (4.3 | ) | (2.9 | ) |
| Base Chemicals - Port Arthur outage                           |       | (9.4                                                | )          | —                                            |       | (9.4 | ) | — |   |
| Base Chemicals - other                                        |       | (0.7                                                | )          | (1.6                                              | )          | (1.3 | ) | (4.3 | ) |
| Corporate and other                                           |       | 0.1                                                 |       | 0.1                                               |       | — |   | 0.1 |   |
| Total restructuring, impairment and plant closing costs       |       | (9.2                                                | )          | (18.8                                             | )          | (17.0 | ) | (29.2 | ) |
| **Total**                                                     |       | $                                                   | 132.5      |                                              | $          | (63.6 | ) | $ | 121.4 |   | $ | (148.1 | ) |

 

----

(1)                                 Includestax expense on the cumulative effect of an accounting change in 2005 of $1.9million for us and $1.5 million for Huntsman International.

(2)                                 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

52

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economic performance compared to prior periods. Because EBITDA excludesinterest, income taxes, depreciation and amortization, EBITDA provides anindicator of general economic performance that is not affected by debtrestructurings, fluctuations in interest rates or effective tax rates, orlevels of depreciation and amortization. Accordingly, our management believesthis type of measurement is useful for comparing general operating performancefrom period to period and making certain related management decisions. EBITDAis also used by securities analysts, lenders and others in their evaluation ofdifferent companies because it excludes certain items that can vary widelyacross different industries or among companies within the same industry. Forexample, interest expense can be highly dependent on a company’s capitalstructure, debt levels and credit ratings. Therefore, the impact of interestexpense on earnings can vary significantly among companies. In addition, thetax positions of companies can vary because of their differing abilities totake advantage of tax benefits and because of the tax policies of the variousjurisdictions in which they operate. As a result, effective tax rates and taxexpense can vary considerably among companies. Finally, companies employproductive assets of different ages and utilize different methods of acquiringand depreciating such assets. This can result in considerable variability inthe relative costs of productive assets and the depreciation and amortizationexpense among companies. Our management also believes that our investors useEBITDA as a measure of our ability to service indebtedness as well as to fundcapital expenditures and working capital requirements. Nevertheless, ourmanagement recognizes that there are material limitations associated with theuse of EBITDA in the evaluation of our Company as compared to net income, whichreflects overall financial performance, including the effects of interest,income taxes, depreciation and amortization. EBITDA excludes interest expense.Because we have borrowed money in order to finance our operations, interestexpense is a necessary element of our costs and ability to generate revenue.Therefore, any measure that excludes interest expense has material limitations.EBITDA also excludes taxes. Because the payment of taxes is a necessary elementof our operations, any measure that excludes tax expense has materiallimitations. Finally, EBITDA excludes depreciation and amortization expense.Because we use capital assets, depreciation and amortization expense is anecessary element of our costs and ability to generate revenue. Therefore, anymeasure that excludes depreciation and amortization expense has materiallimitations. Our management compensates for the limitations of using EBITDA byusing it to supplement GAAP results to provide a more complete understanding ofthe factors and trends affecting the business than GAAP results alone. Ourmanagement also uses other metrics to evaluate capital structure, tax planningand capital investment decisions. For example, our management uses creditratings and net debt ratios to evaluate capital structure, effective tax rateby jurisdiction to evaluate tax planning, and payback period and internal rateof return to evaluate capital investments. Our management also uses tradeworking capital to evaluate its investment in accounts 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.

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):

53

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| ** **                                                       | ** ** | **Six Months Ended June 30,** | ** ** | **Percent** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|
| **Huntsman Corporation**                                    | ** ** | **2006**                                          | ** ** | **2005**    | ** ** | **Change** | ** ** |
| ** **                                                       | ** ** | ** **                                        | ** ** | ** **  |       |   |   |
| EBITDA                                                           |       | $                                                 | 780.5      |        | $          | 613.4 |   | — |   |
| Depreciation and  amortization                                   |       | (234.5                                            | )          | (249.4      | )          | (6 | )% |
| Interest  expense, net                                           |       | (181.4                                            | )          | (240.7      | )          | (25 | )% |
| Income tax  expense (1)                                          |       | (32.7                                             | )          | (63.0       | )          | (48 | )% |
| Net income                                                       |       | 331.9                                             |       | 60.3        |       | 450 | % |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                            |       | (4.0        | )          | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax |       | (50.5                                             | )          | —      |       | NM |   |
| Equity in income  of unconsolidated affiliates                   |       | (2.1                                              | )          | (5.2        | )          | (60 | )% |
| Depreciation and  amortization                                   |       | 234.5                                             |       | 249.4       |       | (6 | )% |
| (Gain) loss on  disposal of assets                               |       | (92.4                                             | )          | 1.1         |       | NM |   |
| Noncash  restructuring, impairment and plant closing costs       |       | 12.3                                              |       | 0.1         |       | NM |   |
| Loss on early  extinguishment of debt                            |       | —                                            |       | 235.0       |       | NM |   |
| Noncash interest  expense                                        |       | 2.1                                               |       | 37.6        |       | (94 | )% |
| Deferred income  taxes                                           |       | 18.4                                              |       | 28.1        |       | (35 | )% |
| Loss on pending  disposal of discontinued operations             |       | —                                            |       | 36.4        |       | NM |   |
| Net unrealized  loss on foreign currency transactions            |       | 26.9                                              |       | 12.6        |       | 113 | % |
| Other, net                                                       |       | 2.0                                               |       | (14.3       | )          | NM |   |
| Changes in  operating assets and liabilities                     |       | (159.6                                            | )          | (182.2      | )          | (12 | )% |
| Net cash provided by  operating activites                        |       | $                                                 | 323.5      |        | $          | 454.9 |   | (29 | )% |

 
| ** **                                                       | ** ** | **Six Months Ended June 30,** | ** ** | **Percent** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|
| **Huntsman International**                                  | ** ** | **2006**                                          | ** ** | **2005**    | ** ** | **Change** | ** ** |
|                                                             | ** ** | ** **                                        | ** ** | ** **  |       |   |   |
| EBITDA                                                           |       | $                                                 | 771.3      |        | $          | 769.8 |   | — |   |
| Depreciation and  amortization                                   |       | (220.9                                            | )          | (236.1      | )          | (6 | )% |
| Interest  expense, net                                           |       | (183.7                                            | )          | (236.8      | )          | (22 | )% |
| Income tax  expense                                              |       | (78.8                                             | )          | (70.1       | )          | 12 | % |
| Net income                                                       |       | 287.9                                             |       | 226.8       |       | 27 | % |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                            |       | (4.2        | )          | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax |       | (46.1                                             | )          | —      |       | NM |   |
| Equity in income  of unconsolidated affiliates                   |       | (2.1                                              | )          | (5.2        | )          | (60 | )% |
| Depreciation and  amortization                                   |       | 220.9                                             |       | 236.1       |       | (6 | )% |
| (Gain) loss on  disposal of assets                               |       | (92.4                                             | )          | 1.1         |       | NM |   |
| Noncash  restructuring, impairment and plant closing costs       |       | 12.3                                              |       | 0.1         |       | NM |   |
| Loss on early  extinguishment of debt                            |       | —                                            |       | 76.0        |       | NM |   |
| Noncash interest  expense                                        |       | 4.1                                               |       | 31.4        |       | (87 | )% |
| Deferred income  taxes                                           |       | 64.5                                              |       | 38.3        |       | 68 | % |
| Loss on pending  disposal of discontinued operations             |       | —                                            |       | 36.4        |       | NM |   |
| Net unrealized  loss on foreign currency transactions            |       | 26.9                                              |       | 12.6        |       | 113 | % |
| Other, net                                                       |       | 4.4                                               |       | (4.4        | )          | NM |   |
| Changes in  operating assets and liabilities                     |       | (162.3                                            | )          | (184.8      | )          | (12 | )% |
| Net cash provided by  operating activites                        |       | $                                                 | 318.1      |        | $          | 460.2 |   | (31 | )% |

 

----

NM—Not Meaningful

**ThreeMonths Ended June 30, 2006 Compared to Three Months Ended June 30, 2005**

For the three months ended June 30, 2006, we had net income of $262.9million on revenues of $3,343.9 million compared to net income of $112.7million on revenues of $3,339.5 million for the 2005 period. For the threemonths ended June 30, 2006, Huntsman International had net income of $220.6million on revenues of $3,343.9 million compared to net income of $104.7million on revenues of $3,339.5 million for the 2005 period. The increase of$150.2 million in our net income and the increase of $115.9 million in HuntsmanInternational’s net income were the result of the following items:

·                  Revenues for the three months ended June 30,2006 increased by $4.4 million, as compared with the 2005 period, dueprincipally to higher sales volumes in our Polyurethanes, Materials andEffects,

54

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Pigments and Polymers segmentsand higher average selling prices in our Performance Products, Pigments,Polymers and Base Chemicals segments. This increase was partially offset bylower sales volumes in our Performance Products and Base Chemicals segments andlower average selling prices in our Polyurethanes, Materials and Effects andPigments segments. For more information, see “—Segment Analysis” below.

·                  Our gross profit and the gross profit ofHuntsman International for the three months ended June 30, 2006 decreased by$51.2 million and $51.6 million or 10%, respectively, as compared with the 2005period. This decrease in gross profit, which occurred in all of our operatingsegments except Performance Products, was mainly due to lower margins, as rawmaterial and energy costs increased more than average selling prices during thethree months ended June 30, 2006 as compared with the 2005 period. For moreinformation, see “—Segment Analysis” below.

