**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**Form 10Q/A**

**AmendmentNo. 1**
|  **(Mark  One)**                                                                                                                             | ** **                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                             | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                        |
| **For the quarterly period ended September 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         ** |

 

----

 
| 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                              |

 

----

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
| Huntsman Corporation       | YES x | NO o |
|----------------------------|-------|------|
| Huntsman International LLC | YES x | NO o |

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). 
| Huntsman Corporation       | YES o | NO x |
|----------------------------|-------|------|
| Huntsman International LLC | YES o | NO x |

 

----

On November 10, 2006, 221,566,854 shares of commonstock of Huntsman Corporation were outstanding and 2,728 units of membershipinterests of Huntsman International LLC were outstanding. There is noestablished trading market for Huntsman International LLC’s units of membershipinterests. All of Huntsman International LLC’s units of membership interestsare held by Huntsman Corporation.

----

This Quarterly Report on Form 10-Q/A presentsinformation for two registrants: Huntsman Corporation and HuntsmanInternational LLC (“Huntsman International”). Huntsman International is awholly owned subsidiary of Huntsman Corporation and is the principal operatingcompany of Huntsman Corporation. The information reflected in this QuarterlyReport on Form 10-Q/A is equally applicable to both Huntsman Corporation andHuntsman International, except where otherwise indicated. HuntsmanInternational meets the conditions set forth in General Instructions H(1)(a)and (b) of Form 10-Q/A and, to the extent applicable, is therefore filing thisform with a reduced disclosure format.

----

**Explanatory Note**

This Amendment No. 1 on Form 10-Q/A amends Items 1, 2and 4 of Part I of the Quarterly Report on Form 10-Q previously filed for thequarter ended September 30, 2006, by Huntsman Corporation and HuntsmanInternational LLC.  This Form 10-Q/A isfiled in connection with the restatement of our financial statements for thethree and nine months ended September 30, 2006. Financial statementinformation and related disclosures included in this Form 10-Q/A reflect, whereappropriate, changes as a result of the restatement.  All other information contained in this Form10-Q/A is as of the date of the original filing. In addition,Exhibits 31.1, 31.2, 32.1 and 32.2 of the original filing have beenamended to contain currently dated certifications from our Chief ExecutiveOfficer and Chief Financial Officer.

In February 2007, we discovered an error in ourcalculation of the impairment loss related to the sale of our European basechemicals and polymers business.  Weconcluded that there was $99.0 million in additional non-cash asset impairmentcharges recorded in discontinued operations for the three and nine months endedSeptember 30, 2006 related to the sale of our European base chemicals andpolymers business. In connection with the sale of the European base chemicalsand polymers business, we agreed to take action to remove the accountsreceivable of this business from our accounts receivable securitization programso that the purchaser could acquire such accounts receivable. The additionalnon-cash charges resulted primarily because we had not appropriately includedthe effect of the re-purchase of these receivables in the determination of theimpairment loss.

The significant effects on us and HuntsmanInternational of the restatement are described in “Note 23. Restatement” to ourcondensed consolidated financial statements (unaudited).

 

----

 

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**QUARTERLYREPORT ON FORM 10-Q/A FOR THE QUARTERLY PERIOD**

**ENDEDSEPTEMBER 30, 2006**

 

**TABLE OFCONTENTS**

** **
| PART I   | FINANCIAL  INFORMATION                                                                        |   |
|----------|-----------------------------------------------------------------------------------------------|--------|
| ITEM 1.  | Financial  Statements:                                                                        |   |
|     |                                                                                          |   |
|     | Huntsman Corporation and Subsidiaries:                                                        |   |
|     | Condensed Consolidated Balance Sheets (Unaudited)                                             |   |
|     | Condensed  Consolidated Statements of Operations and Comprehensive (Loss) Income  (Unaudited) |   |
|     | Condensed Consolidated Statements of Cash Flows  (Unaudited)                                  |   |
|     |                                                                                          |   |
|     | Huntsman International LLC and Subsidiaries:                                                  |   |
|     | Condensed Consolidated Balance Sheets (Unaudited)                                             |   |
|     | Condensed  Consolidated Statements of Operations and Comprehensive Income (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 4.  | Controls and  Procedures                                                                      |   |
| PART II  | OTHER INFORMATION                                                                             |   |
| ITEM  6. | Exhibits                                                                                      |   |

 

----

 

**PART I. FINANCIAL INFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(InMillions, Except Share and Per Share Amounts)**
| ** **                                                                                                                                                                          | ** ** | **September 30,**                             | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2006**                                           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(As restated, see Note 23)** | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                          | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| **Current assets:**                                                                                                                                                                 | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                                          |       | $                                                  | 245.8      |                  | $          | 142.8 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $56.9 and $33.7,  respectively)                                                                                     |       | 1,398.0                                            |       | 1,475.2               |       |
| Accounts  receivable from affiliates                                                                                                                                                |       | 17.4                                               |       | 7.4                   |       |
| Inventories, net                                                                                                                                                                    |       | 1,422.2                                            |       | 1,309.2               |       |
| Prepaid expenses                                                                                                                                                                    |       | 73.0                                               |       | 46.2                  |       |
| Deferred income  taxes                                                                                                                                                              |       | 59.3                                               |       | 31.2                  |       |
| Other current  assets                                                                                                                                                               |       | 134.2                                              |       | 84.0                  |       |
| Current assets  held for sale                                                                                                                                                       |       | 401.9                                              |       | —                |       |
| **Total  current assets**                                                                                                                                                           |       | 3,751.8                                            |       | 3,096.0               |       |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| Property, plant and  equipment, net                                                                                                                                                 |       | 3,942.1                                            |       | 4,643.2               |       |
| Investment in  unconsolidated affiliates                                                                                                                                            |       | 199.7                                              |       | 175.6                 |       |
| Intangible assets, net                                                                                                                                                              |       | 194.9                                              |       | 216.3                 |       |
| Goodwill                                                                                                                                                                            |       | 91.3                                               |       | 91.2                  |       |
| Deferred income taxes                                                                                                                                                               |       | 120.6                                              |       | 94.2                  |       |
| Notes receivable from  affiliates                                                                                                                                                   |       | —                                             |       | 3.0                   |       |
| Other noncurrent assets                                                                                                                                                             |       | 471.9                                              |       | 551.0                 |       |
| Noncurrent assets held  for sale                                                                                                                                                    |       | 531.4                                              |       | —                |       |
| **Total  assets**                                                                                                                                                                   |       | $                                                  | 9,303.7    |                  | $          | 8,870.5 |   |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                      | ** ** | ** **                                         | ** ** | ** **            | ** ** |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| **Current liabilities:**                                                                                                                                                            | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                                                                                    |       | $                                                  | 1,046.8    |                  | $          | 1,093.5 |   |
| Accrued  liabilities                                                                                                                                                                |       | 601.3                                              |       | 747.2                 |       |
| Deferred income  taxes                                                                                                                                                              |       | 24.3                                               |       | 2.4                   |       |
| Current portion  of long-term debt                                                                                                                                                  |       | 226.8                                              |       | 44.6                  |       |
| Current  liabilities held for sale                                                                                                                                                  |       | 323.2                                              |       | —                |       |
| **Total  current liabilities**                                                                                                                                                      |       | 2,222.4                                            |       | 1,887.7               |       |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| Long-term debt                                                                                                                                                                      |       | 4,099.1                                            |       | 4,413.3               |       |
| Deferred income taxes                                                                                                                                                               |       | 207.7                                              |       | 258.3                 |       |
| Other noncurrent  liabilities                                                                                                                                                       |       | 851.5                                              |       | 770.2                 |       |
| Noncurrent liabilities  held for sale                                                                                                                                               |       | 74.4                                               |       | —                |       |
| **Total  liabilities**                                                                                                                                                              |       | 7,455.1                                            |       | 7,329.5               |       |
| ** **                                                                                                                                                                          | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Minority interests in  common stock of consolidated subsidiaries                                                                                                                    |       | 29.5                                               |       | 20.4                  |       |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| **Commitments and contingencies  (Notes 13 and 14)**                                                                                                                                | ** ** | ** **                                         | ** ** | ** **            | ** ** |
|                                                                                                                                                                                |       |                                               |       |                  |       |
| **Stockholders’ equity:**                                                                                                                                                      | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Common stock  $0.01 par value, 1,200,000,000 shares authorized, 221,576,862 issued and  220,639,647 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                                                                                                                                                         |       | 2,795.4                                            |       | 2,779.8               |       |
| Unearned  stock-based compensation                                                                                                                                                  |       | (14.9                                              | )          | (11.8                 | )          |
| Accumulated  deficit                                                                                                                                                                |       | (1,357.8                                           | )          | (1,505.8              | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                      |       | 106.7                                              |       | (31.3                 | )          |
| **Total  stockholders’ equity**                                                                                                                                                |       | 1,819.1                                            |       | 1,520.6               |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                |       | $                                                  | 9,303.7    |                  | $          | 8,870.5 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

1

----

 

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVE(LOSS) INCOME (UNAUDITED)**

**(InMillions, Except Per Share Amounts)**
| ** **                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(As restated,  see Note 23)**       | ** ** | ** **                                          | ** ** | **(As restated,  see Note 23)** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                          |       | $                                                    | 2,665.0    |                                                | $          | 2,562.8 |   | $ | 8,024.7 |   | $ | 8,040.3 |   |
| Related party sales                                                                     |       | 21.0                                                 |       | 25.1                                                |       | 63.0 |   | 80.7 |   |
| **Total revenues**                                                                      |       | 2,686.0                                              |       | 2,587.9                                             |       | 8,087.7 |   | 8,121.0 |   |
| **Cost of  goods sold**                                                                 |       | 2,313.1                                              |       | 2,184.2                                             |       | 6,893.7 |   | 6,771.9 |   |
| ** **                                                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                       |       | 372.9                                                |       | 403.7                                               |       | 1,194.0 |   | 1,349.1 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating  expenses:**                                                                | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative                                                     |       | 209.7                                                |       | 161.8                                               |       | 555.8 |   | 487.4 |   |
| Research and development                                                                |       | 35.3                                                 |       | 22.1                                                |       | 88.6 |   | 72.0 |   |
| Other operating (income) expense                                                        |       | (28.6                                                | )          | 7.5                                                 |       | (122.8 | ) | 42.0 |   |
| Restructuring, impairment and plant closing costs                                       |       | 3.5                                                  |       | 66.6                                                |       | 20.0 |   | 91.6 |   |
| Total expenses                                                                          |       | 219.9                                                |       | 258.0                                               |       | 541.6 |   | 693.0 |   |
| **Operating  income**                                                                   |       | 153.0                                                |       | 145.7                                               |       | 652.4 |   | 656.1 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Interest  expense, net                                                                  |       | (83.4                                                | )          | (101.1                                              | )          | (264.8 | ) | (341.8 | ) |
| Loss on accounts  receivable securitization program                                     |       | (4.0                                                 | )          | (2.8                                                | )          | (10.8 | ) | (7.5 | ) |
| Equity in income  of unconsolidated affiliates                                          |       | 0.5                                                  |       | 1.8                                                 |       | 2.6 |   | 7.0 |   |
| Loss on early  extinguishment of debt                                                   |       | (14.5                                                | )          | (41.4                                               | )          | (14.5 | ) | (276.4 | ) |
| Other income  (expense)                                                                 |       | 1.3                                                  |       | (2.5                                                | )          | 1.4 |   | (3.3 | ) |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **Income  (loss) from continuing operations before income taxes and minority interest** |       | 52.9                                                 |       | (0.3                                                | )          | 366.3 |   | 34.1 |   |
| ** **                                                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  benefit (expense)                                                           |       | 17.4                                                 |       | (13.5                                               | )          | (16.0 | ) | (36.9 | ) |
| Minority  interest in subsidiaries’ income                                         |       | (0.4                                                 | )          | (1.6                                                | )          | (1.1 | ) | (1.5 | ) |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **Income  (loss) from continuing operations**                                           |       | 69.9                                                 |       | (15.4                                               | )          | 349.2 |   | (4.3 | ) |
| ** **                                                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) income  from discontinued operations, net of tax                                 |       | (259.4                                               | )          | (14.5                                               | )          | (257.3 | ) | 30.7 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **(Loss)  income before extraordinary gain and accounting change**                      |       | (189.5                                               | )          | (29.9                                               | )          | 91.9 |   | 26.4 |   |
| Extraordinary  gain on the acquisition of a business, net of tax of nil                 |       | 7.2                                                  |       | —                                              |       | 57.7 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax of $1.9                |       | —                                               |       | —                                              |       | — |   | 4.0 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **Net  (loss) income**                                                                  |       | (182.3                                               | )          | (29.9                                               | )          | 149.6 |   | 30.4 |   |
| Preferred stock  dividends                                                              |       | —                                               |       | —                                              |       | — |   | (43.1 | ) |
| **Net  (loss) income available to common stockholders**                                 |       | $                                                    | (182.3     | )                                                   | $          | (29.9 | ) | $ | 149.6 |   | $ | (12.7 | ) |
| ** **                                                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) income**                                                                  |       | $                                                    | (182.3     | )                                                   | $          | (29.9 | ) | $ | 149.6 |   | $ | 30.4 |   |
| Other  comprehensive income (loss)                                                      |       | 57.7                                                 |       | (25.4                                               | )          | 138.0 |   | (177.0 | ) |
| **Comprehensive (loss) income**                                                         |       | $                                                    | (124.6     | )                                                   | $          | (55.3 | ) | $ | 287.6 |   | $ | (146.6 | ) |

 

(continued)

2

----

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVE(LOSS) INCOME (UNAUDITED)—CONTINUED**

**(InMillions, Except Per Share Amounts)**
| ** **                                                       | ** ** | **Three Months Ended**               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **September 30,**                         | ** ** | **September 30,**          | ** ** |
| ** **                                                       | ** ** | **2006**                                       | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **(As restated,  see Note 23)** | ** ** | ** **                      | ** ** | **(As restated,  see Note 23)** | ** ** | ** ** | ** ** |
| **Basic  income (loss) per share:**                              | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss)  from continuing operations                        |       | $                                              | 0.32       |                            | $          | (0.07 | ) | $ | 1.58 |   | $ | (0.22 | ) |
|  (Loss)  income from discontinued operations, net of tax    |       | (1.18                                          | )          | (0.07                           | )          | (1.16 | ) | 0.14 |   |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.03                                           |       | —                          |       | 0.26 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                         |       | —                          |       | — |   | 0.02 |   |
|                                                             |       |                                           |       |                            |       |   |   |   |   |
| Net (loss)  income                                               |       | $                                              | (0.83      | )                               | $          | (0.14 | ) | $ | 0.68 |   | $ | (0.06 | ) |
|                                                             |       |                                           |       |                            |       |   |   |   |   |
| Weighted average  shares                                         |       | 220.6                                          |       | 220.5                           |       | 220.6 |   | 220.5 |   |
|                                                             |       |                                           |       |                            |       |   |   |   |   |
| **Diluted  income (loss) per share:**                            | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss)  from continuing operations                        |       | $                                              | 0.30       |                            | $          | (0.07 | ) | $ | 1.50 |   | $ | (0.22 | ) |
|  (Loss)  income from discontinued operations, net of tax    |       | (1.11                                          | )          | (0.07                           | )          | (1.11 | ) | 0.14 |   |
| Extraordinary  gain on the acquisition of a business, net of tax |       | 0.03                                           |       | —                          |       | 0.25 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax |       | —                                         |       | —                          |       | — |   | 0.02 |   |
|                                                             |       |                                           |       |                            |       |   |   |   |   |
| Net (loss)  income                                               |       | $                                              | (0.78      | )                               | $          | (0.14 | ) | $ | 0.64 |   | $ | (0.06 | ) |
|                                                             |       |                                           |       |                            |       |   |   |   |   |
| Weighted average shares                                          |       | 233.2                                          |       | 220.5                           |       | 233.1 |   | 220.5 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

3

----

 

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Dollarsin Millions)**
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(As restated  see Note 23)**                          | ** ** | ** ** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                       | 149.6      |   | $ | 30.4 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Extraordinary  gain on the acquisition of a business, net of tax                   |       | (57.7                                                   | )          | — |   |
| Cumulative  effect of change in accounting principle, net of tax                   |       | —                                                  |       | (4.0 | ) |
| Equity in income  of unconsolidated affiliates                                     |       | (2.6                                                    | )          | (7.0 | ) |
| Depreciation and  amortization                                                     |       | 353.2                                                   |       | 372.9 |   |
| Provision for  losses on accounts receivable                                       |       | 3.5                                                     |       | 12.2 |   |
| (Gain) loss on  disposal of assets                                                 |       | (92.4                                                   | )          | 3.6 |   |
| Loss on pending  disposal of discontinued operations                               |       | 280.2                                                   |       | 36.4 |   |
| Loss on early  extinguishment of debt                                              |       | 14.5                                                    |       | 276.4 |   |
| Noncash interest  (income) expense                                                 |       | (5.9                                                    | )          | 46.0 |   |
| Noncash  restructuring, impairment and plant closing costs                         |       | 16.8                                                    |       | 40.8 |   |
| Deferred income  taxes                                                             |       | 2.0                                                     |       | 67.8 |   |
| Net unrealized  (gain) loss on foreign currency transactions                       |       | (8.7                                                    | )          | 21.5 |   |
| Stock-based  compensation                                                          |       | 13.0                                                    |       | 6.4 |   |
| Minority  interest in subsidiaries’ income                                    |       | 1.1                                                     |       | 1.5 |   |
| Other, net                                                                         |       | (0.2                                                    | )          | (16.4 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                    |       |   |   |
| Accounts receivable                                                                |       | 182.2                                                   |       | 132.3 |   |
| Inventories, net                                                                   |       | (18.6                                                   | )          | (109.9 | ) |
| Prepaid expenses                                                                   |       | (39.2                                                   | )          | (12.1 | ) |
| Other current assets                                                               |       | (13.0                                                   | )          | (1.2 | ) |
| Other noncurrent assets                                                            |       | (20.0                                                   | )          | 17.4 |   |
| Accounts payable                                                                   |       | 68.5                                                    |       | (64.7 | ) |
| Accrued liabilities                                                                |       | (204.5                                                  | )          | (115.0 | ) |
| Other noncurrent liabilities                                                       |       | (10.9                                                   | )          | (26.0 | ) |
| **Net  cash provided by operating activities**                                     |       | 610.9                                                   |       | 709.3 |   |
| ** **                                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Investing  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              |       | (327.0                                                  | )          | (202.0 | ) |
| Acquisition of  business, net of cash acquired                                     |       | (173.2                                                  | )          | — |   |
| Investment in  unconsolidated affiliates, net                                      |       | (13.6                                                   | )          | (2.9 | ) |
| Proceeds from  sale of assets                                                      |       | 209.0                                                   |       | 10.6 |   |
| Net proceeds  from (investment in) government securities, restricted as to use     |       | 10.8                                                    |       | (33.7 | ) |
| Change in  restricted cash                                                         |       | —                                                  |       | 8.9 |   |
| Other, net                                                                         |       | (1.0                                                    | )          | — |   |
| **Net  cash used in investing activities**                                         |       | (295.0                                                  | )          | (219.1 | ) |
| ** **                                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Financing  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net borrowings  (repayments) under revolving loan facilities                       |       | 62.8                                                    |       | (117.1 | ) |
| Net (repayments)  borrowings on overdraft                                          |       | (4.7                                                    | )          | 17.3 |   |
| Repayment of  long-term debt                                                       |       | (422.4                                                  | )          | (3,685.1 | ) |
| Proceeds from  long-term debt                                                      |       | 137.2                                                   |       | 1,873.1 |   |
| Debt issuance  costs paid                                                          |       | (3.3                                                    | )          | (15.8 | ) |
| Call premiums  related to early extinguishment of debt                             |       | (12.5                                                   | )          | (109.0 | ) |
| Net borrowings  on notes payable                                                   |       | 32.7                                                    |       | 12.5 |   |
| Dividend paid to  preferred stockholders                                           |       | (10.8                                                   | )          | (7.2 | ) |
| Net proceeds  from issuance of common and preferred stock                          |       | —                                                  |       | 1,491.9 |   |
| Contribution  from minority shareholder                                            |       | 6.2                                                     |       | 3.6 |   |
| Other, net                                                                         |       | —                                                  |       | 4.8 |   |
| **Net  cash used in financing activities**                                         |       | (214.8                                                  | )          | (531.0 | ) |
| Effect of  exchange rate changes on cash                                           |       | 1.9                                                     |       | (2.6 | ) |
| Increase  (decrease) in cash and cash equivalents                                  |       | 103.0                                                   |       | (43.4 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 142.8                                                   |       | 243.2 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                       | 245.8      |   | $ | 199.8 |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                            |       | $                                                       | 314.6      |   | $ | 348.5 |   |
| Cash paid for  income taxes                                                        |       | 27.8                                                    |       | 19.6 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

4

----

 

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(Dollarsin Millions)**
| ** **                                                                                     | ** ** | **September 30,**                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                           | ** ** | **2005**              | ** ** |
| ** **                                                                                     | ** ** | **(As restated, see Note 23)** | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                     |       |                                               |       |                  |       |
| ** **                                                                                     |       |                                               |       |                  |       |
| **Current  assets:**                                                                           | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                      |       | $                                                  | 229.5      |                  | $          | 132.5 |   |
| Accounts receivable (net of allowance for doubtful  accounts of $56.9 and $33.7, respectively) |       | 1,398.0                                            |       | 1,475.2               |       |
| Accounts receivable from affiliates                                                            |       | 22.9                                               |       | 10.4                  |       |
| Inventories, net                                                                               |       | 1,422.2                                            |       | 1,309.2               |       |
| Prepaid expenses                                                                               |       | 72.1                                               |       | 45.9                  |       |
| Deferred income taxes                                                                          |       | 56.8                                               |       | 31.2                  |       |
| Other current assets                                                                           |       | 120.0                                              |       | 69.9                  |       |
| Current assets held for sale                                                                   |       | 401.9                                              |       | —                |       |
| **Total current assets**                                                                       |       | 3,723.4                                            |       | 3,074.3               |       |
|                                                                                           |       |                                               |       |                  |       |
| Property, plant  and equipment, net                                                            |       | 3,707.8                                            |       | 4,336.7               |       |
| Investment in  unconsolidated affiliates                                                       |       | 199.7                                              |       | 175.6                 |       |
| Intangible  assets, net                                                                        |       | 200.0                                              |       | 222.0                 |       |
| Goodwill                                                                                       |       | 91.3                                               |       | 91.2                  |       |
| Deferred income  taxes                                                                         |       | 120.6                                              |       | 94.2                  |       |
| Notes receivable  from affiliates                                                              |       | —                                             |       | 3.0                   |       |
| Other noncurrent  assets                                                                       |       | 561.0                                              |       | 636.0                 |       |
| Noncurrent  assets held for sale                                                               |       | 500.1                                              |       | —                |       |
| **Total assets**                                                                               |       | $                                                  | 9,103.9    |                  | $          | 8,633.0 |   |
|                                                                                           |       |                                               |       |                  |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                      | ** ** | ** **                                         | ** ** | ** **            | ** ** |
|                                                                                           |       |                                               |       |                  |       |
| **Current  liabilities:**                                                                      | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Accounts payable                                                                               |       | $                                                  | 1,046.8    |                  | $          | 1,092.7 |   |
| Accounts payable to affiliates                                                                 |       | 4.6                                                |       | 8.7                   |       |
| Accrued liabilities                                                                            |       | 585.6                                              |       | 732.3                 |       |
| Deferred income taxes                                                                          |       | 32.9                                               |       | 2.4                   |       |
| Current portion of long-term debt                                                              |       | 226.6                                              |       | 44.6                  |       |
| Current liabilities held for sale                                                              |       | 314.6                                              |       | —                |       |
| **Total current liabilities**                                                                  |       | 2,211.1                                            |       | 1,880.7               |       |
|                                                                                           |       |                                               |       |                  |       |
| Long-term debt                                                                                 |       | 4,099.1                                            |       | 4,413.3               |       |
| Deferred income  taxes                                                                         |       | 194.4                                              |       | 216.9                 |       |
| Other noncurrent  liabilities                                                                  |       | 892.5                                              |       | 770.0                 |       |
| Noncurrent  liabilities held for sale                                                          |       | 51.7                                               |       | —                |       |
| **Total liabilities**                                                                          |       | 7,448.8                                            |       | 7,280.9               |       |
| ** **                                                                                     | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Minority  interests in common stock of consolidated subsidiaries                               |       | 29.5                                               |       | 20.4                  |       |
|                                                                                           |       |                                               |       |                  |       |
| **Commitments  and contingencies (Notes 13 and 14)**                                           | ** ** | ** **                                         | ** ** | ** **            | ** ** |
|                                                                                           |       |                                               |       |                  |       |
| **Members’  equity:**                                                                     | ** ** | ** **                                         | ** ** | ** **            | ** ** |
| Members’ equity, 2,728 units issued and outstanding                                       |       | 2,806.8                                            |       | 2,794.0               |       |
| Accumulated deficit                                                                            |       | (1,254.2                                           | )          | (1,384.0              | )          |
| Accumulated other comprehensive income (loss)                                                  |       | 73.0                                               |       | (78.3                 | )          |
| **Total members’ equity**                                                                 |       | 1,625.6                                            |       | 1,331.7               |       |
| **Total  liabilities and members’ equity**                                                |       | $                                                  | 9,103.9    |                  | $          | 8,633.0 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

5

----

 

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVEINCOME (LOSS) (UNAUDITED)**

**(Dollarsin Millions)**
| ** **                                                                       | ** ** | **Three Months Ended**               | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,**                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                       | ** ** | **2006**                                       | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(As restated,  see Note 23)** | ** ** | ** **                      | ** ** | **(As restated,  see Note 23)** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                    | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                   |       | $                                              | 2,665.0    |                            | 2,562.8    |   | $ | 8,024.7 |   | $ | 8,040.3 |   |
| Related party sales                                                              |       | 21.0                                           |       | 25.1                            |       | 63.0 |   | 80.7 |   |
| **Total revenues**                                                               |       | 2,686.0                                        |       | 2,587.9                         |       | 8,087.7 |   | 8,121.0 |   |
| **Cost of  goods sold**                                                          |       | 2,307.8                                        |       | 2,179.4                         |       | 6,881.1 |   | 6,757.7 |   |
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                |       | 378.2                                          |       | 408.5                           |       | 1,206.6 |   | 1,363.3 |   |
|                                                                             |       |                                           |       |                            |       |   |   |   |   |
| **Operating  expenses:**                                                         | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative                                              |       | 211.1                                          |       | 160.9                           |       | 555.7 |   | 484.7 |   |
| Research and development                                                         |       | 35.3                                           |       | 22.1                            |       | 88.6 |   | 72.0 |   |
| Other operating (income) expense                                                 |       | (28.6                                          | )          | 7.5                             |       | (122.8 | ) | 42.0 |   |
| Restructuring, impairment and plant closing costs                                |       | 3.5                                            |       | 66.6                            |       | 20.0 |   | 91.6 |   |
| Total expenses                                                                   |       | 221.3                                          |       | 257.1                           |       | 541.5 |   | 690.3 |   |
| **Operating  income**                                                            |       | 156.9                                          |       | 151.4                           |       | 665.1 |   | 673.0 |   |
|                                                                             |       |                                           |       |                            |       |   |   |   |   |
| Interest  expense, net                                                           |       | (84.6                                          | )          | (102.7                          | )          | (268.3 | ) | (339.5 | ) |
| Loss on accounts  receivable securitization program                              |       | (4.0                                           | )          | (2.8                            | )          | (10.8 | ) | (7.5 | ) |
| Equity in income  of unconsolidated affiliates                                   |       | 0.5                                            |       | 1.8                             |       | 2.6 |   | 7.0 |   |
| Loss on early  extinguishment of debt                                            |       | (18.1                                          | )          | (45.3                           | )          | (18.1 | ) | (121.3 | ) |
| Other income  (expense)                                                          |       | 1.2                                            |       | (2.2                            | )          | 1.3 |   | (3.3 | ) |
|                                                                             |       |                                           |       |                            |       |   |   |   |   |
| **Income  from continuing operations before income taxes and minority interest** |       | 51.9                                           |       | 0.2                             |       | 371.8 |   | 208.4 |   |
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  benefit (expense)                                                    |       | 21.3                                           |       | (12.0                           | )          | (58.2 | ) | (42.9 | ) |
| Minority  interest in subsidiaries’ income                                  |       | (0.4                                           | )          | (1.6                            | )          | (1.1 | ) | (1.5 | ) |
| **Income  (loss) from continuing operations**                                    |       | 72.8                                           |       | (13.4                           | )          | 312.5 |   | 164.0 |   |
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) income  from discontinued operations, net of tax                          |       | (239.4                                         | )          | (14.5                           | )          | (237.3 | ) | 30.7 |   |
|                                                                             |       |                                           |       |                            |       |   |   |   |   |
| **(Loss)  income before extraordinary gain and accounting change**               |       | (166.6                                         | )          | (27.9                           | )          | 75.2 |   | 194.7 |   |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 8.9                                            |       | —                          |       | 55.0 |   | — |   |
| Cumulative  effect of change in accounting principle, net of tax of $1.5         |       | —                                         |       | —                          |       | — |   | 4.2 |   |
| **Net  (loss) income**                                                           |       | (157.7                                         | )          | (27.9                           | )          | 130.2 |   | 198.9 |   |
| Other  comprehensive income (loss)                                               |       | 59.8                                           |       | (24.3                           | )          | 151.3 |   | (179.5 | ) |
| **Comprehensive (loss) income**                                                  |       | $                                              | (97.9      | )                               | $          | (52.2 | ) | $ | 281.5 |   | $ | 19.4 |   |
|                                                                                  |            |                                                |            |                                 |            |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

6

----

 

**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in Millions)** 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(As restated,  see Note 23)**          | ** ** | ** ** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                       | 130.2      |   | $ | 198.9 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Extraordinary  gain on the acquisition of a business, net of tax                   |       | (55.0                                                   | )          | — |   |
| Cumulative  effect of change in accounting principle, net of tax                   |       | —                                                  |       | (4.2 | ) |
| Equity in income  of unconsolidated affiliates                                     |       | (2.6                                                    | )          | (7.0 | ) |
| Depreciation and  amortization                                                     |       | 332.9                                                   |       | 352.8 |   |
| Provision for  losses on accounts receivable                                       |       | 3.5                                                     |       | 12.2 |   |
| (Gain) loss on  disposal of assets                                                 |       | (92.4                                                   | )          | 3.6 |   |
| Loss on pending  disposal of discontinued operations                               |       | 260.2                                                   |       | 36.4 |   |
| Loss on early  extinguishment of debt                                              |       | 18.1                                                    |       | 121.3 |   |
| Noncash interest  (income) expense                                                 |       | (2.9                                                    | )          | 40.6 |   |
| Noncash  restructuring, impairment and plant closing costs                         |       | 16.8                                                    |       | 40.8 |   |
| Deferred income  taxes                                                             |       | 44.2                                                    |       | 73.9 |   |
| Net unrealized  (gain) loss on foreign currency transactions                       |       | (8.7                                                    | )          | 21.5 |   |
| Minority  interest in subsidiaries’ income                                    |       | 1.1                                                     |       | 1.5 |   |
| Other, net                                                                         |       | 12.9                                                    |       | (1.7 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                    |       |   |   |
| Accounts receivable                                                                |       | 183.4                                                   |       | 137.2 |   |
| Inventories, net                                                                   |       | (18.6                                                   | )          | (109.9 | ) |
| Prepaid expenses                                                                   |       | (39.2                                                   | )          | (12.3 | ) |
| Other current assets                                                               |       | (13.0                                                   | )          | (1.2 | ) |
| Other noncurrent assets                                                            |       | (30.7                                                   | )          | 13.2 |   |
| Accounts payable                                                                   |       | 68.5                                                    |       | (63.6 | ) |
| Accrued liabilities                                                                |       | (211.8                                                  | )          | (123.3 | ) |
| Other noncurrent liabilities                                                       |       | 7.7                                                     |       | (13.4 | ) |
| **Net  cash provided by operating activities**                                     |       | 604.6                                                   |       | 717.3 |   |
|                                                                               |       |                                                    |       |   |   |
| **Investing  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              |       | (327.0                                                  | )          | (202.0 | ) |
| Acquisition of  business, net of cash acquired                                     |       | (173.2                                                  | )          | — |   |
| Investment in  unconsolidated affiliates, net                                      |       | (13.6                                                   | )          | (2.9 | ) |
| Proceeds from  sale of assets                                                      |       | 209.0                                                   |       | 10.6 |   |
| Change in  restricted cash                                                         |       | —                                                  |       | 8.9 |   |
| Other, net                                                                         |       | (1.0                                                    | )          | — |   |
| **Net  cash used in investing activities**                                         |       | (305.8                                                  | )          | (185.4 | ) |
|                                                                               |       |                                                    |       |   |   |
| **Financing  Activities:**                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net borrowings  (repayments) under revolving loan facilities                       |       | 62.8                                                    |       | (117.1 | ) |
| Net (repayments)  borrowings on overdraft                                          |       | (4.7                                                    | )          | 17.3 |   |
| Repayment of  long-term debt                                                       |       | (422.4                                                  | )          | (3,135.5 | ) |
| Proceeds from  long-term debt                                                      |       | 137.2                                                   |       | 1,873.1 |   |
| Debt issuance  costs paid                                                          |       | (3.3                                                    | )          | (15.8 | ) |
| Call premiums  related to early extinguishment of debt                             |       | (12.5                                                   | )          | (67.8 | ) |
| Net borrowings  on notes payable                                                   |       | 33.0                                                    |       | 14.0 |   |
| Contribution  from parent                                                          |       | —                                                  |       | 837.6 |   |
| Contribution  from minority shareholder                                            |       | 6.2                                                     |       | 3.6 |   |
| Other, net                                                                         |       | —                                                  |       | 6.1 |   |
| **Net  cash used in financing activities**                                         |       | (203.7                                                  | )          | (584.5 | ) |
|                                                                               |       |                                                    |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | 1.9                                                     |       | (2.6 | ) |
| Increase  (decrease) in cash and cash equivalents                                  |       | 97.0                                                    |       | (55.2 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 132.5                                                   |       | 243.5 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                       | 229.5      |   | $ | 188.3 |   |
|                                                                               |       |                                                    |       |   |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                            |       | $                                                       | 315.2      |   | $ | 348.5 |   |
| Cash paid for  income taxes                                                        |       | $                                                       | 27.8       |   | $ | 19.6 |   |
|                                                                               |       |                                                    |       |   |   |
| Supplemental non-cash  information:                                                |       |                                                    |       |   |   |

 

On February 28, 2005, HMP contributed the HuntsmanInternational Holdings senior subordinated discount notes at an accreted valueof $422.8 million to Huntsman International in exchange for equity.  During the nine months ended September 30,2006 and 2005, Huntsman Corporation contributed $13.0 and $6.4, respectively toHuntsman International related to stock-based compensation.

 

See accompanying notes to unaudited condensed consolidated financialstatements.

7

----

 

**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. (ourconsolidated splitting joint venture with Shanghai Chlor-Alkali ChemicalCompany, Ltd); “SLIC” refers to Shanghai Isocynate Investment BV (ourunconsolidated manufacturing joint venture with BASF AG and three Chinesechemical companies); “HMP” refers to HMP Equity Holdings Corporation (our 100%owned subsidiary that merged into us on March 17, 2005); “HMP Equity Trust”refers to HMP Equity Trust (the holder of approximately 59% of our commonstock); and “MatlinPatterson” refers to MatlinPatterson Global OpportunitiesPartners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. andMatlinPatterson Global Opportunities Partners B, L.P. (collectively, an ownerof HMP Equity Trust).

***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 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, synthetic fiber, textile chemicals and dye industries. We are aleading global producer in many of our key product lines, including methylenediphenyl diisocyanate (“MDI”), amines, surfactants, epoxy-based polymerformulations, textile chemicals, dyes, maleic anhydride and titanium dioxide.

***Company***

We were formed in 2004 to hold, among other things, the equity interestsof Huntsman International, Huntsman Advanced Materials and Huntsman LLC.Huntsman International was formed in 1999 to operate businesses acquiredin a transaction among Huntsman International Holdings, Huntsman SpecialtyChemicals Corporation 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:

8

----

 

·                    OnAugust 16, 2005, Huntsman LLC merged into Huntsman International (the “HuntsmanLLC Merger”). At that time, Huntsman International Holdings also merged intoHuntsman International (collectively with the Huntsman LLC Merger, the “AffiliateMergers”). As a result of the Huntsman LLC Merger, Huntsman Internationalsucceeded to the assets, rights and obligations of Huntsman LLC. HuntsmanInternational entered into supplemental indentures under which it assumed theobligations of Huntsman LLC under its outstanding debt securities. The HuntsmanInternational subsidiaries that guarantee Huntsman International’s outstandingdebt securities now provide guarantees with respect to these securities, andall of Huntsman LLC’s subsidiaries that guaranteed its debt securities continueto provide guarantees with respect to these debt securities. In addition,Huntsman LLC’s guarantor subsidiaries executed supplemental indentures toguarantee all of Huntsman International’s outstanding debt securities.

·                  OnDecember 20, 2005, we agreed to pay $125 million to affiliates ofSISU Capital Limited and other third parties to acquire the 9.7% of the equityof Huntsman Advanced Materials that we did not already own. In conjunction withthis acquisition, we amended our senior secured credit facilities and increasedour existing term loan B by $350 million. We used proceeds from theincreased term loan, together with approximately $74 million of cash onhand, to acquire the equity interest in Huntsman Advanced Materials, to redeemHuntsman Advanced Materials’ $250 million of outstanding 11% seniorsecured notes due 2010, to pay $35.6 million in call premiums plus accruedinterest, and to pay other related costs. We then contributed our 100%ownership interest in Huntsman Advanced Materials to Huntsman International(the “Huntsman Advanced Materials Minority Interest Transaction”).

As a result ofthese transactions, we now operate all of our businesses through HuntsmanInternational and substantially all of our debt obligations are obligations ofHuntsman International and/or its subsidiaries.

On June 27, 2006, we sold the assets comprising ourU.S. butadiene and MTBE business operated by our Base Chemicals segment. OnJune 30, 2006, we acquired the global textile effects business of CibaSpecialty Chemicals Inc (the “Textile Effects Acquisition”). On September 27,2006, we entered into a Sale and Purchase Agreement with SABIC (UK)Petrochemicals Holdings Limited (“SABIC”) to sell all of our European basechemicals and polymers business. Each of these transactions is consistent withour announced intention to evaluate and potentially dispose of certain of ourcommodity chemicals businesses and to expand our differentiated chemicalsportfolio. For more information concerning these transactions, see “Note 3. DiscontinuedOperations” and “Note 4. Business Disposition and Combination.”

HMP Equity Trustholds approximately 59% of our common stock. Jon M. Huntsman and Peter R.Huntsman control the voting of the shares of our common stock held by HMPEquity Trust. However, the shares of our common stock held by HMP Equity Trustwill not be voted in favor of certain fundamental corporate actions without theconsent of MatlinPatterson, through its representatives David J. Matlin orChristopher R. Pechock, and Jon M. Huntsman and Peter R. Huntsman have agreedto cause all of the shares of our common stock held by HMP Equity Trust to bevoted in favor of the election to our board of directors of two nomineesdesignated by MatlinPatterson.

***Accounting for CertainTransactions***

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.

9

----

 

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

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

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

·                    HMP debt thatwas reflected at our Company and that was repaid in 2005; and

·                    the differentcapital structures.

***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, except forintercompany sales between discontinued and continuing operations.

***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 to consolidatedfinancial statements included in the Annual Report on Form 10-K for theyear 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***

Certainamounts in the consolidated financial statements for prior periods have beenreclassified to 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.

10

----

 

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 transactions entered into or modified afterMarch 31, 2006. The adoption of EITF Issue No. 04-13 did not have asignificant impact on our consolidated financial statements.

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. The adoption of this pronouncement is not expectedto have an impact on our consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. (“FIN”) 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109*. FIN48 clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS No. 109 by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Thisinterpretation is effective for fiscal years beginning after December 15, 2006.We are reviewing FIN 48 to determine its impact on our consolidated financialstatements.

In June 2006, theEITF reached a consensus on Issue 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)*, thatconcludes that the presentation of taxes within the Issue’s scope is anaccounting policy decision that should be disclosed. If the taxes are reportedon a gross basis, companies are required to disclose the amounts of those taxesif such amounts are deemed significant. This pronouncement is effective forinterim and annual reporting periods beginning after December 15, 2006. We areevaluating this pronouncement to determine what disclosures will be required inour financial statements.

In September 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. This statement is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. We are reviewing SFAS No. 157 to determine the statement’simpact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)*. SFAS No.158 requires most public companies to recognize the overfunded or underfundedstatus of their defined benefit postretirement plan(s) (other thanmultiemployer plans) as an asset or liability in their statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. In addition, effective for fiscalyears ending after December 15, 2008, SFAS No. 158 requires a company tomeasure the funded status of a plan as of the date of its year-end statement offinancial position. We will be required to recognize the funded status of ourdefined benefit pension and other postretirement benefit plans and to providethe required disclosures as of the end of 2006. As of the end of 2008, we willbe required to measure the funded status of our plans as of December 31. If weand Huntsman International had adopted SFAS No. 158 as of December 31, 2005,the net increase to the defined benefit pension and other postretirementbenefit obligations would have been $300.6 million and $366.7 million,respectively. We are reviewing SFAS No. 158 to determine the statement’s impacton our 2006 consolidated financial statements.

11

----

 

In September 2006,the Securities and Exchange Commission released Staff Accounting Bulletin 108 (“SAB108”) which provides guidance on how the effects of the carryover or reversalof prior year misstatements should be considered in quantifying a current yearmisstatement. SAB 108 requires entities to quantify the effects of unadjustederrors using both a balance sheet and an income statement approach. Entitiesare required to evaluate whether either approach results in a quantifyingmisstatement that is material. SAB 108 is effective for fiscal years endingafter November 15, 2006. We are currently evaluating SAB 108 to determine itsimpact on our consolidated financial statements.

**3.             Discontinued Operations**

***EuropeanBase Chemicals and Polymers Business***

On September 27, 2006, we entered into a Sale andPurchase Agreement with SABIC to sell all of the outstanding equity interestsof Huntsman Petrochemicals (UK) Limited for an aggregate purchase price of $700million in cash plus the assumption by the purchaser of approximately $126million in unfunded pension liabilities. The final purchase price is subject toadjustments relating to working capital, investment in our low densitypolyethylene (“LDPE”) plant currently under construction in Wilton, U.K. andunfunded pension liabilities. In connection with this sale, we agreed to takeaction to remove the accounts receivable of the European base chemicals andpolymers business from our accounts receivable securitization program so thatthe purchaser could acquire all such accounts receivable. These accountsreceivable totaled approximately $92.3 million at September 30, 2006. As aresult of this transaction, SABIC will acquire our European base chemicals andpolymers business. The transaction will not include our Teesside, U.K.-basedPigments operations or the Wilton, U.K.-based aniline and nitrobenzeneoperations of our Polyurethanes segment. The transaction is conditioned upon,among other things, receipt of necessary approvals under applicable antitrustlaws and other relevant regulations and other customary closing conditions.This transaction is expected to close by the end of 2006. We intend to use thenet proceeds from the transaction to redeem in full the remaining $250 millionoutstanding principal amount of our 9.875% senior notes due 2009 and to repay aportion of the debt under our senior credit facilities.

Beginning on September 30, 2006, the assets andliabilities of our European base chemicals and polymers business have beenclassified as held for sale and its results of operations for current and priorperiods have been classified as discontinued operations in our financialstatements in accordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. The following majorclasses of assets and liabilities are presented as held for sale in theaccompanying September 30, 2006 condensed consolidated balance sheet(unaudited) (dollars in millions):
|                                     | ** ** | **Huntsman**    | ** ** | **Huntsman**      | ** ** |
|-------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                          | ** ** | **Corporation** | ** ** | **International** | ** ** |
| **ASSETS**                          | ** ** | ** **      |       |              |       |
| Accounts and  notes receivable, net |       | $               | 186.1      | ** **        | $          | 186.1 | ** ** |
| Inventories, net                    |       | 187.3           | ** ** | 187.3             | ** ** |
| Other current  assets               |       | 28.5            | ** ** | 28.5              | ** ** |
| Property, plant  and equipment, net |       | 470.9           |       | 439.6             |       |
| Other noncurrent  assets            |       | 60.5            |       | 60.5              |       |
| **Total assets**                    |       | 933.3           |       | 902.0             |       |
| **LIABILITIES**                     |       |            |       |              |       |
| Accounts payable                    |       | 183.3           |       | 183.3             |       |
| Accrued  liabilities                |       | 139.9           |       | 131.3             |       |
| Other noncurrent  liabilities       |       | 74.4            |       | 51.7              |       |
| **Total liabilities**               |       | 397.6           |       | 366.3             |       |
| **Net  assets**                     |       | $               | 535.7      |              | $          | 535.7 |   |

 

The following results of our European base chemicalsand polymers business have been presented as discontinued operations in theaccompanying condensed consolidated statements of operations (unaudited)(dollars in millions):

12

----

 

** HuntsmanCorporation:**
|                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Revenues                                                |       | $                                | 711.1      |                            | $          | 534.0 |   | $ | 1,841.1 |   | $ | 1,689.4 |   |
| Costs and  expenses                                     |       | (678.3                           | )          | (553.7                          | )          | (1,806.1 | ) | (1,583.2 | ) |
| Loss on pending  disposal                               |       | (280.2                           | )          | —                          |       | (280.2 | ) | — |   |
| Operating loss                                          |       | (247.4                           | )          | (19.7                           | )          | (245.2 | ) | 106.2 |   |
| Income tax  (expense) benefit                           |       | (11.2                            | )          | 5.8                             |       | (10.5 | ) | (31.9 | ) |
| (Loss) income from discontinued  operations, net of tax |       | $                                | (258.6     | )                               | $          | (13.9 | ) | $ | (255.7 | ) | $ | 74.3 |   |

** **

** HuntsmanInternational:**
|                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Revenues                                                |       | $                                | 711.1      |                            | $          | 534.0 |   | $ | 1,841.1 |   | $ | 1,689.4 |   |
| Costs and  expenses                                     |       | (678.2                           | )          | (553.7                          | )          | (1,806.0 | ) | (1,583.2 | ) |
| Loss on pending  disposal                               |       | (260.2                           | )          | —                          |       | (260.2 | ) | — |   |
| Operating loss                                          |       | (227.3                           | )          | (19.7                           | )          | (225.1 | ) | 106.2 |   |
| Income tax  (expense) benefit                           |       | (11.3                            | )          | 5.8                             |       | (10.6 | ) | (31.9 | ) |
| (Loss) income  from discontinued operations, net of tax |       | $                                | (238.6     | )                               | $          | (13.9 | ) | $ | (235.7 | ) | $ | 74.3 |   |

 

The loss on pending disposal in 2006 represents theimpairment of long-lived assets resulting from the write-down of the Europeanbase chemicals and polymers business to the purchase price less cost to sell.The actual loss on disposal may differ from this estimate as we finalizecertain tax matters in the U.K. In addition, we expect to incur a pension settlementloss of approximately $27 million during the first quarter of 2007 and anadditional loss on disposal of approximately $2 million for successfulcompletion bonuses upon closing of the transaction. In connection with thissale, the Compensation Committee of our Board of Directors has authorized theaccelerated vesting of certain stock-based compensation awards. Accordingly, weexpect to record additional compensation expense of approximately $1 millionduring the fourth quarter of 2006. The European base chemicals and polymersbusiness is reported in segment EBITDA of our Base Chemicals operating segmentin the accompanying condensed consolidated financial statements (unaudited).

***TDI***

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):

13

----

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Revenues                                       |       | $                                | —     |                            | $          | 1.0 |   | $ | — |   | $ | 24.4 |   |
| Costs and  expenses                            |       | (0.8                             | )          | (1.6                            | )          | (1.6 | ) | (31.6 | ) |
| Loss on disposal                               |       | —                           |       | —                          |       | — |   | (36.4 | ) |
| Operating loss                                 |       | (0.8                             | )          | (0.6                            | )          | (1.6 | ) | (43.6 | ) |
| Income tax  expense                            |       | —                           |       | —                          |       | — |   | — |   |
| Loss from  discontinued operations, net of tax |       | $                                | (0.8       | )                               | $          | (0.6 | ) | $ | (1.6 | ) | $ | (43.6 | ) |

 

We expect to incurapproximately $0.5 million of additional costs related to the TDI transactionthrough the first quarter of 2007. The TDI business is reported in segmentEBITDA of our Polyurethanes segment in our accompanying condensed consolidatedfinancial statements (unaudited).

**4.             Business Disposition andCombination**

***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 $274million, which includes approximately $12 million of favorablepost-closing working capital adjustments, of which $192 million was paid to usat closing, $7.9 million was received in the third quarter of 2006 and $4.1million was received in October 2006. The additional $70 million will bepayable to us after the restart of our Port Arthur, Texas olefins unit that wasdamaged in a fire (see “Note 16. Port Arthur, Texas Plant Fire”) and therelated resumption of crude butadiene supply; provided that we achieve certainintermediate steps toward restarting the plant and the restart occurs within 30months of this sale. In connection with this sale, we recognized a pre-tax gainof $90.3 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.

The carrying valueof the assets and liabilities sold at June 27, 2006 was as follows (dollars inmillions):

| **ASSETS**                          | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| Accounts and  notes receivable, net |       | $          | 80.3       |   |
| Inventories, net                    |       | 12.7       |       |
| Other current  assets               |       | 2.6        |       |
| Property, plant  and equipment, net |       | 83.2       |       |
| Other noncurrent  assets            |       | 2.0        |       |
| **Total assets**                    |       | 180.8      |       |
| ** **                          | ** ** | ** ** | ** ** |
| **LIABILITIES**                     | ** ** | ** ** | ** ** |
| Accounts payable                    |       | 65.7       |       |
| Accrued  liabilities                |       | 0.1        |       |
| Other noncurrent  liabilities       |       | 1.3        |       |
| **Total liabilities**               |       | 67.1       |       |
| **Net assets**                      |       | $          | 113.7      |   |

 

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

14

----

 

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 assets sold.We are not required to pay under these indemnification obligations until claimsagainst us exceed $5 million. Upon exceeding this $5 millionthreshold, we generally are obligated to provide indemnification for any lossesin excess of $5 million, up to a limit of $137.5 million. We believethat there is a remote likelihood that we will be required to pay any materialamounts under the indemnity provision. As a result, we have estimated that thefair value of this indemnity at the date of the closing of the sale is minimal,and accordingly, no amounts have been recorded.

***Textile Effects Acquisition***

On June 30, 2006,we acquired the textile effects business of Ciba Specialty Chemicals Inc. for approximately$172.1 million (CHF 215 million) in cash, of which $139.2 million was paid onJune 30, 2006 and $32.9 million was paid on July 3, 2006. This purchase priceis subject to finalization of post-closing working capital adjustments, which arecurrently estimated to be $21.4 million. We acquired the textile effectsbusiness in order to expand our differentiated chemicals business portfolio.The operating results of the textile effects business have been consolidatedwith our operating results beginning on July 1, 2006 and are reported with ouradvanced materials operations as part of our Materials and Effects segment.

We have accountedfor the Textile Effects Acquisition using the purchase method in accordancewith SFAS No. 141, *Business Combinations.*As such, we analyzed the fair value of tangible and intangible assets acquiredand liabilities assumed, and we determined the excess of fair value of netassets acquired over 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.Accordingly, no basis was assigned to property, plant and equipment or anyother non-current assets and the remaining excess was recorded as anextraordinary gain, net of taxes (which were not applicable because the gainwas recorded in purchase accounting). The preliminary allocation of thepurchase price to the assets and liabilities acquired is summarized as follows(dollars in millions):
| ** **                                                                                                         | ** ** | **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                                                                  |       | (21.4                     | )          | (21.4                       | )          |
| Direct costs of acquisition                                                                                        |       | 8.8                       |       | 8.8                         |       |
| Total  acquisition costs                                                                                           |       | 159.5                     |       | 159.5                       |       |
|                                                                                                               |       |                      |       |                        |       |
| Fair value of  assets acquired and liabilities assumed:                                                            |       |                      |       |                        |       |
| Cash                                                                                                               |       | 7.7                       |       | 7.7                         |       |
| Accounts receivable                                                                                                |       | 250.3                     |       | 250.3                       |       |
| Inventories                                                                                                        |       | 233.6                     |       | 233.6                       |       |
| Prepaid expenses and other current assets                                                                          |       | 12.6                      |       | 12.6                        |       |
| Deferred taxes                                                                                                     |       | 7.9                       |       | 5.3                         |       |
| Accounts payable                                                                                                   |       | (95.8                     | )          | (95.8                       | )          |
| Accrued liabilities                                                                                                |       | (35.3                     | )          | (35.3                       | )          |
| Short-term debt                                                                                                    |       | (5.0                      | )          | (5.0                        | )          |
| Noncurrent liabilities                                                                                             |       | (158.8                    | )          | (158.9                      | )          |
| Total fair value  of net assets acquired                                                                           |       | 217.2                     |       | 214.5                       |       |
| Extraordinary gain on  the acquisition of a business — excess of fair value of net assets acquired  over cost |       | $                         | 57.7       |                        | $          | 55.0 |   |

 

This purchaseprice allocation is preliminary pending finalization of the determination ofthe fair value of assets acquired and liabilities assumed, including finalvaluation of working capital acquired and pension and other 

15

----

 

post-retirement benefits assumed, finalization of restructuring plans,estimates of asset retirement obligations and determination of related deferredtaxes. During the third quarter of 2006, we revised our estimates of fair valueof working capital, restructuring liabilities and deferred taxes. We areassessing and formulating plans to exit certain activities of the textileeffects business and expect to involuntarily terminate the employment of, orrelocate, certain textile effects employees. We expect to spend approximately$150 million over the next three years on capital expenditures and arestructuring program that will see textile effects’ operations expandsignificantly in Asia but consolidate in the Americas and in Europe. Weestimate that we will eliminate up to 650 positions and will createapproximately 300 new positions, globally. These plans include the exit ofvarious manufacturing, sales and administrative activities throughout thebusiness through 2009. This preliminary purchase price allocation includesrecorded liabilities for workforce reduction, non-cancelable lease terminationcosts and demolition, decommissioning and other restructuring costs of $63.9million, $3.4 million, $1.5 million and $4.8 million, respectively. Wehave not yet finalized plans to exit certain business activities and may recordadditional liabilities for workforce reduction, demolition and non-cancelablelease costs as these plans are finalized. We expect that it is reasonablypossible that material changes to the allocation could occur and any changes toour purchase price allocation will be recorded as an adjustment to theextraordinary gain in future 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** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                       |       | $                                | 2,686.0    |                            | $          | 2,832.9 |   | $ | 8,606.2 |   | $ | 8,899.6 |   |
| (Loss) income  before extraordinary gain and accounting change |       | (189.5                           | )          | (15.4                           | )          | 111.1 |   | 50.0 |   |
| Net (loss)  income                                             |       | (182.3                           | )          | (8.2                            | )          | 168.8 |   | 111.7 |   |
| Basic (loss)  income per share                                 |       | (0.83                            | )          | (0.04                           | )          | 0.77 |   | 0.31 |   |
| Diluted (loss) income  per share                               |       | (0.78                            | )          | (0.04                           | )          | 0.72 |   | 0.31 |   |
|                                                                |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**HuntsmanInternational:**
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                       |       | $                                | 2,686.0    |                            | $          | 2,832.9 |   | $ | 8,606.2 |   | $ | 8,899.6 |   |
| (Loss) income  before extraordinary gain and accounting change |       | (166.6                           | )          | (13.4                           | )          | 94.4 |   | 218.3 |   |
| Net (loss)  income                                             |       | (157.7                           | )          | (4.5                            | )          | 149.4 |   | 277.5 |   |
|                                                                |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Ourpro forma net income (loss) reflects an extraordinary gain on the Textile EffectsAcquisition of $7.2 million for both the three months ended September 30,2006 and 2005, and $57.7 million for both the nine months ended September 30,2006 and 2005. The pro forma net income of Huntsman International reflects anextraordinary gain on the Textile Effects Acquisition of $8.9 million for boththe three months ended September 30, 2006 and 2005, and $55.0 million for boththe nine months ended September 30, 2006 and 2005.