·                  Our operating expenses and the operatingexpenses of Huntsman International for the three months ended June 30,2006 decreased by $87.9 million and $91.5 million, respectively, ascompared with the 2005 period, primarily due to a $90.9 million gain on thesale of our U.S. butadiene and MTBE business. For more information, see “Note4. Business Disposition and Combination—Sale of U.S. Butadiene and MTBEBusiness” in our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

·                  Restructuring, impairment and plant closingcosts for the three months ended June 30, 2006 decreased to $9.2 million from$18.8 million in the 2005 period. For further discussion of restructuringactivities, see “Note 5. Restructuring, Impairment and Plant Closing Costs” toour Condensed Consolidated Financial Statements (Unaudited) included elsewherein this report.

·                   Our net interestexpense, and the net interest expense of Huntsman International, for the three months ended June 30, 2006decreased by $6.5 million and $6.4 million, or 6%, respectively, as comparedwith the 2005 period, primarily due to lower average debt balances whichresulted from the repayment of debt.

·                  Our income tax expense decreased by $4.7 millionto an expense of $24.3 million for the three months ended June 30, 2006 ascompared to an expense of $29.0 million for the same period in 2005. HuntsmanInternational’s income tax expense increased by $24.7 million to an expense of$65.1 million for the three months ended June 30, 2006 as compared to anexpense of $40.4 million for the same period in 2005. Our tax obligations areaffected by the mix of income and losses in the tax jurisdictions in which weoperate. Our tax expense decreased while pre-tax income increased largely dueto increased income in jurisdictions where no tax expense is provided becauseof the release of valuation allowances and due to decreased income injurisdictions where tax expense would have been provided. HuntsmanInternational’s increased tax expense was due largely to increased pre-taxincome, as well as recognition in the quarter of the tax expense related to thesale of the U.S. butadiene and MTBE business. Additionally, on August 16, 2005,we completed the Affiliate Mergers. Prior to the Affiliate Mergers, HuntsmanInternational Holdings, including Huntsman International, was treated as apartnership for U.S. federal income tax purposes and, as such, was generallynot subject to U.S. income tax but rather such income was taxed directly to itsowners. After the Affiliate Mergers, Huntsman International is treated as acorporate subsidiary and is subject to U.S. income tax. Therefore, HuntsmanInternational’s tax expense for the periods ended June 30, 2006 and June 30,2005 are not comparable.

·                  The loss from discontinued operations representsthe operating results and loss on disposal of our TDI business. For furtherinformation, see “Note 18. Discontinued Operations” in our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

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·                  The extraordinary gain on the acquisition of abusiness represents the fair value of the net assets acquired in excess of thepurchase price paid for the Textile Effects business, after the values of alllong-lived assets were reduced to zero. For more information, see “Note 4.Business Disposition and Combination—Acquisition of Textile Effects Business”in our Condensed Consolidated Financial Statements (Unaudited) includedelsewhere in this report.

**Six months ended June 30, 2006Compared to Six months ended June 30, 2005**

 

Forthe six months ended June 30, 2006, we had net income of $331.9 million onrevenues of $6,531.6 million compared to net income of $60.3 million onrevenues of $6,688.8 million for the 2005 period. For the six months ended June30, 2006, Huntsman International had net income of $287.9 million on revenuesof $6,531.6 million compared to net income of $226.8 million on revenues of$6,688.8 million for the 2005 period. The increase of $271.6 million in our netincome and the increase of $61.1 million in Huntsman International’s net incomewere the result of the following items:

·                  Revenues for the six months ended June 30, 2006decreased by $157.2 million, or 2%, as compared with the 2005 period, dueprincipally to lower sales volumes in our Polyurethanes, Performance Products,Polymers and Base Chemicals segments and lower average selling prices in ourPolyurethanes, Materials and Effects, and Pigments segments. This decrease waspartially offset by increased sales volumes in our Materials and Effects andPigments segments and increased average selling prices in our PerformanceProducts, Polymers and Base Chemicals segments. For more information, see “—SegmentAnalysis” below.

·                  Our gross profit,and the gross profit of Huntsman International, for the six months ended June 30, 2006 decreased by $262.0 million and$264.1 million, or 24%, respectively, as compared with the 2005 period. Thisdecrease in gross profit, which occurred in all of our operating segments, wasmainly due to lower margins, as raw material and energy costs increased morethan average selling prices during the six months ended June 30, 2006 ascompared with the 2005 period. For more information, see “—Segment Analysis”below.

·                  Our operatingexpenses and the operating expenses of Huntsman International for the six months ended June 30, 2006decreased by $115.5 million and $115.2 million, respectively,primarily due to a $90.9 million gain on the sale or our U.S. butadieneand MTBE business. For more information, see “Note 4. Business Disposition andCombination—Sale of U.S. Butadiene and MTBE Business” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

·                  Restructuring, impairment and plant closingcosts for the six months ended June 30, 2006 decreased to $17.0 million from$29.2 million in the 2005 period. For further discussion of restructuringactivities, see “Note 5. Restructuring, Impairment and Plant Closing Costs” toour Condensed Consolidated Financial Statements (Unaudited) included elsewherein this report.

·                  Our net interestexpense and Huntsman International’s net interest expense for the six months ended June 30, 2006 decreased by$59.3 million and $53.1 million, respectively, or 25% and 22%, respectively, ascompared with the 2005 period, primarily due to lower average debt balanceswhich resulted from the repayment of debt from the proceeds of our initialpublic offering in 2005 and operating cash flows.

·                  The loss on early extinguishment of debt duringthe six months ended June 30, 2005 resulted from the repayment of debt during2005 from the proceeds of our initial public offering and operating cash flows.

·                  Our income taxexpense decreased by $28.4 million to an expense of $32.7 million for the sixmonths ended June 30, 2006 as compared to an expense of $61.1 million for thesame period in 2005. Huntsman International’s income tax expense increased by$10.2 million to an expense of $78.8 million

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forthe six months ended June 30, 2006 as compared to an expense of $68.6 millionfor the same period in 2005. Our tax obligations are affected by the mix ofincome and losses in the tax jurisdictions in which we operate. Our tax expensedecreased while pre-tax income increased largely due to increased income injurisdictions where no tax expense is provided because of the release ofvaluation allowances and due to decreased income in jurisdictions where taxexpense would have been provided. Huntsman International’s increased taxexpense was due largely to increased pre-tax income, as well as recognition inthe quarter of the tax expense related to the sale of the U.S. butadiene andMTBE business. Additionally, on August 16, 2005, we completed the AffiliateMergers. Prior to the Affiliate Mergers, Huntsman International Holdings,including Huntsman International, was treated as a partnership for U.S. federalincome tax purposes and, as such, was generally not subject to U.S. income taxbut rather such income was taxed directly to its owners. After the AffiliateMergers, Huntsman International is treated as a corporate subsidiary and issubject to U.S. income tax. Therefore, Huntsman International’s tax expense forthe periods ended June 30, 2006 and June 30, 2005 are not comparable.

·                  The loss from discontinued operations representsthe operating results and loss on disposal of our TDI business. For furtherinformation, see “Note 18. Discontinued Operations” in our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

·                  The extraordinary gain on the acquisition of abusiness represents the fair value of the net assets acquired in excess of thepurchase price paid for the Textile Effects business, after the values of alllong-lived assets were reduced to zero. For more information, see “Note 4.Business Disposition and Combination—Acquisition of Textile Effects Business”in our Condensed Consolidated Financial Statements (Unaudited) includedelsewhere in this report.

·                    In 2005, we changed the measurement date of ourpension and postretirement benefit plans from December 31 to November 30. Theeffect of the change in measurement date on the respective obligations andassets of the plan resulted in a cumulative effect of a change in accountingprinciple credit for us of $4.0 million ($0.02 per diluted share), net of taxof $1.9 million, and for Huntsman International of $4.2 million, net of tax of$1.5 million, recorded effective January 1, 2005.

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**SegmentAnalysis**

***Three Months Ended June 30, 2006Compared to Three Months Ended June 30, 2005***

The following table setsforth the revenues and EBITDA for each of our operating segments (dollars inmillions):

 
|                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Percent** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005**    | ** ** | **Change** | ** ** |
| **Revenues:**                               |       |                                                |       |        |       |   |   |
| Polyurethanes                               |       | $                                                   | 925.1      |        | $          | 894.7 |   | 3 | % |
| Materials and Effects                       |       | 320.7                                               |       | 310.5       |       | 3 | % |
| Performance Products                        |       | 520.1                                               |       | 534.3       |       | (3 | )% |
| Pigments                                    |       | 276.0                                               |       | 267.7       |       | 3 | % |
| Polymers                                    |       | 453.8                                               |       | 408.2       |       | 11 | % |
| Base Chemicals                              |       | 1,070.8                                             |       | 1,110.9     |       | (4 | )% |
| Eliminations                                |       | (222.6                                              | )          | (186.8      | )          | 19 | % |
| **Total**                                   |       | $                                                   | 3,343.9    |        | $          | 3,339.5 |   | — |   |
|                                        |       |                                                |       |        |       |   |   |
| **Huntsman  Corporation Segment EBITDA:**   |       |                                                |       |        |       |   |   |
| Polyurethanes                               |       | $                                                   | 180.5      |        | $          | 155.6 |   | 16 | % |
| Materials and Effects                       |       | 33.9                                                |       | 45.2        |       | (25 | )% |
| Performance Products                        |       | 73.7                                                |       | 65.6        |       | 12 | % |
| Pigments                                    |       | 31.8                                                |       | 24.6        |       | 29 | % |
| Polymers                                    |       | 31.7                                                |       | 32.5        |       | (2 | )% |
| Base Chemicals                              |       | 141.9                                               |       | 81.5        |       | 74 | % |
| Corporate and other                         |       | 5.8                                                 |       | (38.7       | )          | NM |   |
| **Total**                                   |       | $                                                   | 499.3      |        | $          | 366.3 |   | 36 | % |
|                                        |       |                                                |       |        |       |   |   |
| **Huntsman  International Segment EBITDA:** |       |                                                |       |        |       |   |   |
| Polyurethanes                               |       | $                                                   | 180.5      |        | $          | 155.6 |   | 16 | % |
| Materials and Effects                       |       | 33.9                                                |       | 45.2        |       | (25 | )% |
| Performance Products                        |       | 73.7                                                |       | 65.6        |       | 12 | % |
| Pigments                                    |       | 31.8                                                |       | 24.6        |       | 29 | % |
| Polymers                                    |       | 31.7                                                |       | 32.5        |       | (2 | )% |
| Base Chemicals                              |       | 141.9                                               |       | 81.5        |       | 74 | % |
| Corporate and other                         |       | (1.4                                                | )          | (40.6       | )          | (97 | )% |
| **Total**                                   |       | $                                                   | 492.1      |        | $          | 364.4 |   | 35 | % |