16

----

 

**5.            Inventories**

Inventories consisted ofthe following (dollars in millions):

|                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                              |       |                   |       |                  |       |
| Raw materials  and supplies       |       | $                      | 329.7      |                  | $          | 374.1 |   |
| Work in progress                  |       | 110.4                  |       | 82.1                  |       |
| Finished goods                    |       | 1,124.4                |       | 988.1                 |       |
| **Total**                         |       | 1,564.5                |       | 1,444.3               |       |
| ** **                        |       |                   |       |                  |       |
| LIFO reserves                     |       | (120.5                 | )          | (119.7                | )          |
| Lower of cost or  market reserves |       | (21.8                  | )          | (15.4                 | )          |
| **Net**                           |       | $                      | 1,422.2    |                  | $          | 1,309.2 |   |

 

As of September30, 2006 and December 31, 2005, approximately 18% 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 receivable by us at September 30, 2006 was $2.1 million(0.3 million pounds of feedstock and products). The amount included ininventory under open exchange agreements payable by us at December 31, 2005 was$3.8 million (8.8 million pounds of feedstock and products).

**6.            ****Restructuring,Impairment and Plant Closing Costs**

While we continuously focus on identifyingopportunities to reduce our operating costs and maximize our operatingefficiency, we have now substantially implemented our comprehensive global costreduction program, referred to as “Project Coronado.” Project Coronado was aprogram designed to reduce our annual fixed manufacturing and selling, generaland administrative costs, as measured at 2002 levels, by $200 million. Inconnection with Project Coronado, we announced the closure of eight smaller,less competitive manufacturing units in our Polyurethanes, Materials andEffects, Performance Products and Pigments segments. These and other actionshave resulted in the reduction of approximately 1,500 positions in thesebusinesses since 2000.

17

----

 

As of September 30, 2006and December 31, 2005, accrued restructuring costs by type of cost andinitiative consisted of the following (dollars in millions):
| ** **                                                                | ** ** | ** **        | ** ** | ** **              | ** ** | ** **           | ** ** | **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       |       | 63.9              |       | 1.5                     |       | 3.4                  |       | 4.8               |       | 73.6         |       |
| 2006 charges for  2003 initiatives                                        |       | 2.2               |       | —                  |       | —               |       | —            |       | 2.2          |       |
| 2006 charges for  2004 initiatives                                        |       | 3.1               |       | 0.1                     |       | —               |       | —            |       | 3.2          |       |
| 2006 charges for  2005 initiatives                                        |       | 2.1               |       | —                  |       | —               |       | 0.2               |       | 2.3          |       |
| 2006 charges for  2006 initiatives                                        |       | 2.1               |       | —                  |       | —               |       | —            |       | 2.1          |       |
| Reversal of  reserves no longer required (2)                              |       | (3.9              | )          | (2.2                    | )          | (0.5                 | )          | —            |       | (6.6         | )          |
| Partial reversal  of Advanced Materials opening balance sheet liabilities |       | (2.5              | )          | —                  |       | —               |       | —            |       | (2.5         | )          |
| 2006 payments  for 2003 initiatives                                       |       | (7.1              | )          | —                  |       | (0.3                 | )          | (0.2              | )          | (7.6         | )          |
| 2006 payments for  2004 initiatives                                       |       | (14.2             | )          | (2.1                    | )          | (0.6                 | )          | (0.2              | )          | (17.1        | )          |
| 2006 payments  for 2005 initiatives                                       |       | (6.9              | )          | —                  |       | —               |       | (0.9              | )          | (7.8         | )          |
| 2006 payments  for 2006 initiatives                                       |       | (0.2              | )          | —                  |       | —               |       | —            |       | (0.2         | )          |
| Reclassification  of net activity in liabilities held for sale            |       | (7.1              | )          | —                  |       | —               |       | —            |       | (7.1         | )          |
| Foreign currency  effect on reserve balance                               |       | 2.6               |       | 0.2                     |       | 0.3                  |       | 0.1               |       | 3.2          |       |
| Accrued liabilities as  of September 30, 2006                             |       | $                 | 88.3       |                    | $          | 3.3                  |       | $                 | 8.8        |         | $          | 15.6 |   | $ | 116.0 |   |

 

----

(1)                                 Withthe exception of liabilities recorded in connection with business combinations,accrued liabilities classified as workforce reductions consist primarily ofrestructuring programs involving ongoing termination benefit arrangements andrestructuring programs involving special termination benefits. Accordingly, therelated liabilities were accrued as a one-time charge to earnings in accordancewith SFAS No. 112, *Employers’ Accounting forPostemployment Benefits* and with SFAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, respectively. The remaining accruedliabilities related to these charges of $24.4 million represent workforcereductions to be paid by the end of 2011. Liabilities for workforce reductionsrecorded in connection with business combinations were accrued in accordancewith EITF 95-3, *Recognition of Liabilitiesin Connection with a Purchase Business Combination*, and are expectedto be paid through 2009. Of the total workforce reduction reserves of $88.3million, $68.2 million relates to 698 positions that have not been terminatedas of September 30, 2006.

(2)                                 Thereversal of workforce reduction reserves relates to differences between theactual payments made to employees upon termination of such employees positionsand the original estimates of termination payments, redeployment of employeeswhose positions were originally expected to be terminated, changes toapplicable laws and regulations and revisions to original estimates based oninformation currently available.

(3)           Accruedliabilities by initiatives were as follows (dollars in millions):

|                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                        |       |                   |       |                  |       |
| 2001 initiatives                            |       | $                      | 1.4        |                  | $          | 1.4 |   |
| 2003 initiatives                            |       | 18.6                   |       | 28.4                  |       |
| 2004 initiatives                            |       | 23.9                   |       | 47.7                  |       |
| 2005 initiatives                            |       | 4.8                    |       | 11.6                  |       |
| 2006 initiatives                            |       | 74.3                   |       | —                |       |
| Foreign currency  effect on reserve balance |       | (7.0                   | )          | (10.8                 | )          |
| Total                                       |       | $                      | 116.0      |                  | $          | 78.3 |   |

 

18

----

 

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       |       | —            |       | 73.6                   |       | —          |       | —       |       | —       |       | —        |       | 73.6       |       |
| 2006 charges for 2003  initiatives                                        |       | —            |       | 0.2                    |       | —          |       | 2.0          |       | —       |       | —        |       | 2.2        |       |
| 2006 charges for 2004  initiatives                                        |       | 0.1               |       | 0.2                    |       | 0.3             |       | 2.6          |       | —       |       | —        |       | 3.2        |       |
| 2006 charges for 2005  initiatives                                        |       | —            |       | —                 |       | 1.0             |       | 0.2          |       | —       |       | 1.1           |       | 2.3        |       |
| 2006 charges for 2006  initiatives                                        |       | —            |       | 2.1                    |       | —          |       | —       |       | —       |       | —        |       | 2.1        |       |
| Reversal of reserves no  longer required                                  |       | (0.3              | )          | (1.0                   | )          | (2.2            | )          | (2.4         | )          | (0.7         | )          | —        |       | (6.6       | )          |
| Partial reversal of  Advanced Materials opening balance sheet liabilities |       | —            |       | (2.5                   | )          | —          |       | —       |       | —       |       | —        |       | (2.5       | )          |
| 2006 payments for 2003  initiatives                                       |       | (2.1              | )          | (2.0                   | )          | —          |       | (3.5         | )          | —       |       | —        |       | (7.6       | )          |
| 2006 payments for 2004  initiatives                                       |       | (1.1              | )          | (0.6                   | )          | (7.8            | )          | (7.3         | )          | (0.3         | )          | —        |       | (17.1      | )          |
| 2006 payments for 2005  initiatives                                       |       | (0.3              | )          | (1.0                   | )          | (2.2            | )          | (0.3         | )          | —       |       | (4.0          | )          | (7.8       | )          |
| 2006 payments for 2006  initiatives                                       |       | —            |       | (0.2                   | )          | —          |       | —       |       | —       |       | —        |       | (0.2       | )          |
| Reclassification of net  activity in liabilities held for sale            |       | —            |       | —                 |       | —          |       | —       |       | —       |       | (7.1          | )          | (7.1       | )          |
| Foreign currency effect  on reserve balance                               |       | 0.6               |       | 0.3                    |       | 1.4             |       | 0.9          |       | —       |       | —        |       | 3.2        |       |
| Accrued liabilities as  of September 30, 2006                             |       | $                 | 7.8        |                   | $          | 76.9            |       | $            | 16.1       |         | $          | 8.8           |       | $          | 2.4        |   | $ | 4.0 |   | $ | 116.0 |   |
|                                                                      |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Current portion of  restructuring reserve                                 |       | $                 | 3.2        |                   | $          | 31.8            |       | $            | 8.5        |         | $          | 4.8           |       | $          | 2.4        |   | $ | 3.1 |   | $ | 53.8 |   |
| Long-term portion of  restructuring reserve                               |       | 4.6               |       | 45.1                   |       | 7.6             |       | 4.0          |       | —       |       | 0.9           |       | 62.2       |       |
|                                                                      |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Estimated additional  future charges for current restructuring projects:  |       |              |       |                   |       |            |       |         |       |         |       |          |       |       |       |
| Estimated additional  charges within one year                             |       | $                 | —     |                   | $          | 0.3             |       | $            | 0.1        |         | $          | 1.9           |       | $          | 9.8        |   | $ | — |   | $ | 12.1 |   |
| Estimated additional  charges beyond one year                        |       | —            |       | —                 |       | 0.1             |       | 1.9          |       | 17.6         |       | —        |       | 19.6       |       |

 

Details withrespect to cash and non-cash restructuring, impairment and plant closing costsby initiative for the nine months ended September 30, 2006 are providedbelow (dollars in millions):

| Cash charges:                                            |       |   |     |
|----------------------------------------------------------|------------|--------|----------|
| 2006 charges for 2003 initiatives                        |       | 2.2    |     |
| 2006 charges for 2004 initiatives                        |       | 3.2    |     |
| 2006 charges for 2005 initiatives                        |       | 2.3    |     |
| 2006 charges for 2006 initiatives                        |       | 2.1    |     |
| Reversal of reserves no longer required                  |       | (6.6   | )        |
| Non-cash charges                                         |       | 16.8   |     |
| Total Restructuring,  Impairment and Plant Closing Costs | ** ** | **$**  | **20.0** | ** ** |
|                                                          |            |        |          |  |

 

During the ninemonths ended September 30, 2006, our Materials and Effects segment reversed$2.5 million of reserves established in connection with the acquisition ofour advanced materials business. This reserve reversal was recorded as areduction to property, plant and equipment in accordance with EITF 95-3, *Recognitionof Liabilities in Connection with a Purchase Business Combination.*In addition, we recorded $73.6 million of liabilities for workforcereduction, non-cancelable lease termination costs, demolition and decommissioningcosts and other restructuring costs related to the Textile Effects Acquisition.For more information, see “Note 4. Business Disposition and Combination—TextileEffects Acquisition.”

During the ninemonths ended September 30, 2006, our Polymers segment recorded a non-cashimpairment charge of $5.7 million related to capital expenditures andturnaround costs associated with our Australian styrenics business that waspreviously impaired. The long-lived assets in this business were determined tobe impaired in 

19

----

 

accordance with SFAS No.144 and an impairment charge was recorded in 2005. Capital expenditures andturnaround costs in this business, which are necessary to maintain operations,are also considered to be impaired immediately after they are incurred.Management continues to evaluate the strategic and operational initiativesrelated to this business. Capital expenditures and turnaround costs related tothis business are expected to result in additional restructuring charges of$27.4 million through 2009.

During the ninemonths ended September 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 17.Port Arthur, Texas Plant Fire.”

**7.             Debt**

Outstanding debtconsisted of the following (dollars in millions):

**Huntsman Corporation:**
|                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                       |       |                   |       |                  |       |
| Senior Credit  Facilities:       |       |                   |       |                  |       |
| Revolving Facility               |       | $                      | 69.0       |                  | $          | — |   |
| Term Loans                       |       | 2,107.4                |       | 2,099.3               |       |
| 2010 Secured  Notes              |       | 293.9                  |       | 293.6                 |       |
| 2009 Senior  Notes               |       | 252.3                  |       | 454.7                 |       |
| 2011 Senior  Floating Rate Notes |       | —                 |       | 100.0                 |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0                  |       | 198.0                 |       |
| Subordinated  Notes              |       | 1,188.6                |       | 1,145.2               |       |
| Australian  Credit Facilities    |       | 58.8                   |       | 63.8                  |       |
| HPS (China) debt                 |       | 64.8                   |       | 42.6                  |       |
| Other                            |       | 93.1                   |       | 60.7                  |       |
| Total debt                       |       | $                      | 4,325.9    |                  | $          | 4,457.9 |   |
|                             |       |                   |       |                  |       |
| Current portion                  |       | $                      | 226.8      |                  | $          | 44.6 |   |
| Long-term  portion               |       | 4,099.1                |       | 4,413.3               |       |
| Total debt                       |       | $                      | 4,325.9    |                  | $          | 4,457.9 |   |

 

20

----

 

**Huntsman International:**
|                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| Senior Credit  Facilities:       |       |                   |       |                  |       |
| Revolving Facilty                |       | $                      | 69.0       |                  | $          | — |   |
| Term Loans                       |       | 2,107.4                |       | 2,099.3               |       |
| 2010 Secured  Notes              |       | 293.9                  |       | 293.6                 |       |
| 2009 Senior  Notes               |       | 252.3                  |       | 454.7                 |       |
| 2011 Senior  Floating Rate Notes |       | —                 |       | 100.0                 |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0                  |       | 198.0                 |       |
| Subordinated  Notes              |       | 1,188.6                |       | 1,145.2               |       |
| Australian  Credit Facilities    |       | 58.8                   |       | 63.8                  |       |
| HPS (China) debt                 |       | 64.8                   |       | 42.6                  |       |
| Other                            |       | 92.9                   |       | 60.7                  |       |
| Total debt                       |       | $                      | 4,325.7    |                  | $          | 4,457.9 |   |
|                             |       |                   |       |                  |       |
| Current portion                  |       | $                      | 226.6      |                  | $          | 44.6 |   |
| Long-term  portion               |       | 4,099.1                |       | 4,413.3               |       |
| Total debt                       |       | $                      | 4,325.7    |                  | $          | 4,457.9 |   |

 

***SeniorCredit Facilities***

As of September 30, 2006, our senior secured credit facilities (“SeniorCredit Facilities”) consisted of (i) a $650 million revolvingfacility (the “Revolving Facility”), (ii) a $1,991.5 million termloan B facility (the “Dollar Term Loan”), and (iii) a €91.2 million($115.9 million) euro term loan B facility (the “Euro Term Loan,” andcollectively with the Dollar Term Loan, the “Term Loans”). As of September 30,2006, there were $69.0 million borrowings outstanding under the RevolvingFacility, and we had $39.4 millionin U.S. dollar equivalents of letters of credit and bank guarantees issued andoutstanding under the Revolving Facility.

***TransactionsAffecting our Debt***

On November 13, 2006, we completed an offering ofsubordinated notes (the “New Subordinated Notes Offering”) consisting of €400million ($508.0 million) 6.875% euro-denominated notes due 2013 (the “2013Subordinated Notes”) and $200 million 7.875% U.S. dollar-denominated notes due2014 (the “2014 Subordinated Notes” and, collectively with the 2013Subordinated Notes, the “New Subordinated Notes”).  We intend to use the estimated net proceedsof approximately $699 million to redeem all (approximately $366 million) of ouroutstanding U.S. dollar-denominated 10.125% senior subordinated notes due 2009and a portion (approximately €258 million) of our outstanding euro-denominated 10.125% senior subordinatednotes due 2009 (collectively, the “2009 Subordinated Notes”).  The call price of the 2009 Subordinated notesis 101.688% plus accrued interest.

The2013 Subordinated Notes are redeemable on or after November 15, 2009 at105.156%, declining ratably to par on or after November 15, 2012.  The 2014 Subordinated Notes are redeemable onor after November 15, 2010 at 103.938%, declining ratably to par on or afterNovember 15, 2012.  The New SubordinatedNotes are unsecured and interest is payable semiannually on November 15 and May15 of each year.  The indenturesgoverning the New Subordinated Notes contain covenants relating to, among otherthings, the incurrence of debt, limitations on asset sales, limitations ondistributions and limitations on affiliate transactions.  The indentures also contain change of controlprovisions requiring us to offer to repurchase the New Subordinated Notes upona change of control.  The NewSubordinated Notes are guaranteed by the same guarantors as our outstandingnotes.

Under the terms of a registration rights agreement among HuntsmanInternational, the subsidiary guarantors and the initial purchasers of our$175.0 million 7.375% seniorsubordinated notes due 2015 and our €135.0 million ($171.5 million)7.5% senior subordinated notes due 2015 (collectively, the “2015 SubordinatedNotes” and, together with the 2009 Subordinated Notes, the “Subordinated Notes”),we were required to complete an exchange offer for the 2015 Subordinated Noteson or before September 11, 2005. Because we did not complete the exchange offerby this date, we were required to pay additional interest on the 2015Subordinated Notes at a rate of 0.25% per year for the first 90-day periodfollowing this date, and this rate increased by an additional 0.25% for eachsubsequent 90-day period, up to a maximum of 1.0%. As of September 30, 2006, wewere paying an additional 1.0% on the 2015 Subordinated Notes and had paid atotal of $2.4 million in additional interest. Additional interest willcease to accrue upon the earlier of the completion of the exchange offer orDecember 17, 2006. Since we are not able to complete the exchange offer beforethis date, we have withdrawn the registration statement relating to theexchange offer.

21

----

 

On August 1, 2006,we made a voluntary repayment of $50.0 million U.S. dollar equivalents on ourTerm Loans ($47.3 million on the Dollar Term Loan and €2.2 million on the EuroTerm Loan) with available liquidity.

On July 13, 2006,we entered into a transaction to repurchase $37.5 million of our 9.875% seniornotes due 2009 (the “2009 Senior Notes”) at a price of 105.0% of the aggregateprincipal amount thereof. In addition, on August 14, 2006, and on September 20,2006 we completed  redemptions of $62.5million and $100 million, respectively, of the 2009 Senior Notes at a callprice of 104.937% plus accrued interest. Following this repurchase and partial redemption,we have $250 million aggregate principal amount outstanding ($252.3 millionbook value) of the 2009 Senior Notes. We funded these redemptions fromavailable liquidity including from cash, borrowings under our RevolvingFacility and issuance of commercial paper under our off balance sheet accountsreceivable securitization program.

On June 30, 2006,we entered into an amendment to our Senior Credit Facilities to provide for anadditional $100 million of borrowings under the Dollar Term Loan on the sameterms as our then-existing Dollar Term Loan (the “June 30, 2006 Amendment”). Weborrowed the additional amounts under the Dollar Term Loan on July 14, 2006and, on July 24, 2006, used the proceeds to redeem all of our $100 millionoutstanding senior floating rate notes due 2011 at a call price of 104.0% ofthe aggregate principal amount thereof. The June 30, 2006 Amendment alsomodified certain other provisions in our Senior Credit Facilities, includingcertain financial covenants.

***Compliance with Covenants***

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

**8.             Derivative Instruments and HedgingActivities**

As of September 30, 2006 and December 31, 2005, and for the ninemonths ended September 30, 2006 and 2005, the fair value, change in fair value,and realized gains or losses of outstanding hedging contracts were notsignificant.

We may enter into foreign currency derivative instruments to minimizethe short-term impact of movements in foreign currency rates. During thequarter ended September 30, 2006, we entered into foreign currency instrumentsto minimize the foreign currency impact on forecasted capital expenditurespayable in Singapore Dollars associated with the construction of ourpolyetheramine manufacturing facility in Singapore. The notional amount of thesederivative instruments is approximately 25 million of Singapore Dollars, andthese instruments extend through April of 2007. These contracts are notdesignated as hedges for financial reporting purposes and are recorded at fairvalue.

**9.             Securitization of AccountsReceivable**

Under our accounts receivable securitization program (“A/RSecuritization Program”), we grant an undivided interest in certain of ourtrade 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. The A/RSecuritization Program currently provides for financing through a commercialpaper conduit program (in both U.S. dollars and euros). On April 18, 2006, theA/R Securitization Program was amended to expand the size of the commercialpaper conduit program to a committed amount of approximately $500 million U.S.dollar equivalents for three years. Interest costs to the Receivables Trust onamounts drawn under the commercial paper conduit are 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.

22

----

 

As of September 30, 2006, the Receivables Trust had approximately $233million and approximately €205 million ($260.5 million) in commercial paperoutstanding.

**10.          EmployeeBenefit Plans**

Components of the netperiodic benefit costs from continuing operations for the three and nine monthsended September 30, 2006 and 2005 were as follows (dollars in millions):

**Huntsman Corporation:**
|                                        | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | **Other Postretirement** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans**                  | ** ** | **Benefit Plans**                               | ** ** |
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Three Months Ended  September 30,** | ** ** |
| ** **                             | ** ** | **2006**                                             | ** ** | **2005**                                             | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                                    | 16.6       |                                                 | $          | 15.8                          |       | $ | 1.1 |   | $ | 1.2 |   |
| Interest cost                          |       | 27.9                                                 |       | 28.1                                                 |       | 2.3                           |       | 2.0 |   |
| Expected return  on assets             |       | (32.8                                                | )          | (32.4                                                | )          | —                        |       | — |   |
| Amortization of  transition obligation |       | 0.4                                                  |       | 0.7                                                  |       | —                        |       | — |   |
| Amortization of  prior service cost    |       | (1.7                                                 | )          | (1.0                                                 | )          | (0.7                          | )          | (0.5 | ) |
| Amortization of  actuarial loss        |       | 3.8                                                  |       | 7.5                                                  |       | 0.8                           |       | 0.9 |   |
| Settlement loss                        |       | 0.4                                                  |       | —                                               |       | —                        |       | — |   |
| **Net periodic benefit cost**          |       | $                                                    | 14.6       |                                                 | $          | 18.7                          |       | $ | 3.5 |   | $ | 3.6 |   |

 
|                                        | ** ** | ** **                          | ** ** | **Other Postretirement**   | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**          | ** ** |
| ** **                             | ** ** | **Nine Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
| ** **                             | ** ** | **September 30,**              | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 49.9       |                            | $          | 47.6 |   | $ | 3.3 |   | $ | 2.8 |   |
| Interest cost                          |       | 83.6                                |       | 82.1                            |       | 6.9 |   | 5.8 |   |
| Expected return  on assets             |       | (98.5                               | )          | (91.9                           | )          | — |   | — |   |
| Amortization of  transition obligation |       | 1.2                                 |       | 1.3                             |       | — |   | — |   |
| Amortization of  prior service cost    |       | (5.1                                | )          | (4.0                            | )          | (2.1 | ) | (1.5 | ) |
| Amortization of  actuarial loss        |       | 11.4                                |       | 19.8                            |       | 2.4 |   | 2.7 |   |
| Settlement loss                        |       | 1.2                                 |       | —                          |       | — |   | — |   |
| **Net periodic benefit cost**          |       | $                                   | 43.7       |                            | $          | 54.9 |   | $ | 10.5 |   | $ | 9.8 |   |

 

23

----

 

**HuntsmanInternational:**
|                                        | ** ** | ** **                                                                            | ** ** | **Other Postretirement **                                      | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans  Three Months Ended  September 30,** | ** ** | **Benefit Plans  Three Months Ended  September 30,** | ** ** |
| ** **                             | ** ** | **2006**                                                                              | ** ** | **2005**                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                                                                     | 16.6       |                                                                     | $          | 15.8 |   | $ | 1.1 |   | $ | 1.2 |   |
| Interest cost                          |       | 27.9                                                                                  |       | 28.1                                                                     |       | 2.3 |   | 2.0 |   |
| Expected return  on assets             |       | (32.8                                                                                 | )          | (32.4                                                                    | )          | — |   | — |   |
| Amortization of  transition obligation |       | 0.4                                                                                   |       | 0.7                                                                      |       | — |   | — |   |
| Amortization of  prior service cost    |       | (1.7                                                                                  | )          | (1.0                                                                     | )          | (0.7 | ) | (0.5 | ) |
| Amortization of  actuarial loss        |       | 5.7                                                                                   |       | 7.8                                                                      |       | 0.8 |   | 0.9 |   |
| Settlement loss                        |       | 0.4                                                                                   |       | —                                                                   |       | — |   | — |   |
| **Net periodic benefit cost**          |       | $                                                                                     | 16.5       |                                                                     | $          | 19.0 |   | $ | 3.5 |   | $ | 3.6 |   |

 

|                                        | ** ** | ** **                          | ** ** | **Other Postretirement ** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Defined Benefit Plans** | ** ** | **Benefit Plans**              | ** ** |
| ** **                             | ** ** | **Nine Months Ended**     | ** ** | **Nine Months Ended**     | ** ** |
| ** **                             | ** ** | **September 30,**              | ** ** | **September 30,**              | ** ** |
| ** **                             | ** ** | **2006**                            | ** ** | **2005**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                   | 49.9       |                                | $          | 47.6 |   | $ | 3.3 |   | $ | 2.8 |   |
| Interest cost                          |       | 83.6                                |       | 82.1                                |       | 6.9 |   | 5.8 |   |
| Expected return on  assets             |       | (98.5                               | )          | (91.9                               | )          | — |   | — |   |
| Amortization of  transition obligation |       | 1.2                                 |       | 1.3                                 |       | — |   | — |   |
| Amortization of prior  service cost    |       | (5.1                                | )          | (4.0                                | )          | (2.1 | ) | (1.5 | ) |
| Amortization of  actuarial loss        |       | 17.1                                |       | 20.1                                |       | 2.4 |   | 2.7 |   |
| Settlement loss                        |       | 1.2                                 |       | —                              |       | — |   | — |   |
| **Net  periodic benefit cost**         |       | $                                   | 49.4       |                                | $          | 55.2 |   | $ | 10.5 |   | $ | 9.8 |   |

 

During the ninemonths ended September 30, 2006 and 2005, we made contributions to our pensionplans of $93.0 million and $44.7 million, respectively. During the remainder of2006, we expect to contribute an additional $22.0 million to our pension plans,excluding the pension plans acquired in connection with the Textile EffectsAcquisition.