 

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NM—Not Meaningful****

***Polyurethanes***

For the three months ended June 30, 2006, Polyurethanes segment revenuesincreased by $30.4 million, or 3%, as compared with the 2005 period. Thisincrease was primarily a result of higher overall sales volumes, partiallyoffset by lower average selling prices. The overall sales volume increase wasdue to an 11% increase in MDI sales volumes, partially offset by reduced MTBEsales volumes. The increase in MDI sales volumes was driven by strong growth ininsulation-related applications. Average selling prices were lower by 3%,mainly driven by a 9% decrease

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in average MDI prices, offset in part by higheraverage MTBE prices. Lower average MDI prices were due to pricing pressures inAsia, the negative foreign currency exchange impacts of the U.S. dollarstrengthening against the relevant European currencies and the expectation ofnew industry capacity.

For the threemonths ended June 30, 2006, Polyurethanes segment EBITDA increased by $24.9million, or 16%, as compared with the 2005 period. Segment EBITDA increasedprimarily due to lower losses from our discontinued TDI operations of $40.1million and a gain of $8.8 million in the 2006 period related to an insurancerecovery. This increase was partially offset by lower contribution margins thatresulted primarily from higher raw material and energy costs while averageselling prices decreased. During the three months ended June 30, 2006 and 2005,our Polyurethanes segment recorded restructuring, impairment and plant closingcosts of nil and a credit of $2.2 million, respectively. For further discussionof restructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

***Materials and Effects***

Materials andEffects segment revenues for the three months ended June 30, 2006 increased by$10.2 million, or 3%, as compared to the same period in 2005. Thisincrease resulted primarily in response to an 8% increase in sales volumesand was partially offset by a 4% decrease in average selling prices, including1% due to negative foreign currency exchange impacts. Sales volumes in Europeand Asia increased as a result of improved demand in most of our markets andthe introduction of new product lines. Average selling prices in Europe andAsia were lower due to changes in our product mix and market pressure,particularly in more competitive markets such as construction, coatings, windand electronics, and negative foreign currency exchange impacts on sellingprices as the U.S. dollar strengthened against the relevant foreign currencies.

Materials andEffects segment EBITDA for the three months ended June 30, 2006 of $33.9million decreased by 25% as compared to segment EBITDA of $45.2 million for thesame period in 2005. Segment EBITDA decreased primarily as a result of a $6.0million increase in indirect costs and selling, general and administrativeexpenses, partially in support of new business development initiatives, andnegative foreign currency exchange impacts. Contribution margins were stable ashigher energy and raw material costs were offset by higher revenues anddecreased logistics and distribution expenses. In addition, during the threemonths ended June 30, 2006 and 2005, our Materials and Effects segment recordedrestructuring and plant closing credits of $0.3 million and $0.6 million,respectively. For further discussion of restructuring activities, see “Note 5.Restructuring, Impairment and Plant Closing Costs” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

***Performance Products***

For the threemonths ended June 30, 2006, Performance Products revenues decreased by $14.2million, or 3%, as compared with the 2005 period. This decrease primarilyresulted from lower sales volumes in certain product lines, offset in part byhigher average selling prices for all major product lines except ethyleneglycol. Overall, sales volumes decreased by 9%, principally due to lower salesof ethylene glycol, related to deteriorating market conditions and the impact ofthe fire at our Port Arthur, Texas manufacturing plant, and lower sales ofcertain surfactants following the closure of substantially all of ourWhitehaven, U.K. manufacturing facility in June 2005. During the second quarter of 2006, we idled production ofnon-anti-freeze grade ethylene glycol, which represents the majority of ourproduction capacity of ethylene glycol, following the fire at our Port Arthur,Texas plant. Average selling prices increased by 7% in responseto higher raw material and energy costs, despite negative foreign currencyexchange impacts on selling prices as the U.S. dollar strengthened against therelevant European currencies.

For the threemonths ended June 30, 2006, Performance Products segment EBITDA increased by$8.1 million, or 12%, as compared with the 2005 period. The increase in segmentEBITDA resulted primarily from higher contribution margins as average sellingprices increased more than raw materials and energy costs, lower manufacturingcosts and a $1.5 million gain on the sale of real estate. The increase occurrednotwithstanding lower

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earnings in ethylene glycol. During the three monthsended June 30, 2006 and 2005, our Performance Products segment recorded arestructuring, impairment and plant closing credit of $1.4 million comparedwith a charge of $0.3 million in the 2005 period. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

***Pigments***

Forthe three months ended June 30, 2006, Pigments segment revenues increased by$8.3 million, or 3%, as compared with the 2005 period. This increase resultedprincipally from a 5% increase in sales volumes and was partially offset by a2% decrease in average selling prices. Sales volumes were higher primarily dueto higher demand in Europe and the Asia-Pacific region. Average selling pricesdecreased primarily in Europe because of pricing pressure and the negativeforeign currency exchange impacts on selling prices as the U.S. dollarstrengthened against the relevant European currencies.

Pigments segmentEBITDA for the three months ended June 30, 2006 increased by $7.2 million, or29%, as compared with the 2005 period, resulting primarily from lowerrestructuring, impairment and plant closing costs, offset in part by lowercontribution margins due to lower average selling prices and increased rawmaterials and energy costs. During the three months ended June 30, 2006 and 2005,our Pigments segment recorded restructuring, impairment and plant closing costsof $0.1 million and $14.4 million, respectively. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report. 

***Polymers***

Forthe three months ended June 30, 2006, Polymers revenues increased by $45.6million, or 11%, as compared with the 2005 period, mainly due to a 9% increasein average selling prices and a 2% increase in sales volumes to outsidecustomers. Average selling prices increased primarily in response to higher rawmaterials and energy costs. Sales volumes were higher primarily due to improvedcustomer demand for polyethylene and polypropylene.

For the threemonths ended June 30, 2006, Polymers segment EBITDA decreased by $0.8 million,or 2%, as compared to the 2005 period. This decrease in segment EBITDA resultedfrom lower contribution margins as raw material and energy costs increased morethan average selling prices and was partially offset by lower selling andadministrative costs. During the three months ended June 30, 2006 and 2005, ourPolymers segment recorded restructuring, impairment and plant closing chargesof $0.8 million and $1.0 million, respectively. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

***Base Chemicals***

For the threemonths ended June 30, 2006, Base Chemicals revenues decreased by $40.1 million,or 4%, as compared with the 2005 period. This decrease was mainly due to an 18%decrease in sales volumes, partially offset by a 17% increase in averageselling prices. The sales volume decrease was driven principally by a 31%decrease in sales volumes of olefins which resulted from the fire at our PortArthur, Texas manufacturing plant. Sales volumes also decreased due to lowerdemand in Europe. Average selling prices increased primarily in response tohigher raw material and energy costs, partially offset by negative foreigncurrency exchange impacts as the U.S. dollar strengthened against the relevantEuropean currencies.

For the three monthsended June 30, 2006, Base Chemicals segment EBITDA increased by $60.4 million,or 74%, as compared with the 2005 period. This increase in segment EBITDAresulted primarily from a $90.9 million gain on the sale of our U.S. butadieneand MTBE business, partially offset by lower contribution margins as rawmaterial and energy costs increased more than average selling prices and wasfurther impacted by the higher restructuring, impairment and plant closingcosts that resulted primarily from $9.4million of asset write-offs related

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to the fire at our Port Arthur, Texas manufacturingplant. We estimate that segment EBITDA was negatively impacted by $47.1 millionin 2006 due to lost sales volumes related to the fire. During the three monthsended June 30, 2006 and 2005, our Base Chemicals segment recordedrestructuring charges of $10.1 million (including the $9.4 million assetwrite-offs related to the fire) and $1.6 million, respectively. Forfurther discussion of restructuring activities, see “Note 5. Restructuring,Impairment and Plant Closing Costs” to our Condensed Consolidated FinancialStatements (Unaudited) included elsewhere in this report.

***Corporate and Other - HuntsmanCorporation***

Corporate and other items includes 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 June 30, 2006, EBITDA from corporate and other itemsimproved by $44.5 million to a gain of $5.8 million from a loss of$38.7 million for the 2005 period. The improvement in the 2006 periodEBITDA resulted primarily from an extraordinary gain of $50.5 million on theacquisition of the Textile Effects business.