In 2005, we changed the measurement date of our pension andpostretirement benefit plans from December 31 to November 30. We believe theone-month change of the measurement date is preferable because it provides us 

24

----

 

moretime 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. As of the end of 2008, we will be required to change themeasurement date of our plans to December 31 pursuant to SFAS No. 158.

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

**11.****          Dividends on 5% Mandatory Convertible PreferredStock**

In connection withthe initial public offering of our 5% mandatory convertible preferred stock onFebruary 16, 2005, we declared all dividends that will be payable on suchpreferred stock from the issuance through the mandatory conversion date, whichis February 16, 2008. Accordingly, we recorded dividends payable of$43.1 million and a corresponding charge to net income available to commonstockholders during the first quarter of 2005. As of September 30, 2006, we had$21.0 million invested in government securities that are restricted forsatisfaction of our dividend payment obligations through the mandatoryconversion date. We expect to pay dividends in cash on February 16,May 16, August 16 and November 16 of each year prior toFebruary 16, 2008. Under certain circumstances, we may not be permitted topay dividends in cash. If this were to occur, any unpaid dividend would bepayable in shares of common stock on February 16, 2008 based on the marketvalue of the common stock at that time.

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

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

**HuntsmanCorporation:**
| ** **                                                                                                                                             | ** ** | **Accumulated other comprehensive  income (loss)** | ** ** | **Other comprehensive income (loss)** | ** ** | **Other comprehensive income (loss)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | ** **                                                        | ** ** | ** **                                           | ** ** | **Three Months Ended**                     | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                                                                                             | ** ** | **September 30 , **                                | ** ** | **December 31,**                                | ** ** | **September 30,**                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                             | ** ** | **2006**                                                          | ** ** | **2005**                                             | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  translation adjustments, net of tax of $31.8 million and $31.8 million as of  September 30, 2006 and December 31, 2005, respectively |       | $                                                                 | 195.6      |                                                 | $          | 62.4                                                 |       | $ | 56.5 |   | $ | (24.8 | ) | $ | 133.2 |   | $ | (179.6 | ) |
| Minimum pension  liability, net of tax of $32.2 million and $30.0 million as of September 30,  2006 and December 31, 2005, respectively                |       | (99.6                                                             | )          | (102.1                                               | )          | —                                               |       | — |   | 2.5 |   | (5.0 | ) |
| Other  comprehensive income of unconsolidated affiliates                                                                                               |       | 7.3                                                               |       | 7.3                                                  |       | —                                               |       | — |   | — |   | — |   |
| Other                                                                                                                                                  |       | 3.4                                                               |       | 1.1                                                  |       | 1.2                                                  |       | (0.6 | ) | 2.3 |   | 7.6 |   |
| Total                                                                                                                                                  |       | $                                                                 | 106.7      |                                                 | $          | (31.3                                                | )          | $ | 57.7 |   | $ | (25.4 | ) | $ | 138.0 |   | $ | (177.0 | ) |

 

**Huntsman International:**

 
| ** **                                                                                                                                           | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Other comprehensive  income (loss)** | ** ** | **Other comprehensive  income (loss)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | ** **                                          | ** ** | ** **                             | ** ** | **Three Months Ended**                 | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                                                                                           | ** ** | **September 30,**                                   | ** ** | **December 31,**                       | ** ** | **September 30,**                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                           | ** ** | **2006**                                            | ** ** | **2005**                               | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency translation adjustments, net of tax of $16.0 million  and $0.2 million as of September 30, 2006 and December 31, 2005, respectively |       | $                                                   | 216.2      |                                   | $          | 69.9                                   |       | $ | 58.5 |   | $ | (28.7 | ) | $ | 146.3 |   | $ | (192.6 | ) |
| Minimum pension liability, net of tax of $46.5 million and $45.4  million as of September 30, 2006 and December 31, 2005, respectively               |       | (150.8                                              | )          | (153.3                                 | )          | —                                 |       | — |   | 2.5 |   | (5.0 | ) |
| Other comprehensive income of unconsolidated affiliates                                                                                              |       | 7.3                                                 |       | 7.3                                    |       | —                                 |       | — |   | — |   | — |   |
| Other                                                                                                                                                |       | 0.3                                                 |       | (2.2                                   | )          | 1.3                                    |       | 4.4 |   | 2.5 |   | 18.1 |   |
| Total                                                                                                                                                |       | $                                                   | 73.0       |                                   | $          | (78.3                                  | )          | $ | 59.8 |   | $ | (24.3 | ) | $ | 151.3 |   | $ | (179.5 | ) |

 

25

----

 

Items of other comprehensive income (loss) of our Company and ourconsolidated affiliates have been recorded net of tax, with the exception ofthe foreign currency translation adjustments related to subsidiaries withearnings permanently 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.

**13.          Commitmentsand Contingencies**

**Legal Matters**

**DiscolorationClaims**

Certain claimshave been filed against us relating to discoloration of unplasticized polyvinylchloride products allegedly caused by our titanium dioxide (“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 September 30, 2006.

The followingtable presents information about the number of Discoloration Claims for theperiods indicated. Claims include all claims for which service has beenreceived by us, and each such claim represents a plaintiff who is pursuing aclaim against us.
| ** **                                | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Claims  unresolved at beginning of period |       | 2                                                             |       | 3                                                             |       |
| Claims filed  during period               |       | —                                                        |       | —                                                        |       |
| Claims resolved  during period            |       | —                                                        |       | 1                                                             |       |
| Claims unresolved at  end of period       |       | 2                                                             |       | 2                                                             |       |

During the nine months ended September 30, 2005, wesettled a claim for approximately $0.9 million, all of which was paid by ICI.The two Discoloration Claims unresolved as of September 30, 2006 assertedaggregate damages of approximately $67 million. An appropriate liabilityhas been accrued for these claims. Based on our understanding of the merits ofthese claims and our rights under contracts of indemnity and insurance, we donot believe that the net impact on our financial condition, results of operationsor liquidity will be material.

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

26

----

 

multiple cases,one for each claimant, increasing the number of pending cases reported belowfor the nine months ended September 30, 2006. Nevertheless, the complaints inthese cases 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.

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

The following tablepresents for the periods indicated certain information about cases for whichservice has been received that we have tendered to the prior owner, all ofwhich have been accepted.
|                                    | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 576                                                           |       | 398                                                           |       |
| Tendered during  period            |       | 990                                                           |       | 107                                                           |       |
| Resolved during  period (1)        |       | 170                                                           |       | 67                                                            |       |
| Unresolved at end of  period       |       | 1,396                                                         |       | 438                                                           |       |

 

----

(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.

We have never madeany payments with respect to these cases. As of September 30, 2006, we had anaccrued liability of $12.5 million relating to these cases and acorresponding receivable of $12.5 million relating to our indemnityprotection with respect to these cases. We cannot assure you that our liabilitywill not exceed our accruals or that our liability associated with these caseswould not be material to our financial condition, results of operations orliquidity; however, we are not able to estimate the amount or range of loss inexcess of our accruals. Additional asbestos exposure claims may be made againstus in the future, and such claims could be material. However, because we arenot able to estimate the amount or range of losses associated with such claims,we have made no accruals with respect to unasserted asbestos exposure claims asof September 30, 2006.

Certain cases inwhich we are a “premises defendant” are not subject to indemnification by priorowners or operators. The following table presents for the periods indicatedcertain information about these cases. Cases include all cases for whichservice has been received by us.
| ** **                         | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Unresolved at  beginning of period |       | 34                                                            |       | 29                                                            |       |
| Filed during  period               |       | 18                                                            |       | 47                                                            |       |
| Resolved during  period            |       | 9                                                             |       | 8                                                             |       |
| Unresolved at end of  period       |       | 43                                                            |       | 68                                                            |       |

 

27

----

 

We paid grosssettlement costs for asbestos exposure cases that are not subject toindemnification of approximately $10,000 and $20,000 during the nine monthsended September 30, 2006 and 2005, respectively. As of September 30, 2006, wehad an accrual of approximately $0.6 million relating to these cases. We cannotassure you that our liability will not exceed our accruals or that ourliability associated with these cases would not be material to our financialcondition, results of operations or liquidity; however, we are not able toestimate the amount or range of loss in excess of our accruals. Additionalasbestos exposure claims may be made against us in the future, and such claimscould be material. However, because we are not able to estimate the amount orrange of losses associated with such claims, we have made no accruals withrespect to unasserted asbestos exposure claims as of September 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 has been approved by the court. Class certificationdiscovery 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.

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

**TaxDispute**

In connection withthe audit of our income tax returns for the years ended 1998 through 2001, wereceived a Notice of Proposed Adjustment from the Internal Revenue Service. Weare in the process of an administrative appeal before the Internal RevenueService, which we initiated in 2005. The potential liability and the potentialreduction to our net operating losses have been reserved in our financialstatements.

**OtherProceedings**

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

28

----

 

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

***General***

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

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

Weare committed to achieving and maintaining compliance with all applicableenvironmental, health and safety (“EHS”) legal requirements, and we have developedpolicies and management systems that are intended to identify the multitude ofEHS legal requirements applicable to our operations, enhance compliance withapplicable legal requirements, ensure the safety of our employees, contractors,community neighbors and customers and minimize the production and emission ofwastes and other pollutants. Although EHS legal requirements are constantlychanging and are frequently difficult to comply with, these EHS managementsystems are designed to assist us in our compliance goals while also fosteringefficiency and improvement and minimizing overall risk to us.

***EHS Capital Expenditures***

We may incurfuture costs for capital improvements and general compliance under EHS laws,including costs to acquire, maintain and repair pollution control equipment.For the nine months ended September 30, 2006 and 2005, our capital expendituresfor EHS matters totaled $29.3 million and $24.2 million, respectively.Since capital expenditures for these matters are subject to evolving regulatoryrequirements and depend, in part, on the timing, promulgation and enforcementof specific requirements, we cannot provide assurance that our recentexpenditures will be indicative of future amounts required under EHS laws.

***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 somecircumstances, the scope of our liability may extend to damages to naturalresources. Specifically, under the U.S. Comprehensive Environmental Response,Compensation and Liability Act of 1980, as amended (“CERCLA”), and similarstate laws, a current or former owner or operator of real property may beliable for remediation costs regardless of whether the release or disposal ofhazardous substances was in compliance with law at the time it occurred, and acurrent owner or operator may be liable regardless of whether it owned oroperated the facility at the time of the release. In addition, under the U.S.Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), andsimilar state laws, we may be required to remediate contamination originatingfrom our properties as a condition to our hazardous waste permit. For example,our Odessa, Port Arthur and Port Neches facilities in Texas are the subject ofongoing remediation requirements under RCRA authority. In many cases, ourpotential liability arising from historical contamination is based onoperations and other events occurring prior to our ownership of the relevantfacility. In these situations, we frequently obtained an indemnity agreementfrom the prior owner addressing remediation liabilities arising frompre-closing conditions. We have successfully exercised our rights under thesecontractual covenants for a number of sites, and where applicable, mitigatedour ultimate

29

----

 

remediationliability. We cannot assure you, however, that all of such matters will besubject to indemnity or that our existing indemnities will be sufficient tocover our liabilities for such matters.

Some of our manufacturingsites have an extended history of industrial chemical manufacturing and use,including on-site waste disposal. We are aware of soil, groundwater and surfacewater contamination from past operations at some of our sites, and we may findcontamination at other sites in the future. Based on available information andthe indemnification rights we believe are likely to be available, we believethat the costs to investigate and remediate known contamination will not have amaterial adverse effect on our financial condition, results of operations orcash flows. However, if such indemnities are unavailable or do not fully coverthe costs of investigation and remediation or we are required to contribute tosuch costs, and if such costs are material, then such expenditures may have amaterial adverse effect on our financial condition, results of operations orcash flows. At the current time, we are unable to estimate the full cost,exclusive of indemnification benefits, to remediate any of the known contaminationsites.

We have beennotified by third parties of claims against us or our subsidiaries for cleanupliabilities at approximately 12 former facilities and third party sites,including but not limited to sites listed under CERCLA. Based on current informationand past experience at other CERCLA sites, we do not expect any of these thirdparty claims to result in a material liability to us.

***Environmental Reserves***

We have accruedliabilities relating to anticipated environmental cleanup obligations, sitereclamation and closure costs and known penalties. Liabilities are recordedwhen potential liabilities are either known or considered probable and can bereasonably estimated. Our liability estimates are based upon available facts,existing technology and past experience. The environmental liabilities do notinclude amounts recorded as asset retirement obligations. We have accruedapproximately $15 million and $25 million for environmentalliabilities as of September 30, 2006 and December 31, 2005, respectively.Of these amounts, approximately $7 million and $7 million areclassified as accrued liabilities on our condensed consolidated balance sheets(unaudited) as of September 30, 2006 and December 31, 2005, respectively,and approximately $8 million and $18 million are classified as othernoncurrent liabilities on our condensed consolidated balance sheets (unaudited)as of September 30, 2006 and December 31, 2005, respectively. In certaincases, our remediation liabilities are payable over periods of up to30 years. We may incur losses for environmental remediation in excess ofthe amounts accrued; however, we are not able to estimate the amount or rangeof such potential excess.

***RegulatoryDevelopments***

Under the European Union(“EU”) Integrated Pollution Prevention and Control Directive (“IPPC”), EUmember governments are to adopt rules and implement a cross media (air, waterand waste) environmental permitting program for individual facilities. Whilethe EU countries are at varying stages in their respective implementation ofthe IPPC permit program, we have submitted all necessary IPPC permitapplications required to date, and in some cases received completed permitsfrom the applicable government agency. We expect to submit all other IPPCapplications and related documents on a timely basis as the various countriesimplement the IPPC permit program. Although we do not know with certainty whateach IPPC permit will require, we believe, based upon our experience with thepermits received to date, that the costs of compliance with the IPPC permitprogram will not be material to our financial condition, results of operationsor cash flows.

In October 2003,the European Commission (“EC”) adopted a proposal for a new EU regulatoryframework 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. Where warranted by arisk assessment, specified uses of some hazardous substances may be restricted.Additionally, the use of substances with specific hazards would require anauthorization limited in time, pending their substitution. The REACH regulatoryframework is expected to become law in early 2007. As currently envisioned,REACH would take effect in three primary stages over eleven years following thefinal effective date. The

30

----

 

registration, evaluationand authorization phases would require expenditures and resource commitments inorder to, for example, develop information technology tools, generate data,prepare and submit dossiers for substance registration, participate inconsortia, obtain legal advice, and reformulate products if necessary. We haveestablished a cross-business European REACH team that is working closely withour businesses to identify and list all substances manufactured or imported byus into the European Union. We expect to incur costs of up to $5 millionfor REACH compliance in 2007.

OnOctober 13, 2006, the President signed into law the Security and Accountabilityfor Every Port Act (“SAFE”), a********comprehensive******port andchemical plant security******bill. At this time, we do not****knowwhat the financial implications of the new law will be for our operations. Wehave conducted security vulnerability assessments at a number of our sites andhave pursued, or are pursuing, action items arising from these assessments.Until the implementing regulations are promulgated by the Department ofHomeland Security and we have had a chance to evaluate them, the futurefinancial impact of SAFE is uncertain.

***MTBE Developments***

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, 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 of lawsuits have been filed, primarily against gasolinemanufacturers, marketers and distributors, by persons seeking to recover damagesallegedly arising from the presence of MTBE in groundwater. While we have notbeen named as a defendant in any litigation concerning the environmentaleffects of MTBE, we cannot provide assurances that we will not be involved inany such litigation or that such litigation will not have a material adverseeffect on our 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 September 30, 2006.

31

----

 

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

Other operating (income)expense consisted of the following (dollars in millions):
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| (Gain) loss on  sale of business/assets |       | $                                                    | —     |                                                | $          | — |   | $ | (92.4 | ) | $ | 3.6 |   |
| Foreign exchange  (gains) losses        |       | (12.7                                                | )          | (2.9                                                | )          | (7.7 | ) | 23.9 |   |
| Bad debts                               |       | 2.2                                                  |       | 6.0                                                 |       | 3.5 |   | 12.2 |   |
| Property loss  recoveries               |       | (12.5                                                | )          | —                                              |       | (21.3 | ) | — |   |
| Other, net                              |       | (5.6                                                 | )          | 4.4                                                 |       | (4.9 | ) | 2.3 |   |
| Total other  operating (income) expense |       | $                                                    | (28.6      | )                                                   | $          | 7.5 |   | $ | (122.8 | ) | $ | 42.0 |   |

 

**16.          Stock-BasedCompensation Plans**

Under the HuntsmanStock Incentive Plan (the “Stock Incentive Plan”), a plan approved bystockholders, we may grant non-qualified stock options, incentive stockoptions, stock appreciation rights, restricted stock, phantom stock,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 September 30, 2006, we were authorized to grantup to 21,590,909 shares under the Stock Incentive Plan. Option awards have amaximum contractual term of 10 years and generally must have an exerciseprice at least equal to the market price of our common stock on the date theoption award is granted. Stock-based awards generally vest over a three-yearperiod.

The compensation cost forthe Stock Incentive Plan was $4.8 million and $2.6 million for the three monthsended September 30, 2006 and 2005, respectively, and $13.0 million and $6.4million for the nine months ended September 30, 2006 and 2005, respectively.The total income tax benefit recognized in the statement of operations forstock-based compensation arrangements was nil for each of the three and ninemonths ended September 30, 2006 and 2005.

The fair value ofeach stock option award is estimated on the date of grant using theBlack-Scholes valuation model that uses the assumptions noted in the followingtable. Because we only became a publicly-held company in February 2005, webased our assumption of expected volatility on implied volatilities from thestock of comparable companies. 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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend yield                                            |       | 0                                                    | %          | N/A                                                 |       | 0 | % | 0 | % |
| Expected  volatility                                      |       | 23.1                                                 | %          | N/A                                                 |       | 23.1 | % | 22.4 | % |
| Risk-free  interest rate                                  |       | 4.9                                                  | %          | N/A                                                 |       | 4.6 | % | 3.9 | % |
| Expected life of stock  options granted during the period |       | 6.6 years                                            |       | N/A                                                 |       | 6.6 years |   | 6.6 years |   |

 

32

----

 

***Stock Options***

 

A summary of stockoption activity under the Stock Incentive Plan as of September 30, 2006 andchanges during the nine 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                            |       | 1,687      |       | 20.46                                      |       |                                                    |       |                                |       |
| Exercised                          |       | —     |       | —                                     |       |                                                    |       |                                |       |
| Forfeited                          |       | (84        | )          | 21.75                                      |       |                                                    |       |                                |       |
| Outstanding at  September 30, 2006 |       | 4,182      |       | 21.73                                      |       | 8.84                                                    |       | $                                   | 21         |   |
| Exercisable at September 30, 2006  |       | 760        |       | 22.99                                      |       | 8.37                                                    |       | —                              |       |
|                                    |            |            |            |                                            |            |                                                         |            |                                     |            |  |  |

 

Theweighted-average grant-date fair value of stock options granted during the ninemonths ended September 30, 2006 was $7.27 per option. As of September 30, 2006,there was $18.7 million of total unrecognized compensation cost related tononvested stock option arrangements granted under the Stock Incentive Plan.That cost is expected to be recognized over a weighted-average period ofapproximately 1.8 years. No option awards were exercised during the nine monthsended September 30, 2006 or 2005.

***Nonvested shares***

 

Nonvested sharesgranted under the Stock Incentive Plan consist of restricted stock, which isaccounted for as an equity award, and phantom stock, which is accounted for asa liability award because it can be settled in either stock or cash. A summaryof the status of our nonvested shares as of September 30, 2006 and changesduring the nine 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                         |       | 467                    |       | 20.46                                                   |       | 24 |   | 20.50 |   |
| Vested                          |       | (246                   | )          | 22.99                                                   |       | (11 | ) | 23.00 |   |
| Forfeited                       |       | (9                     | )          | 23.00                                                   |       | — |   | — |   |
| Nonvested at September 30, 2006 |       | 949                    |       | 21.75                                                   |       | 46 |   | 21.72 |   |
|                                 |            |                        |            |                                                         |            |  |  |  |  |  |  |

 

As of September30, 2006, there was $15.6 million of total unrecognized compensation costrelated to nonvested share compensation arrangements granted under the StockIncentive Plan. That cost is expected to be recognized over a weighted-averageperiod of approximately 1.9 years. The total fair value of shares that vestedduring the nine months ended September 30, 2006 and 2005 was $5.9 million andnil, respectively.

 

**17.          PortArthur, Texas Plant Fire**

On April 29, 2006,our Port Arthur, Texas olefins manufacturing plant experienced a major fire.With the exception of cyclohexane operations at the site which were restartedon June 9, 2006, the remaining operations at the site remain shutdown. Thedamage is significant and, while no assurances can be made, preliminaryindications are that we would expect to restart the unit late in the secondquarter of 2007. None of our other Jefferson County, Texas manufacturing siteswere damaged. During the second and third quarters of 2006, we recognized a netloss due to the fire totaling $10.0 million (after recording probable insurancerecoveries of $31.4 million) for certain fixed costs incurred during thebusiness interruption period, the write-off of damaged assets and costs torespond and clean up the facility after the fire, $9.4 million of which wasrecorded as an impairment charge and $0.6 million of which was recorded as costof sales in the 

33

----

accompanying condensed consolidated statements ofoperations (unaudited). As noted above, as of September 30, 2006, we haverecorded a receivable of $31.4 million for probable insurance recoveriesthat has been recorded as an offset to the expenses already incurred andrecorded in the statement of operations, of which $20.7 million representsfixed costs incurred subsequent to the business interruption deductible period.

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. Insurancerecoveries will be accounted for as gain contingencies in accordance with SFASNo. 5, *Accounting for Contingencies*, andtherefore will not be recorded and recognized in income until earned andrealized.

**18.          Income Taxes**

We use the asset and liabilitymethod of accounting for income taxes. Deferred income taxes reflect the nettax effects of temporary differences between the carrying amounts of assets andliabilities for financial and tax reporting purposes. We evaluate deferred taxassets to determine whether it is more likely than not that they will berealized. Valuation allowances have been established against a material portionof the net 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.

***Huntsman Corporation***

We recorded an income tax benefit of $17.4 million forthe three months ended September 30, 2006 and an expense of $16.0 million forthe nine months ended September 30, 2006, and expense of $13.5 million and$36.9 million for the same periods in 2005, respectively. Our taxobligations are affected by the mix of income and losses in the taxjurisdictions in which we operate.

Our effective income tax rates were (33)% and 4% for thethree and nine months ended September 30, 2006, respectively, and notmeaningful for the three and nine months ended September 30, 2005. During thethree months ended September 30, 2006, we recognized $22.4 million of taxbenefits related to the release of certain U.K. tax contingencies and therelease of certain valuation allowances in the U.K. The release of the U.K. taxcontingency was in response to a favorable court decision rendered during thequarter to an unrelated company. The release of the valuation allowance in theU.K. resulted from the evaluation of our deferred tax assets occasioned by thecontract to sell our European base chemicals and polymers business to SABIC.The cumulative pre-tax earnings of our European polyurethanes business combinedwith the impact of the sale of our U.K. petrochemical business generatedsufficient positive evidence to support a change in judgment about therealizability of certain deferred tax assets in the U.K. Excluding the net (charges)benefits of $(14.4) million and $75.3 million related to the gain onthe sale of our U.S. butadiene and MTBE business, the loss due to the fire atour Port Arthur, Texas plant, a property loss recovery, and loss on the earlyextinguishment of debt, our effective income tax rates would have been (27)%for the three months and 4% for the nine months ended September 30, 2006,respectively. After further excluding the $22.4 million of tax benefits, oureffective income tax rates would have been 6% for the three months and 12% forthe nine months ended September 30, 2006, respectively. Excluding the netcharges of $88 million and $323 million in 2005 for loss on earlyextinguishment of debt and a write-down of assets, which are not benefited fortax purposes because of valuation allowances on net deferred tax assets, oureffective income tax rates would have been 11% and 15% for the three and ninemonths ended September 30, 2005, respectively. These effective tax rates, for2006 and 2005, are lower than the U.S. statutory rate of 35% primarily due toour mix of earnings in tax jurisdictions where no tax expense is provided dueto the release of valuation allowances, earnings in tax jurisdictions withlower statutory rates, and tax benefits recognized during the quarter asdiscussed above.

34

----

***Huntsman International***

We recorded an income tax benefit of $21.3 million forthe three months ended September 30, 2006 and an expense of $58.2 million forthe nine months ended September 30, 2006, and expense of $12.0 million and$42.9 million for the same periods in 2005, respectively. Our taxobligations are affected by the mix of income and losses in the taxjurisdictions in which we operate.

Our effective income tax rates were (41)% and 16% forthe three and nine months ended September 30, 2006, respectively, and notmeaningful and 20% for the three and nine months ended September 30, 2005,respectively. During the three months ended September 30, 2006, we recognized$22.4 million of tax benefits related to the release of certain U.K. taxcontingencies and the release of certain valuation allowances in the U.K. Therelease of the U.K. tax contingency was in response to a favorable courtdecision rendered during the quarter to an unrelated company. The release ofthe valuation allowance in the U.K. resulted from the evaluation of ourdeferred tax assets occasioned by the contract to sell our European basechemicals and polymers business to SABIC. The cumulative pre-tax earnings ofour European polyurethanes business combined with the impact of the sale of ourU.K. petrochemical business generated sufficient positive evidence to support achange in judgment about the realizability of certain deferred tax assets inthe U.K. Excluding the net benefits (charges) of $(18.1) million and $71.6million related to the gain on the sale of our U.S. butadiene and MTBEbusiness, the loss due to the fire at our Port Arthur, Texas plant, a propertyloss recovery, and loss on the early extinguishment of debt, our effectiveincome tax rates would have been (21)% and 12% for the three and nine monthsended September 30, 2006, respectively. After further excluding the $22.4million of tax benefits, our effective income tax rates would have been 11% forthe three months and 20% for the nine months ended September 30, 2006,respectively. Excluding the net charges of $91.8 million and$167.8 million in 2005 for loss on early extinguishment of debt and awrite-down of assets, which are not benefited for tax purposes because ofvaluation allowances on net deferred tax assets, our effective income tax rateswould have been 13% and 11% for the three and nine months ended September 30,2005, respectively. These effective tax rates are lower than the U.S. statutoryrate of 35% primarily due to our mix of earnings in tax jurisdictions where notax expense is provided due to the release of valuation allowances, earnings intax jurisdictions with lower statutory rates, and tax benefits recognizedduring the quarter as discussed above.

Additionally, on August 16, 2005, we completedthe Affiliate Mergers. Prior to the Affiliate Mergers, Huntsman InternationalHoldings, including Huntsman International, was treated as a partnership forU.S. federal income tax purposes and as such was generally not subject to U.S.income tax, but rather such income was taxed directly to its owners. After theAffiliate Mergers, Huntsman International is treated as a corporate subsidiaryand is subject to U.S. income tax. Therefore, tax expense for the periods endedSeptember 30, 2006 and September 30, 2005 are not comparable.

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

Basicincome (loss) per share excludes dilution and is computed by dividing netincome (loss) available to common stockholders by the weighted average numberof shares outstanding during the period. Diluted income (loss) per sharereflects potential dilution and is computed by dividing net income (loss)available to common stockholders by the weighted average number of sharesoutstanding during the period, increased by the number of additional sharesthat would have been outstanding if the potential dilutive units had beenexercised 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 change in capital structure and declaration ofdividends on our mandatory convertible preferred stock in the first quarter of2005, per share results for the nine month periods ended September 30, 2006 and2005 are not comparable.