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

Corporate and other items includes unallocated corporate overhead,foreign exchange gains and losses, loss on accounts receivable securitizationprogram, loss on the early extinguishment of debt, other non-operating incomeand expense, minority interest in subsidiaries’ (income) loss and extraordinarygain on acquisition of a business. For the three months ended June 30, 2006,EBITDA from corporate and other items improved by $39.2 million to a lossof $1.4 million from a loss of $40.6 million for the 2005 period. Theimprovement in 2006 period Corporate and other EBITDA resulted primarily froman extraordinary gain of $46.1 million on the acquisition of the TextileEffects business.

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***Six Months Ended June 30, 2006Compared to Six Months Ended June 30, 2005***

The following table setsforth the revenues and EBITDA for each of our operating segments (dollars inmillions):

 
|                                            | ** ** | **Six Months Ended June 30,** | ** ** | **Percent** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                                 | ** ** | **2006**                                          | ** ** | **2005**    | ** ** | **Change** | ** ** |
| **Revenues**                               | ** ** | ** **                                        | ** ** | ** **  |       |   |   |
| Polyurethanes                              |       | $                                                 | 1,734.2    |        | $          | 1,774.6 |   | (2 | )% |
| Materials and  Effects                     |       | 627.9                                             |       | 622.0       |       | 1 | % |
| Performance  Products                      |       | 1,010.4                                           |       | 1,055.0     |       | (4 | )% |
| Pigments                                   |       | 534.8                                             |       | 530.9       |       | 1 | % |
| Polymers                                   |       | 893.2                                             |       | 821.8       |       | 9 | % |
| Base Chemicals                             |       | 2,161.4                                           |       | 2,297.9     |       | (6 | )% |
| Eliminations                               |       | (430.3                                            | )          | (413.4      | )          | 4 | % |
| **Total**                                  |       | $                                                 | 6,531.6    |        | $          | 6,688.8 |   | (2 | )% |
|                                       |       |                                              |       |        |       |   |   |
| **Huntsman  Corporation Segment EBITDA**   |       |                                              |       |        |       |   |   |
| Polyurethanes                              |       | $                                                 | 339.7      |        | $          | 341.3 |   | — |   |
| Materials and Effects                      |       | 68.8                                              |       | 94.2        |       | (27 | )% |
| Performance  Products                      |       | 119.3                                             |       | 132.5       |       | (10 | )% |
| Pigments                                   |       | 65.1                                              |       | 63.9        |       | 2 | % |
| Polymers                                   |       | 66.9                                              |       | 77.4        |       | (14 | )% |
| Base Chemicals                             |       | 162.0                                             |       | 243.1       |       | (33 | )% |
| Corporate and  other                       |       | (41.3                                             | )          | (339.0      | )          | (88 | )% |
| **Total**                                  |       | $                                                 | 780.5      |        | $          | 613.4 |   | 27 | % |
|                                       |       |                                              |       |        |       |   |   |
| **Huntsman  International Segment EBITDA** |       |                                              |       |        |       |   |   |
| Polyurethanes                              |       | $                                                 | 339.7      |        | $          | 341.3 |   | — |   |
| Materials and  Effects                     |       | 68.8                                              |       | 94.2        |       | (27 | )% |
| Performance  Products                      |       | 119.3                                             |       | 132.5       |       | (10 | )% |
| Pigments                                   |       | 65.1                                              |       | 63.9        |       | 2 | % |
| Polymers                                   |       | 66.9                                              |       | 77.4        |       | (14 | )% |
| Base Chemicals                             |       | 162.0                                             |       | 243.1       |       | (33 | )% |
| Corporate and  other                       |       | (50.5                                             | )          | (182.6      | )          | (72 | )% |
| **Total**                                  |       | $                                                 | 771.3      |        | $          | 769.8 |   | — |   |

 

***Polyurethanes***

For the six months ended June 30, 2006, Polyurethanes segment revenuesdecreased by $40.4 million, or 2%, as compared with the 2005 period. Thisdecrease was primarily a result of lower MTBE sales volumes and lower averageselling prices for MDI, offset in part by increased MDI sales volumes andhigher MTBE prices. MDI revenues decreased by 5% due to 8% lower averageselling prices, offset by a 3% increase in MDI sales volumes. Lower average MDIprices were due to pricing pressures in Asia, negative foreign currencyexchange impacts as the U.S. dollar strengthened against the relevant Europeancurrencies and the expectation of new industry capacity. The increase in MDIsales volume was driven mainly by strong growth in insulation-relatedapplications. MTBE revenues increased on higher average selling prices whichwere partially offset by lower sales volumes. The increase in MTBE averageselling prices was principally due to strong demand and tight supplies in themarket.

For the six months ended June 30, 2006, Polyurethanes segment EBITDAdecreased slightly to $339.7 million as compared with $341.3 million for the2005 period. The decrease resulted from lower contribution margins due tohigher raw material and energy costs, offset by lower losses from thediscontinued TDI operations of

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$42.2 million, a gain of $8.8 million in the 2006period related to an insurance recovery and lower restructuring, impairment andplant closing costs. During the six months ended June 30, 2006, ourPolyurethanes segment recorded a restructuring, impairment and plant closingcredit of $2.2 million as compared with costs of $4.1 million in the2005 period. For further discussion of restructuring activities, see “Note 5.Restructuring, Impairment and Plant Closing Costs” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

***Materials and Effects***

Materials andEffects revenues for the six months ended June 30, 2006 increased by $5.9million, or 1%, as compared to the same period in 2005. This increase wasprimarily attributable to a 6% increase in sales volumes, offset by 5% loweraverage selling prices. Average selling prices were lower in most markets inEurope and Asia and also decreased due to negative foreign currency exchangeimpacts as the U.S. dollar strengthened against the relevant Europeancurrencies, but these effects were partially offset by higher selling prices inthe Americas. Sales volumes increased in all regions as a result of improveddemand and the introduction of additional product lines.

Materials andEffects EBITDA for the six months ended June 30, 2006 decreased by $25.4million, or 27%, as compared to the same period in 2005. Segment EBITDAdecreased primarily due to increased operating expenses of $11.6 million,partially in support of new business development initiatives, and a negativeforeign currency exchange impact. A decrease in contribution margins, resultingfrom increases in raw material and energy costs, partially offset by higherrevenues and lower logistics and distribution expenses, also contributed toreduced EBITDA. During the six months ended June 30, 2006, our Materials andEffects segment recorded restructuring, impairment and plant closing costs of$2.0 million as compared with a credit of $0.6 million in the 2005period. For further discussion of restructuring activities, see “Note 5.Restructuring, Impairment and Plant Closing Costs” to our Condensed ConsolidatedFinancial Statements (Unaudited) included elsewhere in this report.

***Performance Products***

For the six monthsended June 30, 2006, Performance Products revenues decreased by $44.6 million,or 4%, as compared with the 2005 period. This decrease was primarily a result of lower sales volumes in certainproduct lines, partially offset by higher average selling prices for all majorproduct lines except ethylene glycol. Overall, sales volumes decreased by 13%,principally due to lower sales of ethylene glycol, related to deterioratingmarket conditions and the impact of the fire at our Port Arthur, Texas olefinsmanufacturing plant, and lower sales of certain surfactants following theclosure of substantially all of our Whitehaven, U.K. manufacturing facility inJune 2005. During the secondquarter of 2006, we idled production of non-anti-freeze grade ethylene glycol,which represents the majority of our production capacity of ethylene glycol,following the fire at our Port Arthur, Texas plant. Average sellingprices increased by 10% in response to higher raw material and energy costs,despite negative foreign currency exchange impacts on selling prices as theU.S. dollar strengthened against the relevant European currencies and theAustralian dollar.

For the six monthsended June 30, 2006, Performance Products segment EBITDA decreased by$13.2 million, or 10%, as compared with the 2005 period. This decreaseresulted primarily from lower earnings in ethylene glycol. Elsewhere, higherraw material and energy prices were recovered through higher average sellingprices and fixed costs were lower than the same period in 2005. In addition,during the six months ended June 30, 2006 and 2005, our Performance Productssegment recorded a restructuring, impairment and plant closing credit of$0.4 million compared with a charge of $1.3 million in the 2005 period anda $1.5 million gain on the sale of real estate during the second quarter of2006. For further discussion of restructuring activities, see “Note 5.Restructuring, Impairment and Plant Closing Costs” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

***Pigments***

Forthe six months ended June 30, 2006, Pigments revenues increased by $3.9million, or 1%, as compared with the 2005 period. The increase resultedprincipally from a 4% increase in sales volumes, offset by a 3% decrease inaverage selling prices. Sales volumes were higher primarily due to improved customerdemand in Europe and the

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Asia-Pacific region. Average selling prices decreasedin Europe primarily as a result of negative foreign currency exchange impactson selling prices as the U.S. dollar strengthened against the relevant Europeancurrencies.

Pigments segmentEBITDA for the six months ended June 30, 2006 increased by $1.2 million, or 2%,as compared with the 2005 period, resulting primarily from lower restructuring,impairment and plant closing costs, offset in part by lower contributionmargins related to lower average selling prices and higher raw material andenergy costs. During the six months ended June 30, 2006 and 2005, our Pigmentssegment recorded restructuring, impairment and plant closing charges of $2.6million and $17.3 million, respectively. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

***Polymers***

For the six months ended June 30, 2006, Polymersrevenues increased by $71.4 million, or 9%, as compared with the 2005period, mainly due to a 10% increase in average selling prices, offset in partby a 1% decrease in sales volumes. Average selling prices were higher primarilydue to tighter market conditions and in response to an increase in raw materialand energy costs. Sales volumes to outside customers increased as a result ofimproved demand in our U.S. markets, offset by continued weak demand for ourAustralian styrenics and expandable polystyrene products.

For the six monthsended June 30, 2006, Polymers segment EBITDA decreased by $10.5 million, or14%, as compared to the 2005 period. This decrease in segment EBITDA resultedfrom lower contribution margins as raw material and energy costs increased morethan average selling prices and was offset in part by lower selling andadministrative costs. During the six months ended June 30, 2006 and 2005, ourPolymers segment recorded restructuring, impairment and plant closing chargesof $4.3 million and $2.9 million, respectively. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

***Base Chemicals***

For the six monthsended June 30, 2006, Base Chemicals revenues decreased by $136.5 million, or6%, as compared with the 2005 period. This decrease was mainly due to an 18%decrease in sales volumes, partially offset by a 14% increase in averageselling prices. The sales volume decrease was driven principally by 19% lowersales volumes of olefins resulting from the fire at our Port Arthur, Texasmanufacturing plant and unplanned outages at certain of our Jefferson County,Texas production facilities which resulted from our inability to obtainsufficient energy from a supplier following an outage at the supplier’sfacility related to the 2005 Gulf Coast storms. Sales volumes also decreaseddue to lower demand in Europe. Higher average selling prices resulted primarilyin response to higher raw material and energy costs, partially offset bynegative foreign currency exchange impacts as the U.S. dollar strengthenedagainst the relevant European currencies.

For the six monthsended June 30, 2006, Base Chemicals segment EBITDA decreased by $81.1 million,or 33%, as compared with the 2005 period. This decrease in segment EBITDA wasprimarily due to lower contribution margins as raw material and energy costsincreased more than average selling prices, particularly in our U.K.operations, and to higher restructuring, impairment and plant closing costsresulting principally from $9.4million of asset write-offs related to the fire at our Port Arthur, Texasplant. We estimate that segment EBITDA was negatively impacted by $47.1 million in 2006 due to lost salesvolumes related to the fire at our Port Arthur, Texas plant. This decrease waspartially offset by a $90.9 million gain on the sale of the segment’sU.S. butadiene and MTBE business in 2006. During the six months ended June30, 2006 and 2005, our Base Chemicals segment recorded restructuring charges of$10.7 million (including $9.4 million of asset write-offs related to thefire) and $4.3 million, respectively. For further discussion of restructuringactivities, see “Note 5. Restructuring, Impairment and Plant Closing Costs” toour Condensed Consolidated Financial Statements (Unaudited) included elsewherein this report.

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

Corporateand other items includes unallocated corporate overhead, foreign exchange gainsand losses, loss on accounts receivable securitization program, loss on theearly extinguishment of debt, other non-operating income and expense, minorityinterest in subsidiaries’ (income) loss, the extraordinary gain on acquisitionof a business and cumulative effect of a change in accounting principle. Forthe six months ended June 30, 2006, EBITDA from corporate and other itemsimproved by $297.7 million to a loss of $41.3 million from a loss of$339.0 million for the 2005 period. The improvement in 2006 periodCorporate and other EBITDA resulted primarily from a $235.0 million reductionin losses on early extinguishment of debt, lower foreign currency exchangelosses and an extraordinary gain of $50.5 million in the 2006 period on theacquisition of the Textile Effects business.

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

Corporate and other items includes unallocated corporate overhead,foreign exchange gains and losses, loss on accounts receivable securitizationprogram, loss on the early extinguishment of debt, other non-operating incomeand expense, minority interest in subsidiaries’ (income) loss, theextraordinary gain on acquisition of a business and cumulative effect of achange in accounting principle. For the six months ended June 30, 2006, EBITDAfrom corporate and other items improved by $132.1 million to a loss of$50.5 million from a loss of $182.6 million for the 2005 period. Theimprovement in 2006 period Corporate and other EBITDA resulted primarily from a$76.0 million reduction in losses on early extinguishment of debt and anextraordinary gain of $46.1 million in the 2006 period on the acquisition ofthe Textile Effects business.

**Liquidity and Capital Resources**

The following is adiscussion of our liquidity and capital resources. Pursuant to GeneralInstructions H(1)(a) and (b) of Form 10-Q, Huntsman International is filingthis report with a reduced disclosure format.

**Cash**

Net cash provided by operating activities for the six months ended June30, 2006 and 2005 was $323.5 million and $454.9 million, respectively. Thedecrease in cash provided by operations was primarily attributable to adecrease in operating income of $134.2 million, partially offset by adecrease in interest expense of $59.3 million, as described in “Results ofOperations” above.

Net cash used in investing activities for the six months ended June 30,2006 and 2005 was $186.3 million and $177.8 million, respectively. Duringthe six months ended June 30, 2006 and 2005, we invested $211.3 million and$128.7 million, respectively, in capital expenditures. The increase in 2006capital expenditures was largely attributable to increased spending in our LDPEfacility under construction at Wilton, U.K. During the six months ended June30, 2006, we spent $88.0 million on the construction of our Wilton, U.K. LDPEfacility as compared to $9.0 million for the 2005 period. Also during thesix months ended June 30, 2006, we acquired the Textile Effects business for$168.9 million, net of cash acquired, sold our U.S. butadiene and MTBEbusiness for $262.0 million of which $192.0 million was paid at closing,while the additional $70.0 million will be payable after closing, if certainconditions are met, and sold other assets for $9.1 million. With respect to theacquisition of Textile Effects, we funded $32.9 million of the acquisitionpayment on July 3, 2006. The amount paid on July 3, 2006 wasreflected in restricted cash and accrued liabilities. For more information, see“—Recent Developments—Acquisition of Textile Effects Business” and “—Sale ofU.S. Butadiene and MTBE Business.” In 2005, in connection with the initialpublic offering of our 5% mandatory convertible preferred stock, we prefundedour dividend obligations through the mandatory conversion date ofFebruary 16, 2008 with investments in government securities of$40.9 million.

Net cash used in financing activities for the six months ended June 30,2006 was $78.0 million as compared with $263.2 million in the 2005 period. Thisdecrease in net cash used by financing activities is mainly a result of netrepayments of debt during the six months ended June 30, 2005 of $1,645.8million, primarily as a result of our initial public offering of common stockand mandatory convertible preferred stock in the first quarter of 2005. As a resultof our initial public offering, we received $1,491.9 million of net proceeds.Also, during the six months ended

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June 30,2005, we used approximately $106.7 million to pay premiums associated withrepayment of indebtedness. During the six months ended June 30, 2006, we hadnet repayments under our debt arrangements of $77.0 million. We paid$7.2 million in dividend obligations in the first half of 2006 as comparedwith $3.6 million in the 2005 period.

**Changes inFinancial Condition**

The following informationsummarizes our working capital position as of June 30, 2006 and December 31,2005 (dollars in millions):

 
| ** **                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | ** **              | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|-------------------------|------------|
| ** **                         | ** ** | **2006**          | ** ** | **2005**              | ** ** | **(Decrease)** | ** ** | **Percent Change** | ** ** |
| **Current assets:**                |       |              |       |                  |       |           | ** ** | ** **              | ** ** |
| Cash and cash  equivalents         |       | $                 | 200.1      |                  | $          | 142.8          |       | $                       | 57.3       |   | 40 | % |
| Restricted cash                    |       | 32.9              |       | —                |       | 32.9           |       | NM                      |       |
| Accounts receivable,  net          |       | 1,701.1           |       | 1,482.6               |       | 218.5          |       | 15                      | %          |
| Inventories, net                   |       | 1,545.6           |       | 1,309.2               |       | 236.4          |       | 18                      | %          |
| Prepaid expenses                   |       | 49.2              |       | 46.2                  |       | 3.0            |       | 6                       | %          |
| Deferred income taxes              |       | 45.0              |       | 31.2                  |       | 13.8           |       | 44                      | %          |
| Other current assets               |       | 63.7              |       | 84.0                  |       | (20.3          | )          | (24                     | )%         |
| Total current assets               |       | 3,637.6           |       | 3,096.0               |       | 541.6          |       | 17                      | %          |
|                               |       |              |       |                  |       |           |       |                    |       |
| **Current liabilities:**           |       |              |       |                  |       |           |       |                    |       |
| Accounts payable                   |       | 1,134.0           |       | 1,093.5               |       | 40.5           |       | 4                       | %          |
| Accrued liabilities                |       | 659.2             |       | 747.2                 |       | (88.0          | )          | (12                     | )%         |
| Deferred income taxes              |       | 38.3              |       | 2.4                   |       | 35.9           |       | NM                      |       |
| Current portion of  long-term debt |       | 173.4             |       | 44.6                  |       | 128.8          |       | 289                     | %          |
| Total current  liabilities         |       | 2,004.9           |       | 1,887.7               |       | 117.2          |       | 6                       | %          |
| Working capital                    |       | $                 | 1,632.7    |                  | $          | 1,208.3        |       | $                       | 424.4      |   | 35 | % |

 

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NM—Not Meaningful

During the six months ended June 30, 2006, our working capital increasedby $424.4 million as a result of the net impact of the following significant changes:

·                  Theincrease in cash and cash equivalents of $57.3 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 restricted cash relates to funds restricted for the acquisition ofTextile Effects.

·                  Theincrease in accounts receivable of $218.5 million was primarily attributable tothe acquisition of Textile Effects, offset somewhat by reduced sales caused bythe fire and damage sustained at our Port Arthur, Texas manufacturing plant anddue to the disposition of the U.S. butadiene and MTBE business.

·                  Theincrease in inventories of $236.4 million was mainly attributable to theacquisition of Textile Effects offset partially by the disposition of our U.S.butadiene and MTBE business and due to lower inventory purchases resulting fromthe outage at our Port Arthur, Texas facility.