35

----

Basicand diluted income (loss) per share is calculated as follows (in millions,except share amounts):
| ** **                                                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic  and diluted income (loss) from continuing operations available to common  stockholders (numerator):** |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  from continuing operations                                                                      |       | $                                | 69.9       |                            | $          | (15.4 | ) | $ | 349.2 |   | $ | (4.3 | ) |
| Preferred stock  dividends                                                                                     |       | —                           |       | —                          |       | — |   | (43.1 | ) |
| Income (loss)  from continuing operations available to common stockholders                                     |       | $                                | 69.9       |                            | $          | (15.4 | ) | $ | 349.2 |   | $ | (47.4 | ) |
| **Basic  and diluted (loss) income available to common stockholders (numerator):**                             |       |                             |       |                            |       |   |   |   |   |
| Net (loss)  income                                                                                             |       | $                                | (182.3     | )                               | $          | (29.9 | ) | $ | 149.6 |   | $ | 30.4 |   |
| Preferred stock  dividends                                                                                     |       | —                           |       | —                          |       | — |   | (43.1 | ) |
| Net (loss)  income available to common stockholders                                                            |       | $                                | (182.3     | )                               | $          | (29.9 | ) | $ | 149.6 |   | $ | (12.7 | ) |
| **Shares  (denominator):**                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding                                                                            |       | 220,639,647                      |       | 220,451,484                     |       | 220,611,837 |   | 220,451,484 |   |
| Dilutive  securities:                                                                                          |       |                             |       |                            |       |   |   |   |   |
| Preferred stock conversion                                                                                     |       | 12,499,925                       |       | —                          |       | 12,499,925 |   | — |   |
| Stock-based awards                                                                                             |       | 38,860                           |       | —                          |       | 5,244 |   | — |   |
| Total dilutive shares  outstanding assuming conversion                                                         |       | 233,178,432                      |       | 220,451,484                     |       | 233,117,006 |   | 220,451,484 |   |

 

Additionalstock-based awards of 4,186,675 and 3,049,560 weighted average equivalentshares of stock were outstanding during the three months ended September 30, 2006and 2005, respectively, and additional stock-based awards of 4,738,390 and2,614,511 weighted average equivalent shares of stock were outstanding duringthe nine months ended September 30, 2006 and 2005, respectively. In addition,the preferred stock would have converted into 12,499,925 shares of common stockfor the three and nine months ended September 30, 2005. However, thesestock-based awards and the preferred stock conversion were not included in thecomputation of diluted earnings per share because the effect would beanti-dilutive.

**20.          Operating Segment Information**

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

36

----

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), benzene,  cyclohexane and paraxylene (2)                                                                                                                                        |

 

----

(1)                                 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.” The propyleneoxide/MTBE operations in our Polyurethanes segment were not included in thissale.

(2)                                 OnSeptember 27, 2006, we entered into a Sale and Purchase Agreement to sell ourEuropean base chemicals and polymers business. This transaction is expected toclose by the end of 2006. Beginning in the third quarter of 2006, the operatingresults of our European base chemicals and polymers business are classified asdiscontinued operations and, accordingly, the revenues of this business areexcluded from the Base Chemicals segment revenues for all periods presented.The EBITDA of our European base chemicals and polymers business is included inthe Base Chemicals segment EBITDA for all periods presented. For more information,see “Note 3. Discontinued Operations—European Base Chemicals and PolymersBusiness.”

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 ourcompany as a whole. The revenues and EBITDA for each of our reportableoperating segments are as follows (dollars in millions):

37

----

 
| ** **                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net  Sales:**                                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Polyurethanes                                                                                    |       | $                                                        | 885.4      |                                                    | $          | 835.3 |   | $ | 2,619.6 |   | $ | 2,609.9 |   |
| Materials and Effects                                                                            |       | 551.1                                                    |       | 289.5                                                   |       | 1,179.0 |   | 911.5 |   |
| Performance Products                                                                             |       | 468.6                                                    |       | 462.4                                                   |       | 1,479.0 |   | 1,517.4 |   |
| Pigments                                                                                         |       | 278.3                                                    |       | 256.6                                                   |       | 813.1 |   | 787.5 |   |
| Polymers                                                                                         |       | 456.5                                                    |       | 427.5                                                   |       | 1,349.7 |   | 1,249.3 |   |
| Base Chemicals                                                                                   |       | 150.7                                                    |       | 458.8                                                   |       | 1,062.4 |   | 1,478.9 |   |
| Eliminations                                                                                     |       | (104.6                                                   | )          | (142.2                                                  | )          | (415.1 | ) | (433.5 | ) |
| Total                                                                                            |       | $                                                        | 2,686.0    |                                                    | $          | 2,587.9 |   | $ | 8,087.7 |   | $ | 8,121.0 |   |
|                                                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| **Huntsman  Corporation:**                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| ** **                                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| **Segment  EBITDA****(1):**                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Polyurethanes                                                                                    |       | $                                                        | 134.9      |                                                    | $          | 193.7 |   | $ | 474.6 |   | $ | 535.0 |   |
| Materials and Effects                                                                            |       | 45.5                                                     |       | 41.3                                                    |       | 114.3 |   | 135.5 |   |
| Performance Products                                                                             |       | 35.7                                                     |       | 25.5                                                    |       | 155.0 |   | 158.0 |   |
| Pigments                                                                                         |       | 26.3                                                     |       | 22.6                                                    |       | 91.4 |   | 86.5 |   |
| Polymers                                                                                         |       | 32.1                                                     |       | (5.8                                                    | )          | 99.0 |   | 71.6 |   |
| Base Chemicals                                                                                   |       | (213.9                                                   | )          | 8.9                                                     |       | (51.9 | ) | 252.0 |   |
| Corporate and other (2)                                                                          |       | (47.0                                                    | )          | (83.8                                                   | )          | (88.3 | ) | (422.8 | ) |
| Total                                                                                            |       | $                                                        | 13.6       |                                                    | $          | 202.4 |   | $ | 794.1 |   | $ | 815.8 |   |
|                                                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| EBITDA (1)                                                                                       |       | $                                                        | 13.6       |                                                    | $          | 202.4 |   | $ | 794.1 |   | $ | 815.8 |   |
| Interest  expense, net                                                                           |       | (83.4                                                    | )          | (101.1                                                  | )          | (264.8 | ) | (341.8 | ) |
| Income tax  benefit (expense)-continuing operations                                              |       | 17.4                                                     |       | (13.5                                                   | )          | (16.0 | ) | (36.9 | ) |
| Income tax (expense)  benefit-discontinued operations and cumulative effect of accounting change |       | (11.2                                                    | )          | 5.8                                                     |       | (10.5 | ) | (33.8 | ) |
| Depreciation and  amortization                                                                   |       | (118.7                                                   | )          | (123.5                                                  | )          | (353.2 | ) | (372.9 | ) |
| Net (loss)  income                                                                               |       | $                                                        | (182.3     | )                                                       | $          | (29.9 | ) | $ | 149.6 |   | $ | 30.4 |   |

 

**Huntsman International:**
| ** **                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| **Segment  EBITDA****(1):**                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Polyurethanes                                                                                    |       | $                                                        | 134.9      |                                                    | $          | 193.7 |   | $ | 474.6 |   | $ | 535.0 |   |
| Materials and Effects                                                                            |       | 45.5                                                     |       | 41.3                                                    |       | 114.3 |   | 135.5 |   |
| Performance Products                                                                             |       | 35.7                                                     |       | 25.5                                                    |       | 155.0 |   | 158.0 |   |
| Pigments                                                                                         |       | 26.3                                                     |       | 22.6                                                    |       | 91.4 |   | 86.5 |   |
| Polymers                                                                                         |       | 32.1                                                     |       | (5.8                                                    | )          | 99.0 |   | 71.6 |   |
| Base Chemicals                                                                                   |       | (213.9                                                   | )          | 8.9                                                     |       | (51.9 | ) | 252.0 |   |
| Corporate and other (2)                                                                          |       | (31.7                                                    | )          | (88.5                                                   | )          | (82.2 | ) | (271.1 | ) |
| Total                                                                                            |       | $                                                        | 28.9       |                                                    | $          | 197.7 |   | $ | 800.2 |   | $ | 967.5 |   |
|                                                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| EBITDA (1)                                                                                       |       | $                                                        | 28.9       |                                                    | $          | 197.7 |   | $ | 800.2 |   | $ | 967.5 |   |
| Interest  expense, net                                                                           |       | (84.6                                                    | )          | (102.7                                                  | )          | (268.3 | ) | (339.5 | ) |
| Income tax  benefit (expense)-continuing operations                                              |       | 21.3                                                     |       | (12.0                                                   | )          | (58.2 | ) | (42.9 | ) |
| Income tax (expense)  benefit-discontinued operations and cumulative effect of accounting change |       | (11.3                                                    | )          | 5.8                                                     |       | (10.6 | ) | (33.4 | ) |
| Depreciation and  amortization                                                                   |       | (112.0                                                   | )          | (116.7                                                  | )          | (332.9 | ) | (352.8 | ) |
| Net (loss)  income                                                                               |       | $                                                        | (157.7     | )                                                       | $          | (27.9 | ) | $ | 130.2 |   | $ | 198.9 |   |

 

----

(1)                                 EBITDAis defined as net income (loss) before interest, income tax and depreciationand amortization.

(2)                                 EBITDAfrom corporate and other items includes unallocated corporate overhead, loss onearly extinguishment of debt, loss on A/R Securitization Program, unallocatedforeign exchange gains or losses, other non-operating income (expense),cumulative effect of change in accounting principle and extraordinary gain onthe acquisition of a business.

38

----

**21.          Subsequent Event**

On November 3, 2006, we entered into a conditionalagreement to sell our Australian polyesters, vinylesters and gelcoatsmanufacturing assets to Nuplex Industries Ltd for A$9.6 million (approximately$7 million) in cash, plus the value of inventory and other stock in trade atthe completion date (subject to certain adjustments) and additionalconsideration payable over a three year period upon achieving certain earningstargets. Completion of the sale is expected by year end 2006, subject to customaryregulatory approvals.

**22.          Condensed Consolidating FinancialStatements of 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 September 30, 2006 and December 31,2005 and for the three and nine months ended September 30, 2006 and 2005. Thereare no contractual restrictions limiting transfers of cash from HuntsmanInternational’s guarantors to Huntsman International. Each of HuntsmanInternational’s guarantors is 100% owned by Huntsman International and hasfully and unconditionally guaranteed Huntsman International’s notes on a jointand several basis.

39

----

**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET(UNAUDITED)**

**ASOF SEPTEMBER 30, 2006**

**(Dollars in Millions)**
| ** **                                      | ** ** | **Parent Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **ASSETS**                                      | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Current  assets:**                            | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Cash and cash  equivalents                      |       | $                       | 32.3       |           | $          | 1.6                |       | $                | 195.6      |                                           | $          | — |   | $ | 229.5 |   |
| Accounts  receivable, net                       |       | 56.8                    |       | 252.0          |       | 1,088.7            |       | 0.5              |       | 1,398.0                                        |       |
| Accounts  receivable from affiliates            |       | 595.3                   |       | 2,478.9        |       | 361.7              |       | (3,413.0         | )          | 22.9                                           |       |
| Inventories, net                                |       | 141.8                   |       | 413.7          |       | 870.9              |       | (4.2             | )          | 1,422.2                                        |       |
| Prepaid expenses                                |       | 9.6                     |       | 85.1           |       | 19.1               |       | (41.7            | )          | 72.1                                           |       |
| Deferred income  taxes                          |       | 52.4                    |       | (0.2           | )          | 19.2               |       | (14.6            | )          | 56.8                                           |       |
| Other current  assets                           |       | 10.8                    |       | 0.3            |       | 117.6              |       | (8.7             | )          | 120.0                                          |       |
| Current assets  held for sale                   |       | —                  |       | —         |       | 402.6              |       | (0.7             | )          | 401.9                                          |       |
| **Total  current assets**                       |       | 899.0                   |       | 3,231.4        |       | 3,075.4            |       | (3,482.4         | )          | 3,723.4                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Property, plant  and equipment, net             |       | 538.0                   |       | 1,263.4        |       | 1,903.4            |       | 3.0              |       | 3,707.8                                        |       |
| Investment in  unconsolidated affiliates        |       | 3,876.0                 |       | 1,372.5        |       | 90.3               |       | (5,139.1         | )          | 199.7                                          |       |
| Intangible  assets, net                         |       | 152.0                   |       | (6.5           | )          | 54.5               |       | —           |       | 200.0                                          |       |
| Goodwill                                        |       | —                  |       | 88.0           |       | 7.4                |       | (4.1             | )          | 91.3                                           |       |
| Deferred income  taxes                          |       | 2.8                     |       | 19.8           |       | 112.6              |       | (14.6            | )          | 120.6                                          |       |
| Notes receivable  from affiliates               |       | 3,108.3                 |       | 1,859.0        |       | —             |       | (4,967.3         | )          | —                                         |       |
| Other noncurrent  assets                        |       | 70.8                    |       | 121.6          |       | 368.6              |       | —           |       | 561.0                                          |       |
| Noncurrent  assets held for sale                |       | —                  |       | —         |       | 500.1              |       | —           |       | 500.1                                          |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total  assets**                               |       | $                       | 8,646.9    |           | $          | 7,949.2            |       | $                | 6,112.3    |                                           | $          | (13,604.5 | ) | $ | 9,103.9 |   |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**       | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Current  liabilities:**                       | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Accounts payable                                |       | $                       | 115.4      |           | $          | 300.8              |       | $                | 630.6      |                                           | $          | — |   | $ | 1,046.8 |   |
| Accounts payable  to affiliates                 |       | 2,427.5                 |       | 254.1          |       | 735.1              |       | (3,412.1         | )          | 4.6                                            |       |
| Accrued  liabilities                            |       | 115.8                   |       | 178.6          |       | 341.5              |       | (50.3            | )          | 585.6                                          |       |
| Deferred income  taxes                          |       | 5.4                     |       | 19.8           |       | 22.3               |       | (14.6            | )          | 32.9                                           |       |
| Current portion  of long-term debt              |       | 145.4                   |       | 8.2            |       | 73.0               |       | —           |       | 226.6                                          |       |
| Current  liabilities held for sale              |       | —                  |       | —         |       | 315.8              |       | (1.2             | )          | 314.6                                          |       |
| **Total  current liabilities**                  |       | 2,809.5                 |       | 761.5          |       | 2,118.3            |       | (3,478.2         | )          | 2,211.1                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| Long-term debt                                  |       | 4,046.7                 |       | 3,076.8        |       | 1,942.9            |       | (4,967.3         | )          | 4,099.1                                        |       |
| Deferred income  taxes                          |       | 22.5                    |       | 33.8           |       | 152.8              |       | (14.7            | )          | 194.4                                          |       |
| Other noncurrent  liabilities                   |       | 142.6                   |       | 206.6          |       | 544.1              |       | (0.8             | )          | 892.5                                          |       |
| Noncurrent  liabilities held for sale           |       | —                  |       | —         |       | 51.7               |       | —           |       | 51.7                                           |       |
| **Total  liabilities**                          |       | 7,021.3                 |       | 4,078.7        |       | 4,809.8            |       | (8,461.0         | )          | 7,448.8                                        |       |
| ** **                                      | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Minority  interests                             |       | —                  |       | 123.9          |       | 24.2               |       | (118.6           | )          | 29.5                                           |       |
| **Members’  equity:**                      | ** ** | ** **              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Members’ equity                            |       | 2,806.8                 |       | 2,836.4        |       | 1,403.8            |       | (4,240.2         | )          | 2,806.8                                        |       |
| Subsidiary  preferred stock                     |       | —                  |       | 73.4           |       | 1.4                |       | (74.8            | )          | —                                         |       |
| (Accumulated  deficit) retained earnings        |       | (1,254.2                | )          | 595.1          |       | (68.5              | )          | (526.6           | )          | (1,254.2                                       | )          |
| Accumulated  other comprehensive income (loss)  |       | 73.0                    |       | 241.7          |       | (58.4              | )          | (183.3           | )          | 73.0                                           |       |
| **Total  members’ equity**                 |       | 1,625.6                 |       | 3,746.6        |       | 1,278.3            |       | (5,024.9         | )          | 1,625.6                                        |       |
|                                            |       |                    |       |           |       |               |       |             |       |                                           |       |
| **Total liabilities and members’  equity** |       | $                       | 8,646.9    |           | $          | 7,949.2            |       | $                | 6,112.3    |                                           | $          | (13,604.5 | ) | $ | 9,103.9 |   |

 

40

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET(UNAUDITED)**

**ASOF DECEMBER 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  unconsolidated 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 |   |

 

41

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)**

**THREEMONTHS ENDED SEPTEMBER 30, 2006**

**(Dollars in Millions)**
| ** **                                                                              | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                           | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Trade sales,  services and fees                                                         |       | $                   | 395.6      |           | $          | 876.0                |       | $                | 1,393.4    |                                           | $          | — |   | $ | 2,665.0 |   |
| Related party  sales                                                                    |       | 95.5                |       | 79.1           |       | 373.1                |       | (526.7           | )          | 21.0                                           |       |
| **Total  revenues**                                                                     |       | 491.1               |       | 955.1          |       | 1,766.5              |       | (526.7           | )          | 2,686.0                                        |       |
| ** **                                                                              | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Cost of  goods sold**                                                                 |       | 399.3               |       | 888.1          |       | 1,545.0              |       | (524.6           | )          | 2,307.8                                        |       |
|                                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                       |       | 91.8                |       | 67.0           |       | 221.5                |       | (2.1             | )          | 378.2                                          |       |
| ** **                                                                              | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Operating  expenses:**                                                                | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Selling, general  and administrative                                                    |       | 45.7                |       | 30.5           |       | 135.0                |       | (0.1             | )          | 211.1                                          |       |
| Research and  development                                                               |       | 9.0                 |       | 7.5            |       | 18.8                 |       | —           |       | 35.3                                           |       |
| Other operating  expense (income)                                                       |       | 8.3                 |       | (26.0          | )          | (10.9                | )          | —           |       | (28.6                                          | )          |
| Restructuring,  impairment and plant closing (credits) costs                            |       | —              |       | (0.7           | )          | 4.2                  |       | —           |       | 3.5                                            |       |
| **Total  expenses**                                                                     |       | 63.0                |       | 11.3           |       | 147.1                |       | (0.1             | )          | 221.3                                          |       |
| ** **                                                                              | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Operating  income**                                                                   |       | 28.8                |       | 55.7           |       | 74.4                 |       | (2.0             | )          | 156.9                                          |       |
| Interest  expense, net                                                                  |       | (14.0               | )          | (46.2          | )          | (24.4                | )          | —           |       | (84.6                                          | )          |
| Gain (loss) on  accounts receivable securitization program                              |       | 3.5                 |       | (3.5           | )          | (4.0                 | )          | —           |       | (4.0                                           | )          |
| Equity in  (losses) income of subsidiaries and unconsolidated affiliates                |       | (163.8              | )          | (163.9         | )          | 0.5                  |       | 327.7            |       | 0.5                                            |       |
| Loss on early  extinguishment of debt                                                   |       | (18.1               | )          | —         |       | —               |       | —           |       | (18.1                                          | )          |
| Other income  (expense)                                                                 |       | 0.8                 |       | 0.4            |       | (0.2                 | )          | 0.2              |       | 1.2                                            |       |
| **(Loss)  income from continuing operations before income taxes and minority interest** |       | (162.8              | )          | (157.5         | )          | 46.3                 |       | 325.9            |       | 51.9                                           |       |
| Income tax  benefit                                                                     |       | 3.1                 |       | 4.2            |       | 14.0                 |       | —           |       | 21.3                                           |       |
| Minority  interest in subsidiaries’ income                                         |       | —              |       | (0.2           | )          | (0.4                 | )          | 0.2              |       | (0.4                                           | )          |
| **(Loss)  income from continuing operations**                                           |       | (159.7              | )          | (153.5         | )          | 59.9                 |       | 326.1            |       | 72.8                                           |       |
| ** **                                                                              | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Loss from  discontinued operations, net of tax                                          |       | (0.8                | )          | —         |       | (238.6               | )          | —           |       | (239.4                                         | )          |
| Extraordinary  gain on the acquisition of a business, net of tax of nil                 |       | 2.8                 |       | —         |       | 6.1                  |       | —           |       | 8.9                                            |       |
| **Net loss**                                                                            |       | $                   | (157.7     | )              | $          | (153.5               | )          | $                | (172.6     | )                                              | $          | 326.1 |   | $ | (157.7 | ) |

 

42

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2006**

**(Dollars in Millions)**
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Trade sales,  services and fees                                                  |       | $                   | 1,112.0    |           | $          | 3,270.0              |       | $                | 3,642.7    |                                           | $          | — |   | $ | 8,024.7 |   |
| Related party  sales                                                             |       | 222.2               |       | 241.5          |       | 694.5                |       | (1,095.2         | )          | 63.0                                           |       |
| **Total  revenues**                                                              |       | 1,334.2             |       | 3,511.5        |       | 4,337.2              |       | (1,095.2         | )          | 8,087.7                                        |       |
| ** **                                                                       | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Cost of  goods sold**                                                          |       | 1,070.4             |       | 3,136.9        |       | 3,764.3              |       | (1,090.5         | )          | 6,881.1                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                |       | 263.8               |       | 374.6          |       | 572.9                |       | (4.7             | )          | 1,206.6                                        |       |
| ** **                                                                       | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Operating  expenses:**                                                         | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Selling, general  and administrative                                             |       | 164.8               |       | 84.9           |       | 306.6                |       | (0.6             | )          | 555.7                                          |       |
| Research and  development                                                        |       | 29.3                |       | 21.6           |       | 37.7                 |       | —           |       | 88.6                                           |       |
| Other operating  expense (income)                                                |       | 32.4                |       | (141.1         | )          | (14.1                | )          | —           |       | (122.8                                         | )          |
| Restructuring,  impairment and plant closing costs                               |       | —              |       | 10.6           |       | 9.4                  |       | —           |       | 20.0                                           |       |
| **Total  expenses (income)**                                                     |       | 226.5               |       | (24.0          | )          | 339.6                |       | (0.6             | )          | 541.5                                          |       |
| ** **                                                                       | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| **Operating  income**                                                            |       | 37.3                |       | 398.6          |       | 233.3                |       | (4.1             | )          | 665.1                                          |       |
| Interest  expense, net                                                           |       | (114.5              | )          | (53.3          | )          | (100.5               | )          | —           |       | (268.3                                         | )          |
| Gain (loss) on  accounts receivable securitization program                       |       | 9.8                 |       | (10.6          | )          | (10.0                | )          | —           |       | (10.8                                          | )          |
| Equity in income  (losses) of subsidiaries and unconsolidated affiliates         |       | 210.7               |       | (77.5          | )          | 2.6                  |       | (133.2           | )          | 2.6                                            |       |
| Loss on early  extinguishment of debt                                            |       | (18.1               | )          | —         |       | —               |       | —           |       | (18.1                                          | )          |
| Other (expense)  income                                                          |       | (0.5                | )          | 5.7            |       | 0.1                  |       | (4.0             | )          | 1.3                                            |       |
| **Income  from continuing operations before income taxes and minority interest** |       | 124.7               |       | 262.9          |       | 125.5                |       | (141.3           | )          | 371.8                                          |       |
| Income tax  expense                                                              |       | (0.2                | )          | (45.4          | )          | (12.6                | )          | —           |       | (58.2                                          | )          |
| Minority  interest in subsidiaries’ income                                  |       | —              |       | (38.6          | )          | (1.0                 | )          | 38.5             |       | (1.1                                           | )          |
| **Income  from continuing operations**                                           |       | 124.5               |       | 178.9          |       | 111.9                |       | (102.8           | )          | 312.5                                          |       |
| ** **                                                                       | ** ** | ** **          | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Loss from  discontinued operations, net of tax                                   |       | (1.6                | )          | —         |       | (235.7               | )          | —           |       | (237.3                                         | )          |
| Extraordinary  gain on the acquisition of a business, net of tax of nil          |       | 7.3                 |       | —         |       | 47.7                 |       | —           |       | 55.0                                           |       |
| **Net income (loss)**                                                            |       | $                   | 130.2      |           | $          | 178.9                |       | $                | (76.1      | )                                              | $          | (102.8 | ) | $ | 130.2 |   |

 

43

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)**

**THREEMONTHS ENDED SEPTEMBER 30, 2005**

**(Dollars in Millions)**
| ** **                                                                              | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International LLC** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|----------------------------------------------------|------------|
| **Revenues:**                                                                           |       |                |       |           |       |                 |       |             |       |                                               |       |
| Trade sales, services and fees                                                          |       | $                   | 304.5      |           | $          | 1,164.5              |       | $                | 1,093.8    |                                               | $          | — |   | $ | 2,562.8 |   |
| Related party sales                                                                     |       | 45.3                |       | 64.7           |       | 199.6                |       | (284.5           | )          | 25.1                                               |       |
| **Total  revenues**                                                                     |       | 349.8               |       | 1,229.2        |       | 1,293.4              |       | (284.5           | )          | 2,587.9                                            |       |
| ** **                                                                              |       |                |       |           |       |                 |       |             |       |                                               |       |
| **Cost of  goods sold**                                                                 |       | 270.0               |       | 1,082.7        |       | 1,110.6              |       | (283.9           | )          | 2,179.4                                            |       |
|                                                                                    |       |                |       |           |       |                 |       |             |       |                                               |       |
| **Gross  profit**                                                                       |       | 79.8                |       | 146.5          |       | 182.8                |       | (0.6             | )          | 408.5                                              |       |
| ** **                                                                              |       |                |       |           |       |                 |       |             |       |                                               |       |
| **Operating  expenses:**                                                                |       |                |       |           |       |                 |       |             |       |                                               |       |
| Selling, general and administrative                                                     |       | 47.2                |       | 37.1           |       | 76.8                 |       | (0.2             | )          | 160.9                                              |       |
| Research and development                                                                |       | 5.6                 |       | 6.4            |       | 10.1                 |       | —           |       | 22.1                                               |       |
| Other operating (income) expense                                                        |       | (48.2               | )          | (7.5           | )          | 63.2                 |       | —           |       | 7.5                                                |       |
| Restructuring, impairment and plant closing costs                                       |       | 1.6                 |       | 12.4           |       | 52.6                 |       | —           |       | 66.6                                               |       |
| **Total expenses**                                                                      |       | 6.2                 |       | 48.4           |       | 202.7                |       | (0.2             | )          | 257.1                                              |       |
| ** **                                                                              |       |                |       |           |       |                 |       |             |       |                                               |       |
| **Operating  income (loss)**                                                            |       | 73.6                |       | 98.1           |       | (19.9                | )          | (0.4             | )          | 151.4                                              |       |
| Interest  expense, net                                                                  |       | (51.2               | )          | (13.2          | )          | (38.3                | )          | —           |       | (102.7                                             | )          |
| Gain (loss) on  accounts receivable securitization program                              |       | 2.4                 |       | (1.2           | )          | (4.0                 | )          | —           |       | (2.8                                               | )          |
| Equity in  (losses) income of subsidiaries and unconsolidated affiliates                |       | (6.8                | )          | 4.9            |       | 1.8                  |       | 1.9              |       | 1.8                                                |       |
| Dividend income                                                                         |       | 4.6                 |       | —         |       | —               |       | (4.6             | )          | —                                             |       |
| Loss on early  extinguishment of debt                                                   |       | (34.9               | )          | (10.4          | )          | —               |       | —           |       | (45.3                                              | )          |
| Other (expense) income                                                                  |       | (10.0               | )          | 8.4            |       | (2.4                 | )          | 1.8              |       | (2.2                                               | )          |
| **(Loss)  income from continuing operations before income taxes and minority interest** |       | (22.3               | )          | 86.6           |       | (62.8                | )          | (1.3             | )          | 0.2                                                |       |
| Income tax  (expense) benefit                                                           |       | (5.4                | )          | 2.9            |       | (9.5                 | )          | —           |       | (12.0                                              | )          |
| Minority  interest in subsidiaries’ loss (income)                                  |       | 0.4                 |       | (1.7           | )          | (0.2                 | )          | (0.1             | )          | (1.6                                               | )          |
| **(Loss)  income from continuing operations**                                           |       | (27.3               | )          | 87.8           |       | (72.5                | )          | (1.4             | )          | (13.4                                              | )          |
| ** **                                                                              |       |                |       |           |       |                 |       |             |       |                                               |       |
| Loss from  discontinued operations, net of tax of nil                                   |       | (0.6                | )          | —         |       | (13.9                | )          | —           |       | (14.5                                              | )          |
| **Net (loss) income**                                                                   |       | $                   | (27.9      | )              | $          | 87.8                 |       | $                | (86.4      | )                                                  | $          | (1.4 | ) | $ | (27.9 | ) |