·                  Othercurrent assets decreased by $20.3 million related principally to a reduction incurrent taxes receivable.

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·                  Accountspayable increased by $40.5 million primarily attributable to the acquisition ofTextile Effects, offset by lower accounts payable in our Base Chemicals segmentresulting from the outage at our Port Arthur facility and due to thedisposition of the U.S. butadiene and MTBE business.

·                  Accruedliabilities decreased by $88.0 million due primarily to lower income and othertaxes payable, payroll, accrued interest and rebate accruals offset partiallyby the acquisition of Textile Effects.

·                  Currentportion of long-term debt increased by $128.8 attributable to the currentclassification of the voluntary prepayment of debt repaid in July and August of2006.

The acquisition of Textile Effects increased our workingcapital on June 30, 2006 by $359.4 million. Working capital sold inconnection with the sale of our U.S. butadiene and MTBE business was$17.2 million. For further information, see “Note 4. Business Dispositionand Combination” in our condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

**Debt and Liquidity**

During2005, we completed a series of transactions designed to simplify ourconsolidated group’s financing and public reporting structure, to reduce ourcost of borrowings and to facilitate other organizational efficiencies. OnFebruary 16, 2005, we completed our initial public offering of common andmandatory convertible preferred stock that resulted in approximately $1.5billion in net proceeds, substantially all of which were used to repayindebtedness. On August 16, 2005, we completed the Huntsman LLC Merger and onDecember 20, 2005 we completed the Huntsman Advanced Materials MinorityInterest Transaction. As a result of these transactions, we now operate all ofour businesses through Huntsman International and substantially all of our debtobligations are obligations of Huntsman International and/or its subsidiaries.

***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; such debtis non-recourse to us and we have no contractual obligation to fund oursubsidiaries’ respective operations.

***Credit Facilities***

As of June 30, 2006, the Senior Credit Facilitiesconsisted of (i) the $650 million Revolving Facility, (ii) the$1,938.8 million Dollar Term Loan, and (iii) the €93.4 million(approximately $117.2 million) Euro Term Loan. As of June 30, 2006, therewere no borrowings outstanding under the Revolving Facility, and we had$33.6 million in U.S. dollar equivalents of letters of credit and bankguarantees issued and outstanding under the Revolving Facility. As of June 30,2006, the weighted average interest rate on the Senior Credit Facilities wasapproximately 6.9%, excluding the impact of interest rate hedges.

HuntsmanInternational entered into the June 30, 2006 Amendment to the Senior CreditFacilities to provide for an additional $100 million of borrowings under theDollar Term Loan on the same terms as the existing Dollar Term Loan. HuntsmanInternational borrowed the additional amounts under the Dollar Term Loan onJuly 14, 2006 and, on July 24, 2006, used the proceeds to redeem all of its$100 million outstanding senior floating rate notes due 2011. The June 30, 2006Amendment also modified certain other provisions in the Senior CreditFacilities, including certain of the financial covenants.

On April 18, 2006,we completed the A/R Securitization Program Amendment and added certainadditional U.S. subsidiaries as additional receivables originators under theprogram. For more information, see “Off-Balance Sheet Arrangements” below. Inconnection with the A/R Securitization Program Amendment, we initiallyincreased our outstandings under the commercial paper conduit program to $475million U.S. dollar equivalents. A portion of the net increase was used to fundthe redemption of medium-term notes issued under the A/R Securitization Program

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and to repay $50 million U.S. dollar equivalents ofterm debt outstanding under our Senior Credit Facilities. As of the date of theA/R Securitization Program Amendment, the agreements governing our SeniorCredit Facilities require us to prepay our Term Loans with proceeds obtainedunder the A/R Securitization Program in excess of $425 million. Pursuant to theJune 30, 2006 Amendment, this mandatory repayment threshold for proceeds obtainedunder the A/R Securitization Program was increased to $500 million.

On August 1, 2006we made a voluntary repayment of $50 million U.S. dollar equivalents on ourTerm Loans ($47.3 million on the Dollar Term Loan and €2.2 million onthe Euro Term Loan) with available liquidity.

***Secured Notes***

On August 16, 2005, in connection with theHuntsman LLC Merger, Huntsman International entered into supplementalindentures under which it assumed the obligations of Huntsman LLC under itsoutstanding 11.625% senior secured notes due 2010 (the “2010 Secured Notes”).As of June 30, 2006, Huntsman International had outstanding $296.0 millionaggregate principal amount ($293.8 million book value and$455.4 million original aggregate principal amount) of the 2010 SecuredNotes, which are redeemable after October 15, 2007 at 105.813% of theprincipal amount thereof, declining ratably to par on and afterOctober 15, 2009. Interest on the 2010 Secured Notes is payable semiannuallyin April and October of each year.

***Senior Notes***

As of June 30, 2006,Huntsman International had outstanding $450.0 million aggregate principalamount ($454.1 million book value) 9.875% 2009 Senior Notes that were issued ata premium. The 2009 Senior Notes are unsecured obligations. Interest on the2009 Senior Notes is payable semiannually in March and September and thesenotes are redeemable after March 1, 2006 at 104.937% of the original aggregateprincipal amount thereof, declining ratably to par on and after March 1, 2008.On July 13, 2006, Huntsman International entered into a transaction torepurchase $37.5 million of its 2009 Senior Notes at a price of 105% of theaggregate principal amount thereof. In addition, on July 14, 2006 HuntsmanInternational issued a partial redemption notice to redeem $62.5 million of the2009 Senior Notes on August 14, 2006 at a call price of 104.937% of theaggregate principal amount thereof. Following this repurchase and partialredemption, there will be $350 million aggregate principal amount outstanding($353.2 million book value) of the 2009 Senior Notes.

As of June 30, 2006, Huntsman International had outstanding$198.0 million ($300 million original aggregate principal amount) of11.5% senior unsecured fixed rate notes due 2012 (the “2012 Senior Fixed RateNotes”) and $100.0 million senior unsecured floating rate notes due 2011(the “2011 Senior Floating Rate Notes”). Interest on the 2012 Senior Fixed RateNotes is payable semiannually in January and July of each year. Interest on the2011 Senior Floating Rate Notes is at LIBOR plus 7.25% (12.32% as of June 30,2006) and is payable quarterly in January, April, July and October of eachyear. The 2012 Senior Fixed Rate Notes are redeemable after July 15, 2008at 105.75% of the principal amount thereof, declining ratably to par on andafter July 15, 2010. The 2011 Senior Floating Rate Notes are redeemableafter July 15, 2006 at 104.0% of the principal amount thereof, decliningratably to par on and after July 15, 2008. As provided for in the June 30,2006 Amendment and as noted above, on July 14, 2006 Huntsman Internationalborrowed an additional $100 million under the Dollar Term Loan and, on July 24,2006, redeemed in full the outstanding 2011 Senior Floating Rate Notes at104.0% of the principal amount thereof outstanding.

***Subordinated Notes***

As of June 30, 2006, Huntsman International had outstanding$175 million 7.375% senior subordinated notes due 2015 and €135 million($169.3 million) 7.5% senior subordinated notes due 2015. The 2015Subordinated Notes are redeemable on or after January 1, 2010 at 103.688%and 103.750%, respectively, of the principal amount thereof, declining ratablyto par on and after January 1, 2013. Under the terms of a registrationrights agreement among Huntsman International, the subsidiary guarantors andthe initial purchasers of the 2015 Subordinated Notes, we were required tocomplete an exchange offer for the 2015 Subordinated Notes on or beforeSeptember 11, 2005. Because we did not complete the exchange offer by thisdate, we are required to pay additional interest on the 2015

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Subordinated Notes at a rate of 0.25% per year for thefirst 90-day period following this date, and this rate increases by anadditional 0.25% for each subsequent 90-day period, up to a maximum of 1.0%. Asof June 30, 2006, we were paying additional interest of 1.0% on the 2015Subordinated Notes. Additional interest will cease to accrue upon the earlier ofthe completion of the exchange offer or December 17, 2006.

As of June 30, 2006, Huntsman International also had outstanding $366.1million ($600 million original aggregate principal amount) and €372.0 million($466.4 million) (€450 million original aggregate principal amount)10.125% senior subordinated notes due 2009 (the “2009 Subordinated Notes” and,together with the 2015 Subordinated Notes, the “Subordinated Notes”). As ofJune 30, 2006, the 2009 Subordinated Notes have an unamortized premium of$3.5 million and as of July 1, 2006, are redeemable at 101.688% decliningto par on and after July 1, 2007.

As of June 30, 2006, Huntsman International had outstanding a combinedtotal of $541.1 million and €507.0 million ($635.7 million)Subordinated Notes, plus $3.5 million of unamortized premium. Interest onthe Subordinated Notes is payable semiannually in January and July of eachyear.

***Other Debt***

We maintain a $25.0 million multicurrencyEuropean Overdraft Facility used for the working capital needs for our Europeansubsidiaries. As of June 30, 2006, there were no borrowings outstanding underthe European Overdraft Facility.

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, is building three plants to manufacture MNB, aniline and crude MDI.We effectively own 35% of SLIC and it is an unconsolidated affiliate. HPS, oursplitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd, recentlycompleted construction of a plant to manufacture pure MDI, polymeric MDI andMDI variants. We own 70% of HPS and it is a consolidated affiliate.

HPS has obtained secured loans for the construction of MDI productionfacilities near Shanghai, China. This debt consists of various committed loansin the aggregate amount of approximately $121 million. As of June 30,2006, HPS had $20.5 million outstanding in U.S. dollar borrowings and234.0 million in RMB borrowings ($29.3 million) under these facilities.The interest 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. As ofJune 30, 2006, the interest rate was approximately 5.8% for U.S. dollarborrowings and 5.5% for RMB borrowings. The loans are secured by substantiallyall the assets of HPS and will be repaid in 16 semiannual installmentsbeginning no later than June 30, 2007. The financing is non-recourse toHuntsman International but is guaranteed during the construction phase byaffiliates of HPS, including us. We have guaranteed 70% of any amount due andunpaid by HPS under the loans described above (except for the VAT facility,which is not guaranteed). Our guarantees remain in effect until HPS hascommenced production of at least 70% of capacity for at least 30 days andachieved a debt service cost ratio of at least 1.5:1. Our Chinese MDI jointventures are unrestricted subsidiaries under the Senior Credit Facilities andunder the indentures governing our outstanding notes. HPS commenced operationson June 30, 2006.

Our Australian subsidiaries maintain credit facilities that had anaggregate outstanding balance of A$84.2 million ($61.6 million) as ofJune 30, 2006. These facilities are non-recourse to us and bear interest at theAustralian index rate plus a margin of 2.9%. As of June 30, 2006, the interestrate for these facilities was 8.9%.

In July 2006, in conjunction with our annual renewal of property andliability insurance programs, we financed substantially all of our premiums forthe 2006/2007 renewal period and at such date Huntsman International enteredinto notes payable in the amount of $65.6 million due in the next twelvemonths. Insurance premium financings are generally secured by the unearnedpremiums under such policies.

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**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 credit facilities and other debt instruments toprovide liquidity for our operations and working capital needs. As of June 30,2006, we had approximately $1,065.2 million of combined cash and combinedunused borrowing capacity, consisting of $233.0 million in cash, of which $32.9million is restricted cash used on July 3, 2006, to fund a portion of theTextile Effects acquisition, $616.4 million in availability under our RevolvingFacility, $15.0 million attributable to our European Overdraft Facility andapproximately $200.8 million in availability under our A/R SecuritizationProgram. As noted above, subsequent to June 30, 2006, Huntsman Internationalused its available liquidity to repurchase and redeem $100 million of the 2009Senior Notes. In addition, on August 1, 2006, we repaid $50 million in U.S.dollar equivalents on our Term Loans under our Senior Credit Facilities. Proforma for these debt repayments, as well as for the payment of $32.9 millionthat was made on July 3, 2006 for the acquisition of Textile Effects, combinedcash and unused borrowing capacity as of June 30, 2006 was $882.3 million.

As a result of the fire damage at our Port Arthur, Texas facility thatoccurred on April 29, 2006, we have experienced a temporary decline in workingcapital as it relates to this facility. As of June 30, 2006, we believe thisdecline in working capital improved liquidity by approximately $40 million, andwe expect our working capital to return to normal operating levels at the timethe facility is restarted.

We have filedclaims under our insurance policies for the recovery of damages, including forproperty damage and business interruption, resulting from the 2005 U.S. GulfCoast storms. While we can provide no assurances that we will recover thesedamages (or the amount of recovery, if any), we anticipate obtaining at least apartial recovery, net of insurance deductibles, by the end of 2006.

We believe our current liquidity, together with funds generated by ourbusinesses, is sufficient to meet the short-term and long-term needs of ourbusinesses, including funding operations, making capital expenditures andservicing our debt obligations in the ordinary course.

**Capital Expenditures**

Excluding capitalexpenditures that will be required related to the fire damage at our PortArthur, Texas facility (see the following paragraph and “Recent Developments—Fire Damage at our Port Arthur, TexasFacility” above), we expect to spend approximately $575 million in 2006,including approximately $200 million in capital expenditures on our LDPEfacility at Wilton, U.K. We expect to commence operations at the LDPE facilityin November 2007 and that the total project capital expenditures will beapproximately $330 million, which is net of a grant of approximately$30 million to be received from the U.K. government’s Department of Tradeand Industry. We expect to finance ourcapital expenditure commitments through a combination of cash flow fromoperations and financing arrangements.

With respect toexpenditures related to the fire damage at our Port Arthur, Texas facility,based on preliminary inspection and review, we estimate that the costs torepair and replace damaged equipment will be approximately $110 million.  We carry normal and customary insurancecoverage for property damage and business interruption.  With respect to property damage, thedeductible amount under our insurance policies is $10 million. During thesecond quarter of 2006, we recorded a receivable of $4.2 million foranticipated insurance recoveries of the amount of losses incurred over the $10million deductible amount. We expect to recover all property damage expenses inexcess of the $10 million deductible in accordance with our insurance policies.

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Capitalexpenditures for the six months ended June 30, 2006 were $211.3 million ascompared with $128.7 million in the 2005 period. The increase in capitalexpenditures in the 2006 period was largely attributable to increased capitalexpenditures at our Wilton, U.K. LDPE project which had approximately $88million in capital spending during the six months ended June 30, 2006 ascompared to approximately $9 million spent in the comparable period in 2005.During the six months ended June 30, 2006, we completed our equity investmentsin HPS, our consolidated Chinese joint venture, and SLIC, our unconsolidatedjoint venture, and during 2006, funded approximately $15 million as equityin HPS and $14 million as equity in SLIC. HPS commenced operations onJune 30, 2006 and SLIC expects to begin operations in August 2006.

**Off-Balance Sheet Arrangements**

***Receivables Securitization***

For a discussion of ourA/R Securitization Program, see “Note 8. Securitization of Accounts Receivable”to our Condensed Consolidated Financial Statements (Unaudited) includedelsewhere in this report and incorporated herein by reference.

***Financing of Chinese MDI Facilities***

On September 19,2003, our Chinese joint ventures, HPS and SLIC, obtained secured financing forthe construction of production facilities. Details concerning HPS’s financingare described in “—Debt and Liquidity—Other Debt” above. SLIC obtained variouscommitted loans in the aggregate amount of approximately $229 million inU.S. dollar equivalents. As of June 30, 2006, there were $87.7 millionoutstanding in U.S. dollar borrowings and 640.0 million in outstanding RMB($80.0 million) borrowings under these facilities. The interest rate onthese facilities is LIBOR plus 0.48% for U.S. dollar borrowings and 90% of thePeoples Bank of China rate for RMB borrowings. The loans are secured bysubstantially all the assets of SLIC and will be paid in 16 semiannual installments,beginning not later than June 30, 2007. We unconditionally guarantee 35%of any amounts due and unpaid by SLIC under the loans described above (exceptfor a $1.5 million VAT facility which is not guaranteed). Our guaranteeremains in effect until SLIC has commenced production of at least 70% ofcapacity for at least 30 days and achieved a debt service coverage ratioof at least 1:1.

**Restructuring,Impairment and Plant Closing Costs**

For a discussion of restructuring, impairment and plant closing costs,see “Note 5. Restructuring, Impairment and Plant Closing Costs” to ourCondensed Consolidated Financial Statements (Unaudited) included elsewhere in thisreport and incorporated herein by reference.

**LegalProceedings**

For a discussionof legal proceedings, see “Note 12. Commitments and Contingencies—LegalMatters” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report and incorporated herein by reference.

**Environmental,Health and Safety Matters**

For a discussion ofenvironmental, health and safety matters, see “Note 13. Environmental, Healthand Safety Matters” to our Condensed Consolidated Financial Statements(Unaudited) included elsewhere in this report and incorporated herein byreference.

**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 and incorporated herein by reference.

**CriticalAccounting Policies**

There have been nochanges in the second quarter of 2006 with respect to our critical accountingpolicies as presented in Management’s Discussion and Analysis of FinancialCondition and Results of Operations for the year ended December 31, 2005included in our 2005 Annual Report on Form 10-K.

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

We are exposed to market risk, including changes in currency exchangerates, interest rates and certain commodity prices. To manage the volatilityrelating to these exposures, from time to time, we enter into variousderivative transactions. We hold and issue derivative financial instruments foreconomic hedging purposes only. For further discussion of our derivativeinstruments and hedging activities, see “Note 7. Derivatives and HedgingActivities” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

**CurrencyExchange Rates**

Our cash flows and earnings are subject to fluctuations due to exchangerate variation. Our sales prices are typically denominated in euros or U.S.dollars. From time to time, we may enter into foreign currency derivativeinstruments to minimize the short-term impact of movements in foreign currencyrates. Where practicable, we generally net multicurrency cash balances amongour subsidiaries to help reduce exposure to foreign currency exchange rates.Certain other exposures may be managed from time to time through financialmarket transactions, principally through the purchase of spot or forwardforeign exchange contracts (generally with maturities of nine months or less).We do not hedge our currency exposures in a manner that would eliminate theeffect of changes in exchange rates on our cash flows and earnings. Our A/RSecuritization Program in certain circumstances requires that we enter intoforward foreign currency hedges intended to hedge currency exposures.

A significant portion of our debt is denominated in euros. We alsofinance certain of our non-U.S. subsidiaries with intercompany loans that are,in some cases, denominated in currencies other than the entities’ functionalcurrency. We manage the net foreign currency exposure created by this debtthrough various means, including cross-currency swaps, the designation ofcertain intercompany loans as permanent loans because they are not expected tobe repaid in the foreseeable future (“Permanent Loans”) and the designation ofdebt and swaps as hedges.

Foreign currency transaction gains and losses on intercompany loans thatare not designated as Permanent Loans are recorded in earnings. Foreigncurrency transaction gains and losses on intercompany loans that are designatedPermanent Loans are recorded in other comprehensive income. From time to time,we review such designation of intercompany loans.