 

44

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2005**

**(Dollars in Millions)**
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    |       |                |       |           |       |                 |       |             |       |                                           |       |
| Trade sales, services and fees                                                   |       | $                   | 1,013.5    |           | $          | 3,605.4              |       | $                | 3,421.4    |                                           | $          | — |   | $ | 8,040.3 |   |
| Related party sales                                                              |       | 205.2               |       | 197.2          |       | 737.2                |       | (1,058.9         | )          | 80.7                                           |       |
| **Total  revenues**                                                              |       | 1,218.7             |       | 3,802.6        |       | 4,158.6              |       | (1,058.9         | )          | 8,121.0                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Cost of  goods sold**                                                          |       | 967.6               |       | 3,298.2        |       | 3,548.7              |       | (1,056.8         | )          | 6,757.7                                        |       |
|                                                                             |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Gross  profit**                                                                |       | 251.1               |       | 504.4          |       | 609.9                |       | (2.1             | )          | 1,363.3                                        |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  expenses:**                                                         |       |                |       |           |       |                 |       |             |       |                                           |       |
| Selling, general and administrative                                              |       | 120.5               |       | 116.7          |       | 248.1                |       | (0.6             | )          | 484.7                                          |       |
| Research and development                                                         |       | 24.1                |       | 19.7           |       | 28.2                 |       | —           |       | 72.0                                           |       |
| Other operating (income) expense                                                 |       | (23.7               | )          | 11.4           |       | 54.3                 |       | —           |       | 42.0                                           |       |
| Restructuring, impairment and plant closing costs                                |       | 1.4                 |       | 16.8           |       | 73.4                 |       | —           |       | 91.6                                           |       |
| **Total expenses**                                                               |       | 122.3               |       | 164.6          |       | 404.0                |       | (0.6             | )          | 690.3                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| **Operating  income**                                                            |       | 128.8               |       | 339.8          |       | 205.9                |       | (1.5             | )          | 673.0                                          |       |
| Interest  expense, net                                                           |       | (179.1              | )          | (45.8          | )          | (114.6               | )          | —           |       | (339.5                                         | )          |
| Gain (loss) on  accounts receivable securitization program                       |       | 12.1                |       | (2.8           | )          | (16.8                | )          | —           |       | (7.5                                           | )          |
| Equity in income  of subsidiaries and unconsolidated affiliates                  |       | 386.9               |       | 203.3          |       | 7.0                  |       | (590.2           | )          | 7.0                                            |       |
| Dividend income                                                                  |       | 4.6                 |       | —         |       |                 |       | (4.6             | )          | —                                         |       |
| Loss on early  extinguishment of debt                                            |       | (110.9              | )          | (10.4          | )          | —               |       | —           |       | (121.3                                         | )          |
| Other (expense)  income                                                          |       | (9.9                | )          | 8.4            |       | (3.6                 | )          | 1.8              |       | (3.3                                           | )          |
| **Income  from continuing operations before income taxes and minority interest** |       | 232.5               |       | 492.5          |       | 77.9                 |       | (594.5           | )          | 208.4                                          |       |
| Income tax  benefit (expense)                                                    |       | 9.9                 |       | (13.3          | )          | (39.5                | )          | —           |       | (42.9                                          | )          |
| Minority  interest in subsidiaries’ loss (income)                           |       | 0.1                 |       | (27.8          | )          | (0.7                 | )          | 26.9             |       | (1.5                                           | )          |
| **Income  from continuing operations**                                           |       | 242.5               |       | 451.4          |       | 37.7                 |       | (567.6           | )          | 164.0                                          |       |
| ** **                                                                       |       |                |       |           |       |                 |       |             |       |                                           |       |
| (Loss) income  from discontinued operations, net of tax of nil                   |       | (43.6               | )          | —         |       | 74.3                 |       | —           |       | 30.7                                           |       |
| **Income  before accounting change**                                             |       | 198.9               |       | 451.4          |       | 112.0                |       | (567.6           | )          | 194.7                                          |       |
| Cumulative  effect of change in accounting principle, net of tax of $1.5         |       | —              |       | —         |       | 4.2                  |       | —           |       | 4.2                                            |       |
| **Net income**                                                                   |       | $                   | 198.9      |           | $          | 451.4                |       | $                | 116.2      |                                           | $          | (567.6 | ) | $ | 198.9 |   |

 

45

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFCASH FLOWS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2006**

**(Dollars in Millions)**
| ** **                                                   | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net  cash provided by (used in) operating activities**     |       | $                   | 1,047.5    |           | $          | (885.8             | )          | $                | 448.3      |                                           | $          | (5.4 | ) | $ | 604.6 |   |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Investing  activities:**                                   | ** ** | ** **          | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Capital  expenditures                                        |       | (18.8               | )          | (50.8          | )          | (257.4             | )          | —           |       | (327.0                                         | )          |
| Acquisition of  business, net of cash acquired               |       | (14.4               | )          | —         |       | (158.8             | )          | —           |       | (173.2                                         | )          |
| Investment in  affiliates, net                               |       | 15.2                |       | (6.8           | )          | (13.8              | )          | (8.2             | )          | (13.6                                          | )          |
| Proceeds from  sale of assets                                |       | —              |       | 200.6          |       | 8.4                |       | —           |       | 209.0                                          |       |
| Other, net                                                   |       | —              |       | —         |       | (1.0               | )          | —           |       | (1.0                                           | )          |
| **Net  cash (used in) provided by investing activities**     |       | (18.0               | )          | 143.0          |       | (422.6             | )          | (8.2             | )          | (305.8                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Financing  activities:**                                   | ** ** | ** **          | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Net borrowings  (repayments) under revolving loan facilities |       | 69.0                |       | —         |       | (6.2               | )          | —           |       | 62.8                                           |       |
| Net repayments  on overdraft facility                        |       | —              |       | —         |       | (4.7               | )          | —           |       | (4.7                                           | )          |
| Repayment of  long-term debt                                 |       | (401.8              | )          | (0.9           | )          | (19.7              | )          | —           |       | (422.4                                         | )          |
| Proceeds from  long-term debt                                |       | 100.0               |       | —         |       | 37.2               |       | —           |       | 137.2                                          |       |
| Intercompany  (repayments) borrowings                        |       | (792.7              | )          | 744.5          |       | 40.0               |       | 8.2              |       | —                                         |       |
| Debt issuance  costs paid                                    |       | (3.3                | )          | —         |       | —             |       | —           |       | (3.3                                           | )          |
| Call premiums  related to early extinguishment of debt       |       | (12.5               | )          | —         |       | —             |       | —           |       | (12.5                                          | )          |
| Net borrowings (repayments)  on notes payable                |       | 33.8                |       | (0.9           | )          | 0.1                |       | —           |       | 33.0                                           |       |
| Contribution  from minority shareholder                      |       | —              |       | —         |       | 6.2                |       | —           |       | 6.2                                            |       |
| Dividends paid                                               |       | —              |       | (5.4           | )          | —             |       | 5.4              |       | —                                         |       |
| **Net  cash (used in) provided by financing activities**     |       | (1,007.5            | )          | 737.3          |       | 52.9               |       | 13.6             |       | (203.7                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Effect of  exchange rate changes on cash                     |       | 0.3                 |       | (0.8           | )          | 2.4                |       | —           |       | 1.9                                            |       |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Increase  (decrease) in cash and cash equivalents            |       | 22.3                |       | (6.3           | )          | 81.0               |       | —           |       | 97.0                                           |       |
| Cash and cash  equivalents at beginning of period            |       | 10.0                |       | 7.9            |       | 114.6              |       | —           |       | 132.5                                          |       |
| Cash and cash  equivalents at end of period                  |       | $                   | 32.3       |           | $          | 1.6                |       | $                | 195.6      |                                           | $          | — |   | $ | 229.5 |   |

 

46

----

**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OFCASH FLOWS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2005**

**(Dollars in Millions)**
| ** **                                                   | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net  cash provided by operating activities**               |       | $                   | 317.4      |           | $          | 262.1              |       | $                | 143.7      |                                           | $          | (5.9 | ) | $ | 717.3 |   |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Investing  activities:**                                   |       |                |       |           |       |               |       |             |       |                                           |       |
| Capital  expenditures                                        |       | (18.1               | )          | (44.3          | )          | (139.6             | )          | —           |       | (202.0                                         | )          |
| Investment in  affiliates, net                               |       | —              |       | 5.1            |       | (8.0               | )          | —           |       | (2.9                                           | )          |
| Proceeds from  sale of assets                                |       | 4.5                 |       | 0.1            |       | 6.0                |       | —           |       | 10.6                                           |       |
| Change in  restricted cash                                   |       | 0.3                 |       | 8.6            |       | —             |       | —           |       | 8.9                                            |       |
| **Net  cash used in investing activities**                   |       | (13.3               | )          | (30.5          | )          | (141.6             | )          | —           |       | (185.4                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| **Financing  activities:**                                   |       |                |       |           |       |               |       |             |       |                                           |       |
| Net (repayments)  borrowings under revolving loan facilities |       | (125.0              | )          | —         |       | 7.9                |       | —           |       | (117.1                                         | )          |
| Net borrowings  on overdraft facility                        |       | —              |       | —         |       | 17.3               |       | —           |       | 17.3                                           |       |
| Repayment of  long-term debt                                 |       | (3,057.4            | )          | (75.9          | )          | (2.2               | )          | —           |       | (3,135.5                                       | )          |
| Proceeds from  long-term debt                                |       | 1,853.6             |       | —         |       | 19.5               |       | —           |       | 1,873.1                                        |       |
| Debt issuance  costs paid                                    |       | (15.4               | )          | (0.4           | )          | —             |       | —           |       | (15.8                                          | )          |
| Call premiums  related to early extinguishment of debt       |       | (64.1               | )          | (3.7           | )          | —             |       | —           |       | (67.8                                          | )          |
| Net borrowings (repayments)  on notes payable                |       | 12.3                |       | (1.3           | )          | 3.0                |       | —           |       | 14.0                                           |       |
| Contribution  from parent                                    |       | 837.6               |       | —         |       | —             |       | —           |       | 837.6                                          |       |
| Contribution  from minority shareholder                      |       | —              |       | —         |       | 3.6                |       | —           |       | 3.6                                            |       |
| Intercompany  borrowings (repayments)                        |       | 267.4               |       | (129.3         | )          | (139.4             | )          | 1.3              |       | —                                         |       |
| Dividends paid                                               |       | —              |       | (4.6           | )          | —             |       | 4.6              |       | —                                         |       |
| Other, net                                                   |       | —              |       | —         |       | 6.1                |       | —           |       | 6.1                                            |       |
| **Net  cash used in financing activities**                   |       | (291.0              | )          | (215.2         | )          | (84.2              | )          | 5.9              |       | (584.5                                         | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Effect of  exchange rate changes on cash                     |       | (0.5                | )          | 0.3            |       | (2.4               | )          | —           |       | (2.6                                           | )          |
|                                                         |       |                |       |           |       |               |       |             |       |                                           |       |
| Increase  (decrease) in cash and cash equivalents            |       | 12.6                |       | 16.7           |       | (84.5              | )          | —           |       | (55.2                                          | )          |
| Cash and cash  equivalents at beginning of period            |       | 7.3                 |       | 14.0           |       | 222.2              |       | —           |       | 243.5                                          |       |
| Cash and cash  equivalents at end of period                  |       | $                   | 19.9       |           | $          | 30.7               |       | $                | 137.7      |                                           | $          | — |   | $ | 188.3 |   |

 

47

----

**23.          Restatement**

In February 2007,we discovered an error in our calculation of the impairment loss related to thesale of our European base chemicals and polymers business. We concluded thatthere was $99.0 million inadditional non-cash asset impairment charges recorded in discontinuedoperations for the three and nine months ended September 30, 2006 related tothe sale of our European base chemicals and polymers business. In connectionwith the sale of the European base chemicals and polymers business, we agreedto take action to remove the accounts receivable of this business from our accountsreceivable securitization program so that the purchaser could acquire suchaccounts receivable. The additional non-cash charges resulted primarily becausewe had not appropriately included the effect of the re-purchase of thesereceivables in the determination of the impairment loss.  As a result, we have restated theaccompanying condensed consolidated financial statements (unaudited) as of andfor the three and nine months ended September 30, 2006 from amounts previouslyreported.

The significanteffects on us and Huntsman International of the restatement on the condensedconsolidated balance sheets (unaudited) as of September 30, 2006 and therelated condensed consolidated statements of operations (unaudited) andcondensed consolidated statements of cash flows (unaudited) are as follows(dollars in millions, except per share amounts):

**Huntsman Corporation**

|                                                         | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|
| At September 30,  2006:                                 |       |                             |       |             |       |
| Noncurrent assets held for sale                         |       | $                                | 630.4      |             | $          | 531.4 |   |
| Total assets                                            |       | 9,402.7                          |       | 9,303.7          |       |
| Accumulated deficit                                     |       | (1,258.8                         | )          | (1,357.8         | )          |
| Total stockholders’ equity                         |       | 1,918.1                          |       | 1,819.1          |       |
|                                                    |       |                             |       |             |       |
| Statement of  Operations:                               |       |                             |       |             |       |
| For the three months ended September 30, 2006:          |       |                             |       |             |       |
| Loss from discontinued operations, net of tax           |       | (160.4                           | )          | (259.4           | )          |
| Loss before extraordinary gain and accounting change    |       | (90.5                            | )          | (189.5           | )          |
| Net loss                                                |       | (83.3                            | )          | (182.3           | )          |
| Comprehensive loss                                      |       | (25.6                            | )          | (124.6           | )          |
| Basic loss per share from discontinued operations       |       | (0.73                            | )          | (1.18            | )          |
| Basic loss per share                                    |       | (0.38                            | )          | (0.83            | )          |
| Diluted loss per share from discontinued operations     |       | (0.69                            | )          | (1.11            | )          |
| Diluted loss per share                                  |       | (0.36                            | )          | (0.78            | )          |
|                                                    |       |                             |       |             |       |
| For the nine months ended September 30, 2006:           |       |                             |       |             |       |
| Loss from discontinued operations, net of tax           |       | (158.3                           | )          | (257.3           | )          |
| Income before extraordinary gain and accounting  change |       | 190.9                            |       | 91.9             |       |
| Net income                                              |       | 248.6                            |       | 149.6            |       |
| Comprehensive income                                    |       | 386.6                            |       | 287.6            |       |
| Basic loss per share from discontinued operations       |       | (0.71                            | )          | (1.16            | )          |
| Basic earnings per share                                |       | 1.13                             |       | 0.68             |       |
| Diluted loss per share from discontinued operations     |       | (0.68                            | )          | (1.11            | )          |
| Diluted earnings per share                              |       | 1.07                             |       | 0.64             |       |
|                                                    |       |                             |       |             |       |
| Statement of  Cash Flows:                               |       |                             |       |             |       |
| For the nine months ended September 30, 2006:           |       |                             |       |             |       |
| Net income                                              |       | 248.6                            |       | 149.6            |       |
| Loss on pending  disposal of discontinued operations    |       | 181.2                            |       | 280.2            |       |
|                                                         |            |                                  |            |                  |            |  |  |

** **

48

----

 

**HuntsmanInternational**

|                                                         | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|
| At September 30,  2006:                                 |       |                             |       |             |       |
| Noncurrent assets held for sale                         |       | $                                | 599.1      |             | $          | 500.1 |   |
| Total assets                                            |       | 9,202.9                          |       | 9,103.9          |       |
| Accumulated deficit                                     |       | (1,155.2                         | )          | (1,254.2         | )          |
| Total member’s equity                              |       | 1,724.6                          |       | 1,625.6          |       |
|                                                    |       |                             |       |             |       |
| Statement of  Operations:                               |       |                             |       |             |       |
| For the three months ended September 30, 2006:          |       |                             |       |             |       |
| Loss from discontinued operations, net of tax           |       | (140.4                           | )          | (239.4           | )          |
| Loss before extraordinary gain and accounting change    |       | (67.6                            | )          | (166.6           | )          |
| Net loss                                                |       | (58.7                            | )          | (157.7           | )          |
| Comprehensive income (loss)                             |       | 1.1                              |       | (97.9            | )          |
|                                                    |       |                             |       |             |       |
| For the nine months ended September 30, 2006:           |       |                             |       |             |       |
| Loss from discontinued operations, net of tax           |       | (138.3                           | )          | (237.3           | )          |
| Income before extraordinary gain and accounting  change |       | 174.2                            |       | 75.2             |       |
| Net income                                              |       | 229.2                            |       | 130.2            |       |
| Comprehensive income                                    |       | 380.5                            |       | 281.5            |       |
|                                                    |       |                             |       |             |       |
| Statement of  Cash Flows:                               |       |                             |       |             |       |
| For the nine months ended September 30, 2006:           |       |                             |       |             |       |
| Net income                                              |       | 229.2                            |       | 130.2            |       |
| Loss on pending  disposal of discontinued operations    |       | 161.2                            |       | 260.2            |       |
|                                                         |            |                                  |            |                  |            |  |  |

 

49

----

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

**Explanatory Note**

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations gives effect to the restatement of our condensedconsolidated financial statements (unaudited) as described in “Note 23.Restatement.”

**Forward-lookingStatements**

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

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

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

**Overview**

**Business**

We are among 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, synthetic fiber, textile chemicals and dye industries. We are aleading global producer in many of our key product lines, including MDI,amines, surfactants, epoxy-based polymer formulations, textile chemicals, dyes,maleic anhydride and titanium dioxide. Our administrative, research anddevelopment and manufacturing operations are primarily conducted at the 78facilities that we own or lease. Our facilities are located in 24 countries andwe employ approximately 15,000 associates worldwide. Our businesses benefitfrom significant vertical integration, large production scale and proprietarymanufacturing technologies, which allow us to maintain a low-cost position. Wehad revenues for the nine months ended September 30, 2006 and 2005 of $8,087.7million and $8,121.0 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 economic conditions,prices of raw materials and global supply and demand pressures.

50

----

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 economic activity.Historically, demand for many of these products has grown at rates in excess ofGDP growth. In Polyurethanes, this growth, particularly in Asia, has recentlyresulted in improved demand and higher industry capacity utilization rates formany of our key products, including MDI.

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 peak duringthe 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 our Base Chemicals segment will be negatively impacted in 2006and 2007 by the fire at our Port Arthur, Texas manufacturing plant.

**Outlook**

                We have made significantprogress toward our previously announced strategic goals of strengthening ourdifferentiated businesses and reducing our indebtedness.  The announced disposition of our Europeanbase chemicals and polymers business (see “—Recent Developments” below), thedisposition of our U.S. butadiene and MTBE business and the Textiles EffectsAcquisition are consistent with these strategic efforts.  Following the completion of thesetransactions, we expect our differentiated portfolio to comprise more than 70%of our revenues. In addition, we expect that the disposition transactions willallow us to reduce our net debt to below $3.5 billion, which will be more than40% less than our net debt level at the end of 2004.

                We are continuing our efforts tostrengthen our differentiated businesses and to reduce our debt and believethat we are exploring the full range of available options.  While we can give no assurances, we intend tosell or spin off our remaining commodity businesses, and we currently believethat a sale transaction is more likely than a spin off transaction.

                In the third quarter of 2006, weexperienced strong demand for many of our products—including MDI, performancespecialties and advanced materials.  Weexpect growth to continue into 2007, particularly in our differentiatedproducts.  In addition, the recentdeclines in raw materials and energy prices, if sustained, will provide furtheropportunities to expand our margins across most of our product lines.

51

----

**RecentDevelopments**

**Announced Divestiture of European Base Chemicalsand Polymers Business**

On September 27,2006, we entered into a Sale and Purchase Agreement with SABIC to sell all ofour European base chemicals and polymers business for an aggregate purchaseprice of $700 million in cash plus the assumption by the purchaser ofapproximately $126 million in unfunded pension liabilities. The final purchaseprice is subject to adjustments relating to working capital, investment in ourLDPE plant currently under construction in Wilton, U.K. and unfunded pensionliabilities. In connection withthis sale, we agreed to take action to remove the accounts receivable of theEuropean base chemicals and polymers business from our accounts receivablesecuritization program so that the purchaser could acquire all such accountsreceivable.  These accounts receivabletotaled approximately $92.3 million at September 30, 2006.  The transaction is conditionedupon, among other things, receipt of necessary approvals under applicableantitrust laws and other relevant regulations and other customary closingconditions. This transaction is expected to close by the end of 2006. We intendto use the net proceeds from the transaction to redeem in full the remaining$250 million outstanding principal amount of our 9.875% 2009 Senior Notes andto repay a portion of the debt under our Senior Credit Facilities.

**New Subordinated Notes Offering**

On November 13, 2006, we completed the NewSubordinated Notes Offering consisting of €400 million ($508.0 million) 6.875%euro-denominated 2013Subordinated Notes and $200 million 7.875% U.S. dollar-denominated 2014Subordinated Notes.  We intend to use theestimated net proceeds of approximately $699 million to redeem all(approximately $366 million) of our outstanding U.S. dollar-denominated 10.125%2009 Subordinated Notes and a portion (approximately €258 million) of ouroutstanding euro-denominated 10.125% 2009 Subordinated Notes.  The call price of the 2009 Subordinated Notesis 101.688% plus accrued interest.  As aresult of the redemption of the 2009 Subordinated Notes, which is expected tobe completed on December 1, 2006, we expect to record a loss on earlyextinguishment of debt in the fourth quarter of 2006 of approximately $12million, and we expect to reduce our annual interest expense by approximately$17 million.

52

----

**Resultsof Operations**

For each of ourCompany and Huntsman International, the following tables set forth theunaudited condensed consolidated results of operations for the three and ninemonths ended September 30, 2006 and 2005 (dollars in millions):

**Huntsman Corporation**

** **
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Nine Months Ended** | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                                                                                          | ** ** | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                                                                                          | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                      | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| **Revenues**                                                                                                        |       | $                                | 2,686.0    |        | $          | 2,587.9                         |       | 4           | %          | $ | 8,087.7 |   | $ | 8,121.0 |   | — |   |
| **Cost of  goods sold**                                                                                             |       | 2,313.1                          |       | 2,184.2     |       | 6                               | %          | 6,893.7     |       | 6,771.9 |   | 2 | % |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                                                   |       | 372.9                            |       | 403.7       |       | (8                              | )%         | 1,194.0     |       | 1,349.1 |   | (11 | )% |
| Operating  expenses                                                                                                 |       | 216.4                            |       | 191.4       |       | 13                              | %          | 521.6       |       | 601.4 |   | (13 | )% |
| Restructuring,  impairment and plant closing costs                                                                  |       | 3.5                              |       | 66.6        |       | (95                             | )%         | 20.0        |       | 91.6 |   | (78 | )% |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  income**                                                                                               |       | 153.0                            |       | 145.7       |       | 5                               | %          | 652.4       |       | 656.1 |   | (1 | )% |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                                              |       | (83.4                            | )          | (101.1      | )          | (18                             | )%         | (264.8      | )          | (341.8 | ) | (23 | )% |
| Loss on accounts  receivable securitization program                                                                 |       | (4.0                             | )          | (2.8        | )          | 43                              | %          | (10.8       | )          | (7.5 | ) | 44 | % |
| Equity in income  of unconsolidated affiliates                                                                      |       | 0.5                              |       | 1.8         |       | (72                             | )%         | 2.6         |       | 7.0 |   | (63 | )% |
| Loss on early  extinguishment of debt                                                                               |       | (14.5                            | )          | (41.4       | )          | (65                             | )%         | (14.5       | )          | (276.4 | ) | (95 | )% |
| Other income  (expense)                                                                                             |       | 1.3                              |       | (2.5        | )          | NM                              |       | 1.4         |       | (3.3 | ) | NM |   |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  (loss) from continuing operations before income taxes and minority interest**                             |       | 52.9                             |       | (0.3        | )          | NM                              |       | 366.3       |       | 34.1 |   | 974 | % |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax benefit  (expense)                                                                                       |       | 17.4                             |       | (13.5       | )          | NM                              |       | (16.0       | )          | (36.9 | ) | (57 | )% |
| Minority  interest in subsidiaries’ income                                                                     |       | (0.4                             | )          | (1.6        | )          | (75                             | )%         | (1.1        | )          | (1.5 | ) | (27 | )% |
| **Income  (loss) from continuing operations**                                                                       |       | 69.9                             |       | (15.4       | )          | NM                              |       | 349.2       |       | (4.3 | ) | NM |   |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) income from  discontinued operations, net of tax                                                             |       | (259.4                           | )          | (14.5       | )          | NM                              |       | (257.3      | )          | 30.7 |   | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax                                                    |       | 7.2                              |       | —      |       | NM                              |       | 57.7        |       | — |   | NM |   |
| Cumulative  effect of change in accounting principle, net of tax                                                    |       | —                           |       | —      |       | —                          |       | —      |       | 4.0 |   | NM |   |
| **Net  (loss) income**                                                                                              |       | (182.3                           | )          | (29.9       | )          | 510                             | %          | 149.6       |       | 30.4 |   | 392 | % |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                                              |       | 83.4                             |       | 101.1       |       | (18                             | )%         | 264.8       |       | 341.8 |   | (23 | )% |
| Income tax  (benefit) expense from continuing operations                                                            |       | (17.4                            | )          | 13.5        |       | NM                              |       | 16.0        |       | 36.9 |   | (57 | )% |
| Income tax expense  (benefit) from discontinued operations and cumulative effect of change in  accounting principle |       | 11.2                             |       | (5.8        | )          | NM                              |       | 10.5        |       | 33.8 |   | (69 | )% |
| Depreciation and  amortization                                                                                      |       | 118.7                            |       | 123.5       |       | (4                              | )%         | 353.2       |       | 372.9 |   | (5 | )% |
| **EBITDA  (1)**                                                                                                     |       | $                                | 13.6       |        | $          | 202.4                           |       | (93         | )%         | $ | 794.1 |   | $ | 815.8 |   | (3 | )% |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash  provided by operating activities                                                                          |       |                             |       |        |       |                            |       | 610.9       |       | 709.3 |   | (14 | )% |
| Net cash used in  investing activities                                                                              |       |                             |       |        |       |                            |       | (295.0      | )          | (219.1 | ) | 35 | % |
| Net cash used in  financing activities                                                                              |       |                             |       |        |       |                            |       | (214.8      | )          | (531.0 | ) | (60 | )% |

 

----

NM—NotMeaningful

53

----

**Huntsman International**
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Nine Months Ended** | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                                                                                          | ** ** | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                                                                                          | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                      | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                                                                        |       | $                                | 2,686.0    |        | $          | 2,587.9                         |       | 4           | %          | $ | 8,087.7 |   | $ | 8,121.0 |   | — |   |
| **Cost of  goods sold**                                                                                             |       | 2,307.8                          |       | 2,179.4     |       | 6                               | %          | 6,881.1     |       | 6,757.7 |   | 2 | % |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                                                   |       | 378.2                            |       | 408.5       |       | (7                              | )%         | 1,206.6     |       | 1,363.3 |   | (11 | )% |
| Operating  expenses                                                                                                 |       | 217.8                            |       | 190.5       |       | 14                              | %          | 521.5       |       | 598.7 |   | (13 | )% |
| Restructuring,  impairment and plant closing costs                                                                  |       | 3.5                              |       | 66.6        |       | (95                             | )%         | 20.0        |       | 91.6 |   | (78 | )% |
|                                                                                                                |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| **Operating  income**                                                                                               |       | 156.9                            |       | 151.4       |       | 4                               | %          | 665.1       |       | 673.0 |   | (1 | )% |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                                              |       | (84.6                            | )          | (102.7      | )          | (18                             | )%         | (268.3      | )          | (339.5 | ) | (21 | )% |
| Loss on accounts  receivable securitization program                                                                 |       | (4.0                             | )          | (2.8        | )          | 43                              | %          | (10.8       | )          | (7.5 | ) | 44 | % |
| Equity in income  of unconsolidated affiliates                                                                      |       | 0.5                              |       | 1.8         |       | (72                             | )%         | 2.6         |       | 7.0 |   | (63 | )% |
| Loss on early  extinguishment of debt                                                                               |       | (18.1                            | )          | (45.3       | )          | (60                             | )%         | (18.1       | )          | (121.3 | ) | (85 | )% |
| Other income  (expense)                                                                                             |       | 1.2                              |       | (2.2        | )          | NM                              |       | 1.3         |       | (3.3 | ) | NM |   |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from continuing operations before income taxes and minority interest**                                    |       | 51.9                             |       | 0.2         |       | NM                              |       | 371.8       |       | 208.4 |   | 78 | % |
| ** **                                                                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  benefit (expense)                                                                                       |       | 21.3                             |       | (12.0       | )          | NM                              |       | (58.2       | )          | (42.9 | ) | 36 | % |
| Minority  interests in subsidiaries’ income                                                                    |       | (0.4                             | )          | (1.6        | )          | (75                             | )%         | (1.1        | )          | (1.5 | ) | (27 | )% |
| **Income  (loss) from continuing operations**                                                                       |       | 72.8                             |       | (13.4       | )          | NM                              |       | 312.5       |       | 164.0 |   | 91 | % |
|                                                                                                                |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| (Loss) income  from discontinued operations, net of tax                                                             |       | (239.4                           | )          | (14.5       | )          | NM                              |       | (237.3      | )          | 30.7 |   | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax                                                    |       | 8.9                              |       | —      |       | NM                              |       | 55.0        |       | — |   | NM |   |
| Cumulative  effect of change in accounting principle, net of tax                                                    |       | —                           |       | —      |       | —                          |       | —      |       | 4.2 |   | NM |   |
| **Net  (loss) income**                                                                                              |       | (157.7                           | )          | (27.9       | )          | 465                             | %          | 130.2       |       | 198.9 |   | (35 | )% |
|                                                                                                                |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Interest  expense, net                                                                                              |       | 84.6                             |       | 102.7       |       | (18                             | )%         | 268.3       |       | 339.5 |   | (21 | )% |
| Income tax  (benefit) expense from continuing operations                                                            |       | (21.3                            | )          | 12.0        |       | NM                              |       | 58.2        |       | 42.9 |   | 36 | % |
| Income tax  expense (benefit) from discontinued operations and cumulative effect of  change in accounting principle |       | 11.3                             |       | (5.8        | )          | NM                              |       | 10.6        |       | 33.4 |   | (68 | )% |
| Depreciation and  amortization                                                                                      |       | 112.0                            |       | 116.7       |       | (4                              | )%         | 332.9       |       | 352.8 |   | (6 | )% |
| **EBITDA  (1)**                                                                                                     |       | $                                | 28.9       |        | $          | 197.7                           |       | (85         | )%         | $ | 800.2 |   | $ | 967.5 |   | (17 | )% |
|                                                                                                                |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Net cash  provided by operating activities                                                                          |       |                             |       |        |       |                            |       | 604.6       |       | 717.3 |   | (16 | )% |
| Net cash used in  investing activities                                                                              |       |                             |       |        |       |                            |       | (305.8      | )          | (185.4 | ) | 65 | % |
| Net cash used in  financing activities                                                                              |       |                             |       |        |       |                            |       | (203.7      | )          | (584.5 | ) | (65 | )% |

 

 

54

----

  Foreach of our Company and Huntsman International, the following tables set forthcertain items of (expense) income included in EBITDA (dollars in millions): 

**HuntsmanCorporation**
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Loss on early  extinguishment of debt                         |       | $                                                        | (14.5      | )                                                       | $          | (41.4 | ) | $ | (14.5 | ) | $ | (276.4 | ) |
| Loss on accounts  receivable securitization program           |       | (4.0                                                     | )          | (2.8                                                    | )          | (10.8 | ) | (7.5 | ) |
| Amounts included  in discontinued operations                  |       | (232.4                                                   | )          | (5.6                                                    | )          | (201.2 | ) | 107.4 |   |
| Cumulative  effect of change in accounting principle          |       | —                                                   |       | —                                                  |       | — |   | 5.9 |   |
| Gain on sale of  business/assets                              |       | 0.8                                                      |       | —                                                  |       | 93.2 |   | — |   |
| Recoveries of  property losses                                |       | —                                                   |       | —                                                  |       | 8.8 |   | — |   |
| Extraordinary  gain on the acquisition of a business          |       | 7.2                                                      |       | —                                                  |       | 57.7 |   | — |   |
|                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                     |       |                                                    |       |   |   |   |   |
| Polyurethanes                                                 |       | —                                                   |       | (0.9                                                    | )          | 2.2 |   | (5.0 | ) |
| Materials and  Effects                                        |       | (1.4                                                     | )          | —                                                  |       | (3.4 | ) | 0.6 |   |
| Performance  Products                                         |       | (1.1                                                     | )          | (5.3                                                    | )          | (0.7 | ) | (6.6 | ) |
| Pigments                                                      |       | 0.2                                                      |       | (9.6                                                    | )          | (2.4 | ) | (26.9 | ) |
| Polymers                                                      |       | (0.7                                                     | )          | (48.4                                                   | )          | (5.0 | ) | (51.3 | ) |
| Base Chemicals -  Port Arthur outage                          |       | —                                                   |       | —                                                  |       | (9.4 | ) | — |   |
| Base Chemicals -  other                                       |       | (0.3                                                     | )          | (2.4                                                    | )          | (1.1 | ) | (2.4 | ) |
| Corporate and  other                                          |       | (0.2                                                     | )          | —                                                  |       | (0.2 | ) | — |   |
| Total  restructuring, impairment and plant closing costs      |       | (3.5                                                     | )          | (66.6                                                   | )          | (20.0 | ) | (91.6 | ) |
| **Total**                                                     |       | $                                                        | (246.4     | )                                                       | $          | (116.4 | ) | $ | (86.8 | ) | $ | (262.2 | ) |

 

**HuntsmanInternational**
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Loss on early  extinguishment of debt                         |       | $                                                        | (18.1      | )                                                       | $          | (45.3 | ) | $ | (18.1 | ) | $ | (121.3 | ) |
| Loss on accounts  receivable securitization program           |       | (4.0                                                     | )          | (2.8                                                    | )          | (10.8 | ) | (7.5 | ) |
| Amounts included  in discontinued operations                  |       | (212.4                                                   | )          | (5.6                                                    | )          | (181.2 | ) | 107.4 |   |
| Cumulative  effect of change in accounting principle          |       | —                                                   |       | —                                                  |       | — |   | 5.7 |   |
| Gain on sale of  business/assets                              |       | 0.8                                                      |       | —                                                  |       | 93.2 |   | — |   |
| Recoveries of  property losses                                |       | —                                                   |       | —                                                  |       | 8.8 |   | — |   |
| Extraordinary  gain on the acquisition of a business          |       | 8.9                                                      |       | —                                                  |       | 55.0 |   | — |   |
|                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Restructuring,  impairment and plant closing (costs) credits: |       |                                                     |       |                                                    |       |   |   |   |   |
| Polyurethanes                                                 |       | —                                                   |       | (0.9                                                    | )          | 2.2 |   | (5.0 | ) |
| Materials and  Effects                                        |       | (1.4                                                     | )          | —                                                  |       | (3.4 | ) | 0.6 |   |
| Performance  Products                                         |       | (1.1                                                     | )          | (5.3                                                    | )          | (0.7 | ) | (6.6 | ) |
| Pigments                                                      |       | 0.2                                                      |       | (9.6                                                    | )          | (2.4 | ) | (26.9 | ) |
| Polymers                                                      |       | (0.7                                                     | )          | (48.4                                                   | )          | (5.0 | ) | (51.3 | ) |
| Base Chemicals -  Port Arthur outage                          |       | —                                                   |       | —                                                  |       | (9.4 | ) | — |   |
| Base Chemicals -  other                                       |       | (0.3                                                     | )          | (2.4                                                    | )          | (1.1 | ) | (2.4 | ) |
| Corporate and  other                                          |       | (0.2                                                     | )          | —                                                  |       | (0.2 | ) | — |   |
| Total  restructuring, impairment and plant closing costs      |       | (3.5                                                     | )          | (66.6                                                   | )          | (20.0 | ) | (91.6 | ) |
| **Total**                                                     |       | $                                                        | (228.3     | )                                                       | $          | (120.3 | ) | $ | (73.1 | ) | $ | (107.3 | ) |

 

----

(1)           EBITDA isdefined as net income (loss) before interest, income taxes, depreciation andamortization. We believe that EBITDA enhances an investor’s understanding ofour financial performance and our ability to satisfy principal and interestobligations with respect to our indebtedness. However, EBITDA should not beconsidered in isolation or viewed as a substitute for net income, cash flowfrom operations or other measures of performance as defined by GAAP. Moreover,EBITDA as used herein is not necessarily comparable to other similarly titledmeasures of other companies due to potential inconsistencies in the method ofcalculation. Our management uses EBITDA to assess financial performance anddebt service capabilities. In assessing financial performance, our managementreviews EBITDA as a general indicator of economic performance compared to priorperiods. Because EBITDA excludes interest, income taxes, depreciation andamortization, EBITDA provides an indicator of general economic performance thatis not affected by debt restructurings, fluctuations in interest rates oreffective tax rates, or levels of depreciation and amortization. Accordingly,our management believes this type of measurement is useful for comparinggeneral operating

55

----

performance from period to period and making certain related managementdecisions. EBITDA is also used by securities analysts, lenders and others intheir evaluation of different companies because it excludes certain items thatcan vary widely across different industries or among companies within the sameindustry. For example, interest expense can be highly dependent on a company’scapital structure, debt levels and credit ratings. Therefore, the impact ofinterest expense on earnings can vary significantly among companies. Inaddition, the tax positions of companies can vary because of their differingabilities to take advantage of tax benefits and because of the tax policies of thevarious jurisdictions in which they operate. As a result, effective tax ratesand tax expense can vary considerably among companies. Finally, companiesemploy productive assets of different ages and utilize different methods ofacquiring and depreciating such assets. This can result in considerablevariability in the relative costs of productive assets and the depreciation andamortization expense among companies. Our management also believes that ourinvestors use EBITDA as a measure of our ability to service indebtedness aswell as to fund capital expenditures and working capital requirements.Nevertheless, our management recognizes that there are material limitationsassociated with the use of EBITDA in the evaluation of our Company as comparedto net income, which reflects overall financial performance, including theeffects of interest, income taxes, depreciation and amortization. EBITDAexcludes interest expense. Because we have borrowed money in order to financeour operations, interest expense is a necessary element of our costs andability to generate revenue. Therefore, any measure that excludes interestexpense has material limitations. EBITDA also excludes taxes. Because thepayment of taxes is a necessary element of our operations, any measure thatexcludes tax expense has material limitations. Finally, EBITDA excludesdepreciation and amortization expense. Because we use capital assets,depreciation and amortization expense is a necessary element of our costs andability to generate revenue. Therefore, any measure that excludes depreciationand amortization expense has material limitations. Our management compensatesfor the limitations of using EBITDA by using it to supplement GAAP results toprovide a more complete understanding of the factors and trends affecting thebusiness than GAAP results alone. Our management also uses other metrics toevaluate capital structure, tax planning and capital investment decisions. Forexample, our management uses credit ratings and net debt ratios to evaluatecapital structure, effective tax rate by jurisdiction to evaluate tax planning,and payback period and internal rate of return to evaluate capital investments.Our management also uses trade working capital to evaluate its investment inaccounts receivable and inventory, net of accounts payable. 

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

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):  

56

----

**Huntsman Corporation**
| ** **                                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                                | ** ** | **2006**                                                | ** ** | **2005**    | ** ** | **Change** | ** ** |
| ** **                                                                                                | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** |
| EBITDA                                                                                                    |       | $                                                       | 794.1      |        | $          | 815.8 |   | (3 | )% |
| Depreciation and  amortization                                                                            |       | (353.2                                                  | )          | (372.9      | )          | (5 | )% |
| Interest  expense, net                                                                                    |       | (264.8                                                  | )          | (341.8      | )          | (23 | )% |
| Income tax  expense from continuing operations                                                            |       | (16.0                                                   | )          | (36.9       | )          | (57 | )% |
| Income tax  expense from discontinued operations and cumulative effect of change in  accounting principle |       | (10.5                                                   | )          | (33.8       | )          | (69 | )% |
| Net income                                                                                                |       | 149.6                                                   |       | 30.4        |       | 392 | % |
| Cumulative  effect of change in accounting principle, net of tax                                          |       | —                                                  |       | (4.0        | )          | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax                                          |       | (57.7                                                   | )          | —      |       | NM |   |
| Equity in income  of unconsolidated affiliates                                                            |       | (2.6                                                    | )          | (7.0        | )          | (63 | )% |
| Depreciation and  amortization                                                                            |       | 353.2                                                   |       | 372.9       |       | (5 | )% |
| (Gain) loss on  disposal of assets                                                                        |       | (92.4                                                   | )          | 3.6         |       | NM |   |
| Noncash  restructuring, impairment and plant closing costs                                                |       | 16.8                                                    |       | 40.8        |       | (59 | )% |
| Loss on early  extinguishment of debt                                                                     |       | 14.5                                                    |       | 276.4       |       | (95 | )% |
| Noncash interest  (income) expense                                                                        |       | (5.9                                                    | )          | 46.0        |       | NM |   |
| Deferred income  taxes                                                                                    |       | 2.0                                                     |       | 67.8        |       | (97 | )% |
| Loss on pending  disposal of discontinued operations                                                      |       | 280.2                                                   |       | 36.4        |       | 670 | % |
| Net unrealized  (gain) loss on foreign currency transactions                                              |       | (8.7                                                    | )          | 21.5        |       | NM |   |
| Other, net                                                                                                |       | 17.4                                                    |       | 3.7         |       | 370 | % |
| Changes in  operating assets and liabilities                                                              |       | (55.5                                                   | )          | (179.2      | )          | (69 | )% |
| Net cash provided by  operating activities                                                                |       | $                                                       | 610.9      |        | $          | 709.3 |   | (14 | )% |

 

----

NM-Not Meaningful

**HuntsmanInternational**
| ** **                                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                                | ** ** | **2006**                                                | ** ** | **2005**    | ** ** | **Change** | ** ** |
|                                                                                                      |       |                                                    |       |        |       |   |   |
| EBITDA                                                                                                    |       | $                                                       | 800.2      |        | $          | 967.5 |   | (17 | )% |
| Depreciation and  amortization                                                                            |       | (332.9                                                  | )          | (352.8      | )          | (6 | )% |
| Interest  expense, net                                                                                    |       | (268.3                                                  | )          | (339.5      | )          | (21 | )% |
| Income tax  expense from continuing operations                                                            |       | (58.2                                                   | )          | (42.9       | )          | 36 | % |
| Income tax  expense from discontinued operations and cumulative effect of change in accounting  principle |       | (10.6                                                   | )          | (33.4       | )          | (68 | )% |
| Net income                                                                                                |       | 130.2                                                   |       | 198.9       |       | (35 | )% |
| Cumulative  effect of change in accounting principle, net of tax                                          |       | —                                                  |       | (4.2        | )          | NM |   |
| Extraordinary  gain on the acquisition of a business, net of tax                                          |       | (55.0                                                   | )          | —      |       | NM |   |
| Equity in income  of unconsolidated affiliates                                                            |       | (2.6                                                    | )          | (7.0        | )          | (63 | )% |
| Depreciation and  amortization                                                                            |       | 332.9                                                   |       | 352.8       |       | (6 | )% |
| (Gain) loss on  disposal of assets                                                                        |       | (92.4                                                   | )          | 3.6         |       | NM |   |
| Noncash  restructuring, impairment and plant closing costs                                                |       | 16.8                                                    |       | 40.8        |       | (59 | )% |
| Loss on early  extinguishment of debt                                                                     |       | 18.1                                                    |       | 121.3       |       | (85 | )% |
| Noncash interest  (income) expense                                                                        |       | (2.9                                                    | )          | 40.6        |       | NM |   |
| Deferred income  taxes                                                                                    |       | 44.2                                                    |       | 73.9        |       | (40 | )% |
| Loss on pending  disposal of discontinued operations                                                      |       | 260.2                                                   |       | 36.4        |       | 615 | % |
| Net unrealized  (gain) loss on foreign currency transactions                                              |       | (8.7                                                    | )          | 21.5        |       | NM |   |
| Other, net                                                                                                |       | 17.5                                                    |       | 12.0        |       | 46 | % |
| Changes in  operating assets and liabilities                                                              |       | (53.7                                                   | )          | (173.3      | )          | (69 | )% |
| Net cash provided by  operating activities                                                                |       | $                                                       | 604.6      |        | $          | 717.3 |   | (16 | )% |

 

----

NM—Not Meaningful

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

For the threemonths ended September 30, 2006, we had a net loss of $182.3 million onrevenues of $2,686.0 million compared to a net loss of $29.9 million onrevenues of $2,587.9 million for the 2005 period. For the three months endedSeptember 30, 2006, Huntsman International had a net loss of $157.7 million onrevenues of $2,686.0

57

----

million comparedto a net loss of $27.9 million on revenues of $2,587.9 million for the 2005period. The increase of $152.4 million in our net loss and the increase of $129.8million in Huntsman International’s net loss were the result of the followingitems:

·                                          Revenuesfor the three months ended September 30, 2006 increased by $98.1 million ascompared with the 2005 period due principally to the Textile EffectsAcquisition on June 30, 2006, higher sales volumes in our Polyurethanes,Materials and Effects and Pigments segments and higher average selling pricesin our Polyurethanes, Materials and Effects, Performance Products, Pigments,Polymers and Base Chemicals segments. This increase was partially offset bylower sales volumes in our Performance Products, Polymers and Base Chemicalssegments. For more information, see “—Segment Analysis” below.

·                                          Ourgross profit and the gross profit of Huntsman International for the threemonths ended September 30, 2006 decreased by $30.8 million and $30.3million, or 8% and 7%, respectively, as compared with the 2005 period. Thisdecrease in gross profit, which occurred in all of our segments, was mainly dueto lower margins, as raw material and energy costs increased more than averageselling prices during the three months ended September 30, 2006 as comparedwith the 2005 period. For more information, see “—Segment Analysis” below.

·                                          Ouroperating expenses and the operating expenses of Huntsman International for thethree months ended September 30, 2006 increased by $25.0 million and $27.3million, respectively, as compared with the 2005 period. The increase wasprimarily due to the Textile Effects Acquisition on June 30, 2006, offset by areduction in operating expenses as a result of the sale of our U.S. butadieneand MTBE business on June 27, 2006.

·                                          Restructuring,impairment and plant closing costs for the three months ended September 30, 2006decreased to $3.5 million from $66.6 million in the 2005 period. For furtherinformation concerning restructuring activities, see “Note 6. Restructuring,Impairment and Plant Closing Costs” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report.

·                                          Our net interest expense and the netinterest expense of Huntsman International for the three months endedSeptember 30, 2006 decreased by $17.7 million and $18.1 million, or 18%,respectively, as compared with the 2005 period. This decrease was primarily dueto lower average debt balances which resulted from the repayment of debt.

·                                          Ourloss on early extinguishment of debt and the loss on early extinguishment ofdebt of Huntsman International for the three months ended September 30, 2006 decreasedby $26.9 million, and $27.2 million, or 65% and 60%, respectively, as comparedwith the 2005 period, resulting from higher repayment of debt during 2005.

·                                          Our income tax expense decreased by $30.9 millionto a benefit of $17.4 million for the three months ended September 30, 2006 ascompared to an expense of $13.5 million for the same period in 2005. HuntsmanInternational’s income tax expense decreased by $33.3 million to a benefit of$21.3 million for the three months ended September 30, 2006 as compared to anexpense of $12.0 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 and Huntsman International’s tax expense decreased largely due tothe release of tax contingencies resulting from a favorable court decision, therelease of valuation allowances in the U.K. resulting from a change in judgmentabout the realizability of deferred tax assets and net decreases in operatingincome in jurisdictions which record a tax benefit. For further informationconcerning taxes, see “Note 18. Income Taxes” to our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

·                                          The loss from discontinued operations representsthe operating results and loss on disposal of our European base chemicals andpolymers business and our TDI business. For further information, see “Note 3.Discontinued Operations” in our condensed consolidated financial statements (unaudited)included elsewhere in this report.

58

----

·                                          Theextraordinary gain on the acquisition of a business represents the fair valueof the net assets acquired in excess of the purchase price paid for the textileeffects business, after the values of all long-lived assets were reduced tozero. For more information, see “Note 4. Business Disposition andCombination—Textile Effects Acquisition” in our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

**NineMonths Ended September 30, 2006 Compared to Nine Months Ended September 30,2005**

For the ninemonths ended September 30, 2006, we had net income of $149.6 million onrevenues of $8,087.7 million compared to net income of $30.4 million onrevenues of $8,121.0 million for the 2005 period. For the nine months endedSeptember 30, 2006, Huntsman International had net income of $130.2 million onrevenues of $8,087.7 million compared to net income of $198.9 million onrevenues of $8,121.0 million for the 2005 period. The increase of $119.2million in our net income and the decrease of $68.7 million in HuntsmanInternational’s net income were the result of the following items:

·                                          Revenuesfor the nine months ended September 30, 2006 decreased by $33.3 million ascompared with the 2005 period due principally to lower sales volumes in ourPolyurethanes, Performance Products, Polymers and Base Chemicals segments andlower average selling prices in our Pigments segment. This decrease waspartially offset by increased sales volumes in our Materials and Effects andPigments segments and increased average selling prices in our Polyurethanes,Materials and Effects, Performance Products, Polymers and Base Chemicalssegments. For more information, see “—Segment Analysis” below.

·                                          Our gross profit and the gross profit ofHuntsman International for the nine months ended September 30, 2006decreased by $155.1 million and $156.7 million, or 11%, respectively, ascompared with the 2005 period. This decrease in gross profit, which occurred inall of our segments, was mainly due to lower margins, as raw material andenergy costs increased more than average selling prices during the nine monthsended September 30, 2006 as compared with the 2005 period. For moreinformation, see “—Segment Analysis” below.

·                                          Our operating expenses and the expenses ofHuntsman International for the nine months ended September 30, 2006decreased by $79.8 million and $77.2 million, respectively, primarily due to a$90.3 million gain on the sale of our U.S. butadiene and MTBE business onJune 27, 2006 and a resulting reduction in operating expenses, offset in partby an increase in operating expenses related to the Textile Effects Acquisitionon June 30, 2006.

·                                          Restructuring,impairment and plant closing costs for the nine months ended September 30, 2006decreased to $20.0 million from $91.6 million in the 2005 period. For furtherinformation concerning restructuring activities, see “Note 6. Restructuring,Impairment and Plant Closing Costs” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report.

·                                          Our net interest expense and HuntsmanInternational’s net interest expense for the nine months ended September30, 2006 decreased by $77.0 million and $71.2 million, or 23% and 21%,respectively, as compared with the 2005 period. This decrease was primarily dueto lower average debt balances which resulted from the repayment of debt.

·                                          Ourloss on early extinguishment of debt and the loss on early extinguishment ofdebt of Huntsman International decreased for the nine months ended September30, 2006 by $261.9 million, and $103.2 million, or 95% and 85%, respectively, ascompared with the 2005 period, resulting from the repayment of debt during 2005primarily from the proceeds of our initial public offering and operating cashflows.

·                                          Our income tax expense decreased by $20.9 millionto an expense of $16.0 million for the nine months ended September 30, 2006 ascompared to an expense of $36.9 million for the same period in 2005. 

59

----

Huntsman International’s income tax expense increased by $15.3 million toan expense of $58.2 million for the nine months ended September 30, 2006 ascompared to an expense of $42.9 million for the same period in 2005. Our taxobligations are affected by the mix of income and losses in the taxjurisdictions in which we operate. Our tax expense decreased while pre-taxincome increased largely due to the release of tax contingencies resulting froma favorable court decision, the release of valuation allowances in the U.K.resulting from a change in judgment about the realizability of deferred taxassets and net decreases in operating income in jurisdictions which record atax benefit. Huntsman International’s increased tax expense was due largely toincreased pre-tax income offset by the release of tax contingencies and therelease of valuation allowances in the U.K. Additionally, on August 16,2005, we completed the Affiliate Mergers. Prior to the Affiliate Mergers,Huntsman International Holdings, including Huntsman International, was treatedas a partnership for U.S. federal income tax purposes and as such was generallynot subject to U.S. income tax, but rather 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, the taxexpense for the periods ended September 30, 2006 and September 30, 2005 are notcomparable. For further information concerning taxes, see “Note 18. IncomeTaxes” to our condensed consolidated financial statements (unaudited) includedelsewhere in this report.

·                                          The loss from discontinued operations representsthe operating results and loss on disposal of our European base chemicals andpolymers business and our TDI business. For further information, see “Note 3.Discontinued Operations” in our condensed consolidated financial statements(unaudited) included elsewhere in this report.

·                                          Theextraordinary gain on the acquisition of a business represents the fair valueof the net assets acquired in excess of the purchase price paid for the textileeffects business, after the values of all long-lived assets were reduced tozero. For more information, see “Note 4. Business Disposition andCombination—Textile Effects Acquisition” in our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report.

·                                          In2005, we changed the measurement date of our pension and postretirement benefitplans from December 31 to November 30. The effect of the change in measurementdate on the respective obligations and assets of the plan resulted in acumulative effect of a change in accounting principle credit for us of $4.0million ($0.02 per diluted share), net of tax of $1.9 million, and for HuntsmanInternational of $4.2 million, net of tax of $1.5 million, recorded effectiveJanuary 1, 2005.