From time to time, we review our non-U.S. dollar denominated debt andswaps to determine the appropriate amounts designated as hedges. As of June 30,2006, we have designated approximately €243.4 million of euro-denominateddebt and €132.4 million of cross-currency rate swaps as a hedge of our netinvestments. As of June 30, 2006 we had approximately €1,201.5 million in neteuro assets.

**InterestRates**

Through ourborrowing activities, we are exposed to interest rate risk. Such risk arisesdue to the structure of our debt portfolio, including the duration of theportfolio and the mix of fixed and floating interest rates. Actions taken toreduce interest rate risk may include managing the mix and rate characteristicsof various interest bearing liabilities as well as entering into interest rateswaps, collars and options. We may purchase interest rate swaps and/or interestrate collars to reduce the impact of changes in interest rates on our floating-ratelong-term debt. As of June 30, 2006, we had approximately $82.9 million notionalamount of outstanding interest rate swaps or collars.

**CommodityPrices**

Our exposure tochanging commodity prices is somewhat limited since the majority of our rawmaterials are acquired at posted or market related prices, and sales prices formany of our finished products are at market related prices which are largelyset on a monthly or quarterly basis in line with industry practice. In order toreduce overall raw material cost volatility, from time to time we may enterinto various commodity contracts to hedge our purchase of commodity products.We do not attempt to hedge our commodity exposure in a manner that wouldeliminate the effects of changes in commodity prices on our cash flows andearnings.

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**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 June 30, 2006.Based on this evaluation, our chief executive officer and chief financialofficer have concluded that, as of June 30, 2006, 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.

No changes to ourinternal control over financial reporting occurred during the three monthsended June 30, 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act). The SEC’s rulesunder Section 404 of the Sarbanes-Oxley Act of 2002 become applicable tous beginning this year with our Annual Report on Form 10-K to befiled in the first quarter of 2007. However, we cannot give any assurance thatour internal controls over financial reporting will be completely effective.Ineffective internal controls over financial reporting could cause investors tolose confidence in our reported financial information and could result in alower trading price for our securities.

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**PART II. OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

**Environmental EnforcementProceedings**

On occasion, wereceive notices of violation, enforcement and other complaints from regulatoryagencies alleging non-compliance with applicable EHS laws. SEC regulationsrequire us to disclose any administrative or judicial environmental proceedinginvolving potential monetary sanctions to which a governmental authority is aparty, unless we believe that the proceeding will result in sanctions of lessthan $100,000. The matters described below are reported in response to theseregulations. Based on currently available information and our past experience,we do not believe that the resolution of the matters described below, or of anyother pending or threatened environmental enforcement proceedings, will have amaterial impact on our financial condition, results of operations or cashflows.

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 millionin attorney’s fees to the Texas Attorney General. As of June 30, 2006, we havepaid $5.5 million toward the penalty and $0.4 million for theattorney’s fees. The monitoring projects are underway and on schedule.

Beginning in thethird quarter of 2004 and extending through December 2005, we havereceived notifications of approximately eight separate enforcement actions fromthe Texas Commission on Environmental Quality (“TCEQ”) for alleged violationsrelated to air emissions at our Port Neches or our Port Arthur plant. Thesealleged violations primarily relate to specific upset emissions, emissions fromcooling towers, or flare operations occurring at particular times and atparticular operating units during 2004 and 2005. These notices of violationappear to be part of a larger enforcement initiative by the TCEQ regionaloffice focused on upset emissions at chemical and refining industry plantslocated within the Beaumont/Port Arthur region. TCEQ is seeking a combinedpenalty of approximately $0.9 million for six of these notices. Settlementnegotiations are proceeding and we expect to resolve these six matters in onepenalty order for slightly more than $0.4 million.  Final resolution of these matters is subjectto further negotiation between us and TCEQ. Huntsman has agreed to settle theother two notices for approximately $0.03 million and is awaiting finalapproval by the TCEQ.

During the firstquarter of 2006, we disclosed to the TCEQ that our Conroe, Texas facility hasbeen out of compliance with Hazardous Air Pollutant (“HAP”) regulations. Priorcalculations performed by outside consultants erroneously showed that thefacility was not a “major” facility for HAP program purposes; that has now beenshown to have been incorrect. The agency has indicated that there will likelybe a penalty imposed, although the TCEQ has not proposed a specific penalty atthis time.

By letter datedSeptember 13, 2005, the Tamil Nadu Pollution Control Board (the “TNPCB”)issued an Order in follow-up to a Show Cause notice dated June 30, 2005,requiring a manufacturing facility of Petro Araldite Private Limited, asubsidiary of Huntsman Advanced Materials in Chennai, India, to close for oneweek and to submit an action plan and timeline to reduce chemical oxygen demandin its wastewater effluent. The facility complied with the order and submittedan action plan to the TNPCB, which was accepted pending installation of assetsto remedy the issue. Since then, the site has achieved the necessary chemicaloxygen demand discharge limits, thus resolving this matter.

**Other Legal Proceedings**

For a discussionof other legal proceedings, see “Note 12. Commitments and Contingencies—LegalMatters” and “Note 13. Environmental, Health and Safety Matters—RemediationLiabilities” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report and incorporated herein by reference.

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**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, 2005 and as follows:

***Our recent acquisition of the Textile Effects business mayrequire significant resources and/or result in significant unanticipatedlosses, costs or liabilities.***

Our recentacquisition of the global Textile Effects business of Ciba Specialty ChemicalsInc. may require significant managerial attention, which may be diverted fromour other operations. These managerial commitments may impair the operation ofour businesses. Furthermore, the acquisition could entail a number ofadditional risks, including:

·                    problemswith effective integration of operations;

·                    theinability to maintain key pre-acquisition business relationships;

·                    increasedoperating costs;

·                    exposureto unanticipated liabilities; and

·                    difficultiesin realizing projected efficiencies, synergies and cost savings.

As a result of theserisks, the actual results of the acquisition could differ materially from ourexpectations.

***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 hascontaminated some water supplies, its use has become controversial inthe U.S. and elsewhere and may be substantially curtailed or eliminated in thefuture by legislation or regulatory action. For example, about 25 states,including California, New York and Connecticut, have adopted rules thatprohibit or restrict the use of MTBE in gasoline sold in those states.

In addition, theEnergy Policy Act of 2005 has substantially curtailed the market for MTBE inthe U.S. by mandating increased use of renewable fuels and eliminating theoxygenate requirement for reformulated gasoline established by the 1990 CleanAir Act Amendments. As a result, the U.S. Environmental Protection Agencyannounced that starting in May 2006, it would no longer specify the oxygencontent for clean-burning gasoline in smog-afflicted areas, easing airpollution regulations that had resulted in MTBE being added to fuel sold inthose areas.

As a result ofthese developments, we currently market, either directly or through thirdparties, our MTBE to customers located outside the U.S. for use as a gasolineadditive, which may produce a lower level of cash flow than the sale of MTBE inthe U.S. We may also elect to use all or a portion of our precursor TBA toproduce saleable products other than MTBE. If we opt to produce products otherthan 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 the sale of MTBE.

A number oflawsuits have been filed, primarily against gasoline manufacturers, marketersand distributors, by persons seeking to recover damages allegedly arising fromthe presence of MTBE in groundwater. While we have not been named as adefendant in any litigation concerning the environmental effects of MTBE, wecannot provide assurances that we will not be involved in any such litigationor that such litigation will not have a material adverse

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effect on our business, results of operations andfinancial condition.

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

**IssuerPurchases of Equity Securities**

The following table presents shares of restrictedstock granted under our stock incentive plan that we withheld upon vesting tosatisfy our tax withholding obligations during the second quarter of 2006. Wehave no publicly announced plans or programs to repurchase our common stock.
| **Period** | ** ** | **Total Number  of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number  (or Approximate Dollar  Value) of Shares that May  Yet Be Purchased Under  the Plans or Programs** | ** ** |
|------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April      |       | —                                       |       | —                                           |       | —                                                                                                                           |       | —                                                                                                                                                                                |       |
| May        |       | —                                       |       | —                                           |       | —                                                                                                                           |       | —                                                                                                                                                                                |       |
| June       |       | 155                                          |       | $                                                | 17.41      |                                                                                                                             | —     |                                                                                                                                                                                  | —     |   |
| Total      |       | 155                                          |       | $                                                | 17.41      |                                                                                                                             | —     |                                                                                                                                                                                  | —     |   |

 

**ITEM 6.EXHIBITS**
| 2.1    |   | Second Amendment to Asset Purchase Agreement, dated as  of June 14****, 2006****,  by and among Texas Petrochemicals LP, a Texas limited partnership, Huntsman  Petrochemical Corporation and Huntsman Fuels, L.P. (incorporated by reference  to Exhibit 2.1 to our Current Report on Form 8-K filed on June 16, 2006)                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 10.1   |   | Consent and Second Amendment to Credit Agreement and  Amendment to Security Documents, dated as of June 30, 2006, by and among  Huntsman International LLC, the financial institutions signatory thereto,  including Deutsche Bank AG New York Branch (incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed on July 7, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 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: August 9, 2006
|        | 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    |   | Second Amendment to Asset Purchase Agreement, dated  as of June 14****, 2006****,  by and among Texas Petrochemicals LP, a Texas limited partnership, Huntsman  Petrochemical Corporation and Huntsman Fuels, L.P. (incorporated by reference  to Exhibit 2.1 to our Current Report on Form 8-K filed on June 16, 2006)                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 10.1   |   | Consent and Second Amendment to Credit Agreement and  Amendment to Security Documents, dated as of June 30, 2006, by and among  Huntsman International LLC, the financial institutions signatory thereto,  including Deutsche Bank AG New York Branch (incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed on July 7, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 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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