60

----

**SegmentAnalysis**

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

Thefollowing table sets forth the revenues and EBITDA for each of our operatingsegments (dollars in millions):
|                                             | ** ** | **Three Months Ended September 30,** | ** ** | **Percent** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **2006**                                                 | ** ** | **2005**    | ** ** | **Change** | ** ** |
| **Revenues:**                               | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                               |       | $                                                        | 885.4      |        | $          | 835.3 |   | 6 | % |
| Materials and  Effects                      |       | 551.1                                                    |       | 289.5       |       | 90 | % |
| Performance  Products                       |       | 468.6                                                    |       | 462.4       |       | 1 | % |
| Pigments                                    |       | 278.3                                                    |       | 256.6       |       | 8 | % |
| Polymers                                    |       | 456.5                                                    |       | 427.5       |       | 7 | % |
| Base Chemicals                              |       | 150.7                                                    |       | 458.8       |       | (67 | )% |
| Eliminations                                |       | (104.6                                                   | )          | (142.2      | )          | (26 | )% |
| **Total**                                   |       | $                                                        | 2,686.0    |        | $          | 2,587.9 |   | 4 | % |
|                                        |       |                                                     |       |        |       |   |   |
| **Huntsman  Corporation Segment EBITDA:**   | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                               |       | $                                                        | 134.9      |        | $          | 193.7 |   | (30 | )% |
| Materials and  Effects                      |       | 45.5                                                     |       | 41.3        |       | 10 | % |
| Performance  Products                       |       | 35.7                                                     |       | 25.5        |       | 40 | % |
| Pigments                                    |       | 26.3                                                     |       | 22.6        |       | 16 | % |
| Polymers                                    |       | 32.1                                                     |       | (5.8        | )          | NM |   |
| Base Chemicals                              |       | (213.9                                                   | )          | 8.9         |       | NM |   |
| Corporate and  other                        |       | (47.0                                                    | )          | (83.8       | )          | (44 | )% |
| **Total**                                   |       | $                                                        | 13.6       |        | $          | 202.4 |   | (93 | )% |
|                                        |       |                                                     |       |        |       |   |   |
| **Huntsman  International Segment EBITDA:** | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                               |       | $                                                        | 134.9      |        | $          | 193.7 |   | (30 | )% |
| Materials and  Effects                      |       | 45.5                                                     |       | 41.3        |       | 10 | % |
| Performance  Products                       |       | 35.7                                                     |       | 25.5        |       | 40 | % |
| Pigments                                    |       | 26.3                                                     |       | 22.6        |       | 16 | % |
| Polymers                                    |       | 32.1                                                     |       | (5.8        | )          | NM |   |
| Base Chemicals                              |       | (213.9                                                   | )          | 8.9         |       | NM |   |
| Corporate and  other                        |       | (31.7                                                    | )          | (88.5       | )          | (64 | )% |
| **Total**                                   |       | $                                                        | 28.9       |        | $          | 197.7 |   | (85 | )% |

 

----

NM—Not Meaningful

***Polyurethanes***

For the threemonths ended September 30, 2006, Polyurethanes segment revenues increased by$50.1 million, or 6%, as compared with the 2005 period. This increase wasprimarily a result of higher overall sales volumes. The overall sales volumeincrease was due to a 16% increase in MDI sales volumes, partially offset byreduced MTBE sales volumes. The increase in MDI sales volumes was driven bystrong demand in all geographic markets. Average MDI selling prices declined by3% as compared to the same period in 2005. Lower average MDI prices were due topricing pressures in Asia and Europe, partially offset by positive movements inthe

61

----

Americas. Average MTBEselling prices during the three months ended September 30, 2006 declinedsharply as compared to the comparable period in 2005, primarily as a result oflegislation which has significantly impacted the use of MTBE in the United States.

For the threemonths ended September 30, 2006, Polyurethanes segment EBITDA decreased by$58.8 million, or 30%, as compared with the 2005 period. Segment EBITDA decreasedpredominantly as a result of lower MTBE margins, which were lower due to higherraw material costs. During the three months ended September 30, 2006 and 2005,our Polyurethanes segment recorded restructuring, impairment and plant closingcosts of nil and $0.9 million, respectively. For further information concerningrestructuring activities, see “Note 6. 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 September 30, 2006increased by $261.6 million, or 90%, as compared to the same period in2005. This increase is primarily due to the Textile Effects Acquisition on June30, 2006. The textile effects business contributed $227.6 million in revenuefor the three months ended September 30, 2006, while advanced materialsrevenues for the same period increased by $34.1 million, or 12%, as compared tothe same period in 2005. Advanced materials revenues increased in response to a5% increase in sales volumes. Sales volumes in Europe and the U.S.increased as a result of improved demand in most of our markets and theintroduction of new product lines. Average selling prices increased primarilyin our more competitive markets, such as construction, coatings and wind, inresponse to higher raw materials and energy costs.

Materials andEffects segment EBITDA was $45.5 million for the three months ended September30, 2006, an increase of 10%, as compared to segment EBITDA of$41.3 million for the same period in 2005. Segment EBITDA increasedprimarily as a result of the Textile Effects Acquisition on June 30, 2006. Thetextile effects business contributed $6.8 million to segment EBITDA forthe three months ended September 30, 2006, while segment EBITDA resulting fromadvanced materials operations decreased by $2.6 million, or 6%, ascompared to the same period in 2005. The decrease in advanced materials EBITDAwas primarily a result of a $5.4 million increase in indirect costs andselling, general and administrative expenses, partially in support of newbusiness development initiatives. Contribution margins increased by $3.0million due to higher volumes and average selling prices. In addition, during the three monthsended September 30, 2006 and 2005, our Materials and Effects segment recordedrestructuring and plant closing charges of $1.4 million and nil, respectively.For further information concerning restructuring activities, see “Note 6.Restructuring, Impairment and Plant Closing Costs” to our condensedconsolidated financial statements (unaudited) included elsewhere in thisreport.

***Performance Products***

For the threemonths ended September 30, 2006, Performance Products revenues increased by$6.2 million, or 1%, as compared with the 2005 period. This increase primarilyresulted from higher average selling prices for all major product lines, offsetin part by lower sales volumes in certain product lines. Overall, sales volumesdecreased by 13%, principally due to lower sales of ethylene glycol resultingfrom deteriorating market conditions, the impact of the fire at our PortArthur, Texas manufacturing plant and lower sales of certain surfactants.Stronger volume growth in our higher margin specialties business partiallyoffset this reduction. Average selling prices increased by 16% in response tohigher raw material and energy costs and strong markets for our specialtiesproducts.

For the threemonths ended September 30, 2006, Performance Products segment EBITDA increasedby $10.2 million, or 40%, as compared with the 2005 period. The increase insegment EBITDA resulted primarily from the receipt of $6.0 million of insuranceproceeds related to property damage incurred as a result of the U.S. Gulf Coaststorms of 2005 and lower restructuring expenses. During the three months endedSeptember 30, 2006 and 2005, our Performance Products segment recordedrestructuring, impairment and plant closing charges of $1.1 million and $5.3million, respectively. For further information concerning restructuringactivities, see “Note 6. Restructuring,

62

----

Impairment and PlantClosing Costs” to our condensed consolidated financial statements (unaudited)included elsewhere in this report.

***Pigments***

Forthe three months ended September 30, 2006, Pigments segment revenues increasedby $21.7 million, or 8%, as compared with the 2005 period. This increaseresulted principally from a 5% increase in average selling prices and a 3%increase in sales volumes. Sales volumes were higher primarily due to higherdemand in Europe. Average selling prices increased primarily in Europe and Asiabecause of stronger demand, and in Europe because of positive foreign currencyexchange impacts on selling prices as the U.S. dollar weakened against therelevant European currencies.

Pigments segmentEBITDA for the three months ended September 30, 2006 increased by $3.7 million,or 16%, as compared with the 2005 period, resulting primarily from lowerrestructuring, impairment and plant closing costs, offset somewhat by lowercontribution margins as increases in selling prices and sales volumes were morethan offset by the impact of higher raw material and energy costs. During thethree months ended September 30, 2006 and 2005, our Pigments segment recordedrestructuring, impairment and plant closing credits of $0.2 million and costsof $9.6 million, respectively. For further information concerning restructuringactivities, see “Note 6. Restructuring, Impairment and Plant Closing Costs” toour condensed consolidated financial statements (unaudited) included elsewherein this report.

***Polymers***

For the three months ended September 30, 2006,Polymers revenues increased by $29.0million, or 7%, as compared with the 2005 period, mainly due to a 14%increase in average selling prices, offset in part by a 6% decrease in salesvolumes. Average selling prices increased primarily in response tohigher raw materials and energy costs. Sales volumes were lower primarily dueto decreased customer demand for polyethylene and polypropylene.

For the three months ended September 30, 2006, Polymers segment EBITDAincreased by $37.9 millionas compared to the 2005 period. This increase in segment EBITDA resulted fromincreased average selling prices and lower restructuring, impairment, and plantclosing costs. During the three months ended September 30, 2006 and 2005, ourPolymers segment recorded restructuring, impairment and plant closing chargesof $0.7 million and $48.4 million, respectively. For further informationconcerning restructuring activities, see “Note 6. Restructuring, Impairment andPlant Closing Costs” to our condensed consolidated financial statements(unaudited) included elsewhere in this report.

***Base Chemicals***

Beginning in thethird quarter of 2006, the operating results of our European base chemicals andpolymers business are classified as discontinued operations and, accordingly,the revenues of this business are excluded from the Base Chemicals segmentrevenues for all periods presented. The EBITDA of our European base chemicalsand polymers business is included in the Base Chemicals segment EBITDA for allperiods presented.

For the threemonths ended September 30, 2006, Base Chemicals revenues decreased by $308.1million, or 67%, as compared with the 2005 period. This decrease was mainly dueto a 34% decrease in sales volumes, partially offset by a 34% increase inaverage selling prices. The sales volume decrease was driven principally by a51% decrease in sales volumes of olefins which resulted from the fire at ourPort Arthur, Texas manufacturing plant and the divestiture of our U.S.butadiene and MTBE business. For further discussion of the fire, see “Note 17.Port Arthur, Texas Plant Fire” to our condensed consolidated financial statements(unaudited) included elsewhere in this report. Average selling prices increasedprimarily in response to higher raw material and energy costs.

For the threemonths ended September 30, 2006, Base Chemicals segment EBITDA decreased by$222.8 million as compared with the 2005 period. Segment EBITDA was negativelyimpacted by $260.2 million due to the impairment of our European basechemicals and polymers business as a result of its pending sale. We alsoestimate that segment EBITDA

63

----

was negatively impactedby approximately $66 million in the 2006 period due to lost olefins salesvolumes related to the fire at our Port Arthur, Texas manufacturing plant.During the three months ended September 30, 2006 and 2005, our Base Chemicalssegment recorded restructuring and impairment charges of $156.4 million and$7.0 million, respectively. For further information concerning restructuringactivities, see “Note 3. Discontinued Operations” and “Note 6.Restructuring, Impairment and Plant Closing Costs” to our condensedconsolidated financial statements (unaudited) included elsewhere in thisreport. Segment EBITDA from our European base chemicals and polymers businesswas a loss of $211.6 million and a loss of $4.3 million for the three monthsended September 30, 2006 and 2005, respectively.

***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 and theimpact of purchase accounting adjustments. For the three months ended September30, 2006, EBITDA from corporate and other items improved by $36.8 million to a loss of $47.0 million from a loss of $83.8 million for the 2005 period. The improvementprimarily resulted from a decrease in expenses of $26.9 million related to theloss on early extinguishment of debt, an increase of $16.8 million inunallocated foreign currency gains, and an extraordinary gain of $7.2 millionrelated to the Textile Effects Acquisition, partially offset by a charge of$20.0 million for the impairment of assets in connection with the announcedsale of our European base chemicals and polymers 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 September 30,2006, EBITDA from corporate and other items improved by $56.8 million to a loss of $31.7 million from a loss of $88.5 million for the 2005 period. The improvementprimarily resulted from a decrease in expenses of $27.2 million related to theloss on early extinguishment of debt, an increase of $16.8 million in unallocatedforeign currency gains, and an extraordinary gain of $8.9 million relatedto the Textile Effects Acquisition.

64

----

***Nine months ended September 30, 2006 Compared to Nine months endedSeptember 30, 2005***

The following table sets forth the revenues andEBITDA for each of our operating segments (dollars in millions):
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                                 | ** ** | **2006**                                                | ** ** | **2005**    | ** ** | **Change** | ** ** |
| **Revenues**                               | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                              |       | $                                                       | 2,619.6    |        | $          | 2,609.9 |   | — |   |
| Materials and Effects                      |       | 1,179.0                                                 |       | 911.5       |       | 29 | % |
| Performance Products                       |       | 1,479.0                                                 |       | 1,517.4     |       | (3 | )% |
| Pigments                                   |       | 813.1                                                   |       | 787.5       |       | 3 | % |
| Polymers                                   |       | 1,349.7                                                 |       | 1,249.3     |       | 8 | % |
| Base Chemicals                             |       | 1,062.4                                                 |       | 1,478.9     |       | (28 | )% |
| Eliminations                               |       | (415.1                                                  | )          | (433.5      | )          | (4 | )% |
| **Total**                                  |       | $                                                       | 8,087.7    |        | $          | 8,121.0 |   | — |   |
|                                       |       |                                                    |       |        |       |   |   |
| **Huntsman Corporation Segment  EBITDA**   | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                              |       | $                                                       | 474.6      |        | $          | 535.0 |   | (11 | )% |
| Materials and Effects                      |       | 114.3                                                   |       | 135.5       |       | (16 | )% |
| Performance Products                       |       | 155.0                                                   |       | 158.0       |       | (2 | )% |
| Pigments                                   |       | 91.4                                                    |       | 86.5        |       | 6 | % |
| Polymers                                   |       | 99.0                                                    |       | 71.6        |       | 38 | % |
| Base Chemicals                             |       | (51.9                                                   | )          | 252.0       |       | NM |   |
| Corporate and other                        |       | (88.3                                                   | )          | (422.8      | )          | (79 | )% |
| **Total**                                  |       | $                                                       | 794.1      |        | $          | 815.8 |   | (3 | )% |
|                                       |       |                                                    |       |        |       |   |   |
| **Huntsman International Segment  EBITDA** | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** |
| Polyurethanes                              |       | $                                                       | 474.6      |        | $          | 535.0 |   | (11 | )% |
| Materials and Effects                      |       | 114.3                                                   |       | 135.5       |       | (16 | )% |
| Performance Products                       |       | 155.0                                                   |       | 158.0       |       | (2 | )% |
| Pigments                                   |       | 91.4                                                    |       | 86.5        |       | 6 | % |
| Polymers                                   |       | 99.0                                                    |       | 71.6        |       | 38 | % |
| Base Chemicals                             |       | (51.9                                                   | )          | 252.0       |       | NM |   |
| Corporate and other                        |       | (82.2                                                   | )          | (271.1      | )          | (70 | )% |
| **Total**                                  |       | $                                                       | 800.2      |        | $          | 967.5 |   | (17 | )% |

 

----

NM - Not Meaningful

 

***Polyurethanes***

Forthe nine months ended September 30, 2006, Polyurethanes segment revenuesincreased by $9.7 million, as compared with the 2005 period. This increase wasprimarily a result of 7% growth in MDI sales volumes, partially offset by lowervolumes in MTBE and a decline in MDI average selling prices. Lower average MDIselling prices were due to pricing pressures in Asia and Europe in response tothe expectation of new industry capacity. The increase in MDI sales volumes wasdriven mainly by strong growth in insulation-related applications. MTBErevenues declined as slightly higher average selling prices were more thanoffset by a reduction in sales volumes as we undertook efforts to improvePO/MTBE plant optimization by reducing our production of by-product MTBE.

Forthe nine months ended September 30, 2006, Polyurethanes segment EBITDAdecreased to $474.6 million as compared with $535.0 million for the 2005period. The decrease resulted from lower sales volumes, largely MTBE and tradesales, coupled with lower contribution margins, primarily in MTBE. MTBEcontribution margins were lower due to the fact that raw material costsincreased more than average selling prices. Polyurethanes segment EBITDA wasalso impacted, in part, by lower losses from the discontinued TDI operations of$42.0 million, a gain of $8.8 million in the 2006 period related to propertyloss recoveries and lower restructuring, impairment and plant closing costs.During the nine months ended September 30, 2006, our Polyurethanes segmentrecorded a restructuring, impairment and plant closing credit of $2.2 millionas compared with a charge of $5.0 million in the 2005 period. For

65

----

furtherinformation concerning restructuring activities, see “Note 6. Restructuring,Impairment and Plant Closing Costs” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report.

***Materials and Effects***

Materialsand Effects revenues for the nine months ended September 30, 2006 increased by$267.5 million, or 29%, as compared to the same period in 2005. Thisincrease is primarily due to the Textile Effects Acquisition on June 30, 2006.The textile effects business contributed $227.6 million of revenue for the ninemonths ended September 30, 2006, while advanced materials revenues for the sameperiod increased by $39.9 million, or 4%, as compared to the same period in2005. The increase in advanced materials revenues was primarily attributable toa 6% increase in sales volumes, offset by lower average selling prices. Averageselling prices were lower in most markets in Europe and Asia and also decreaseddue to negative foreign currency exchange impacts as the U.S. dollarstrengthened against the relevant European currencies, but these effects werepartially offset by higher selling prices in the Americas. Sales volumesincreased in all regions as a result of improved demand and the introduction ofadditional product lines.

Materialsand Effects EBITDA for the nine months ended September 30, 2006 decreased by$21.2 million, or 16%, as compared to the same period in 2005. The textileeffects business contributed $5.5 million to segment EBITDA for the ninemonths ended September 30, 2006, while advanced materials EBITDA for the sameperiod decreased by $26.7 million, or 20%, as compared to the same periodin 2005. Advanced materials EBITDA decreased primarily due to increasedoperating expenses of $17.3 million, partially in support of new businessdevelopment initiatives, and in response to a negative foreign currencyexchange impact. During the nine months ended September 30, 2006, ourMaterials and Effects segment recorded restructuring, impairment and plantclosing costs of $3.4 million as compared with a credit of $0.6 millionin the 2005 period. For further information concerning restructuringactivities, see “Note 6. Restructuring, Impairment and Plant Closing Costs” toour condensed consolidated financial statements (unaudited) included elsewherein this report.

***Performance Products***

Forthe nine months ended September 30, 2006, Performance Products revenuesdecreased by $38.4 million, or 3%, as compared with the 2005 period. Thisdecrease was primarily a result of lower sales volumes in certain productlines, partially offset by higher average selling prices for all major productlines. Overall, sales volumes decreased by 13%, principally due to lower salesof ethylene glycol resulting from deteriorating market conditions, the impactof the fire at our Port Arthur, Texas manufacturing plant and lower sales ofcertain surfactants. Average selling prices increased by 12% in response tohigher raw material and energy costs and strong market conditions for ourspecialties products.

Forthe nine months ended September 30, 2006, Performance Products segment EBITDAdecreased by $3.0 million, or 2%, as compared with the 2005 period. Thisdecrease resulted primarily from lower earnings in ethylene glycol, partiallyoffset by higher earnings in our specialties business and lower restructuringcosts. Higher raw material and energy prices were recovered through higheraverage selling prices across all product lines, except ethylene glycol. Duringthe nine months ended September 30, 2006 and 2005, our Performance Productssegment recorded restructuring, impairment and plant closing charges of $0.7million and $6.6 million, respectively. For further information concerningrestructuring activities, see “Note 6. Restructuring, Impairment and PlantClosing Costs” to our condensed consolidated financial statements (unaudited)included elsewhere in this report.

***Pigments***

Forthe nine months ended September 30, 2006, Pigments revenues increased by $25.6million, or 3%, as compared with the 2005 period. The increase resultedprincipally from a 4% increase in sales volumes, offset slightly by a 1%decrease in average selling prices. Sales volumes were higher primarily due toimproved customer demand in Europe. Average selling prices decreased in Europeprimarily as a result of negative foreign currency exchange impacts on sellingprices as the U.S. dollar strengthened against the relevant Europeancurrencies.

66

----

Pigmentssegment EBITDA for the nine months ended September 30, 2006 increased by $4.9million, or 6%, as compared with the 2005 period, resulting primarily fromlower restructuring, impairment and plant closing costs, offset in part bylower contribution margins related to higher raw material and energy costs.During the nine months ended September 30, 2006 and 2005, our Pigments segmentrecorded restructuring, impairment and plant closing charges of $2.4 millionand $26.9 million, respectively. For further information concerningrestructuring activities, see “Note 6. Restructuring, Impairment and PlantClosing Costs” to our condensed consolidated financial statements (unaudited)included elsewhere in this report.

***Polymers***

For the nine months ended September 30, 2006,Polymers revenues increased by $100.4million, or 8%, as compared with the 2005 period, mainly due to an 11%increase in average selling prices, offset in part by a 3% decrease in salesvolumes. Average selling prices were higher primarily due to tighter marketconditions and in response to an increase in raw material and energy costs.Sales volumes to outside customers decreased as a result of continued weakdemand for our Australian styrenics and expandable polystyrene products.

For the nine months ended September 30, 2006,Polymers segment EBITDA increased by $27.4 million, or 38%, as compared to the 2005period. This increase in segment EBITDA resulted from increased average sellingprices and lower restructuring, impairment, and plant closing costs. During thenine months ended September 30, 2006 and 2005, our Polymers segment recordedrestructuring, impairment and plant closing charges of $5.0 million and $51.3 million, respectively. For further informationconcerning restructuring activities, see “Note 6. Restructuring, Impairment andPlant Closing Costs” to our condensed consolidated financial statements(unaudited) included elsewhere in this report.

***Base Chemicals***

Beginningin the third quarter of 2006, the operating results of our European basechemicals and polymers business are classified as discontinued operations and,accordingly, the revenues of this business are excluded from the Base Chemicalssegment revenues for all periods presented. The EBITDA of our European basechemicals and polymers business is included in the Base Chemicals segmentEBITDA for all periods presented.

Forthe nine months ended September 30, 2006, Base Chemicals revenues decreased by$416.5 million, or 28%, as compared with the 2005 period. This decrease wasmainly due to a 23% decrease in sales volumes, partially offset by a 20%increase in average selling prices. The sales volume decrease was drivenprincipally by 28% lower sales volumes of olefins which resulted from the fireat our Port Arthur, Texas manufacturing plant, unplanned outages at ourJefferson County, Texas production facilities and the divestiture of our U.S.butadiene and MTBE business on June 27, 2006. The Jefferson County outagesresulted because we were unable to obtain sufficient energy from a supplierfollowing an outage at the supplier’s facility related to the 2005 Gulf Coaststorms. Higher average selling prices resulted primarily in response to higherraw material and energy costs.

Forthe nine months ended September 30, 2006, Base Chemicals segment EBITDAdecreased by $303.9 million, as compared with the 2005 period. The decrease insegment EBITDA was due to lower contribution margins as raw material and energycosts increased more than average selling prices, particularly in our U.K.operations. Higher restructuring, impairment and plant closing costs, resultingprincipally from a $260.2 million impairment of our European Base chemicals andpolymers business and $9.4 million of asset write-offs related to the fire atour Port Arthur, Texas plant, also resulted in lower segment EBITDA. Weestimate that segment EBITDA was negatively impacted by approximately $110million in the 2006 period due to lost olefins sales volumes related to thefire at our Port Arthur, Texas plant. For further discussion of the fire, see “Note17. Port Arthur, Texas Plant Fire” to our condensed consolidated financialstatements (unaudited) included elsewhere in this report. This decrease waspartially offset by a $90.3 million gain on the sale of our U.S. butadieneand MTBE business in the 2006 period. During the nine months ended September30, 2006 and 2005, our Base Chemicals segment recorded restructuring andimpairment charges of $266.1 million and $11.3 million, respectively. Forfurther information concerning restructuring activities, see “Note 3.Discontinued Operations” and “Note 6. Restructuring, Impairment and PlantClosing Costs” to our condensed consolidated financial statements (unaudited)included elsewhere in this report. EBITDA from our European base

67

----

chemicals and polymersbusiness was a loss of $176.7 million compared to earnings of $158.5 millionfor the nine months ended September 30, 2006 and 2005, respectively.

***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, the extraordinary gain on acquisition of a business, cumulativeeffect of a change in accounting principle and the impact of purchaseaccounting adjustments. For the nine months ended September 30, 2006, EBITDAfrom corporate and other items improved by $334.5 million to a loss of $88.3 million from a loss of $422.8 million for the 2005 period. The improvementprimarily resulted from a decrease in expenses of $261.9 million related to theloss on early extinguishment of debt, an increase of $48.5 million inunallocated foreign currency gains and an extraordinary gain of $57.7 millionrelated to the Textile Effects Acquisition, partially offset by a charge of$20.0 million for the impairment of assets in connection with the announcedsale of our European base chemicals and polymers business.

***Corporate and Other - HuntsmanInternational***

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, the extraordinary gain on acquisition of a business andcumulative effect of a change in accounting principle. For the nine monthsended September 30, 2006, EBITDA from corporate and other items improved by $188.9million to a loss of $82.2million from a loss of $271.1 million for the 2005 period. The improvementprimarily resulted from a decrease in expenses of $103.2 million related to theloss on early extinguishment of debt, an increase of $48.5 million in unallocatedforeign currency gains and an extraordinary gain of $55.0 million related tothe Textile Effects Acquisition.

**Liquidity and Capital Resources**

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

**Cash**

Net cash provided by operating activities for thenine months ended September 30, 2006 and 2005 was $610.9million and $709.3 million, respectively. The decrease in cashprovided by operations was primarily attributable to a decrease in income fromdiscontinued operations, partially offset by a decrease in interest expense anda loss on early extinguishment of debt, as described in “Results of Operations”above.

Net cash used in investing activities for the ninemonths ended September 30, 2006 and 2005 was $295.0 million and $219.1 million, respectively. During the nine monthsended September 30, 2006 and 2005, we invested $327.0 million and $202.0 million, respectively, in capitalexpenditures. The increase in 2006 capital expenditures was largelyattributable to increased spending on our LDPE facility under construction atWilton, U.K. During the nine months ended September 30, 2006, we spent$130.1 million on the construction of our Wilton, U.K. LDPE facility ascompared to $12.9 million for the 2005 period. Also during the nine monthsended September 30, 2006, we acquired the textile effects business for $173.2 million, net of cash acquired, sold our U.S.butadiene and MTBE business for $274.0 million, of which $192.0 millionwas paid at closing, $7.9 million was received during the third quarter of 2006and $4.1 million was received in October 2006, while the additional $70.0million will be payable after closing, if certain conditions are met. For moreinformation, see “Note 4. Business Disposition and Combination—Sale ofU.S. Butadiene and MTBE Business” to ourcondensed consolidated financial statements (unaudited) included elsewhere inthis report. In 2005, in connection with the initial public offering of our 5%mandatory convertible preferred stock, we prefunded our dividend obligationsthrough the mandatory conversion date of February 16, 2008 withinvestments in government securities of $40.9 million. As reflected infinancing activities, we used $10.8 million and $7.2 million of thesegovernment securities to pay dividends during the nine months ended September30, 2006 and 2005, respectively.

68

----

Net cash used in financing activities for the ninemonths ended September 30, 2006 was $214.8 million as compared with $531.0 million in the 2005 period. This decrease innet cash used by financing activities is mainly a result of net repayments ofdebt during the nine months ended September 30, 2005 of $1,899.3 million,primarily as a result of our initial public offering of common stock and mandatoryconvertible preferred stock in the first quarter of 2005. As a result of ourinitial public offering, we received $1,491.9 million of net proceeds. Also,during the nine months ended September 30, 2005, we used approximately$109.0 million to pay premiums associated with repayment of indebtedness.During the nine months ended September 30, 2006, we had net repayments underour debt arrangements of $194.4 million and used $12.5 million to paypremiums associated with repayment of indebtedness.

**Changes in Financial Condition**

The following information summarizes our workingcapital position as of September 30, 2006 (after giving effect to the sale ofour U.S. butadiene and MTBE business, the classification of our European basechemicals and polymers business as held for sale and the Textile Effects Acquisition)and December 31, 2005 (dollars in millions):
| ** **                         | ** ** | **September 30,** | ** ** | **U.S. Butadiene** | ** ** | **European Base**               | ** ** | **Textile** | ** ** | ** **   | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **Percent** | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------------|------------|--------------------------------------|------------|-------------|------------|--------------|------------|-----------------------|------------|----------------|------------|-------------|------------|
| ** **                         | ** ** | **2006**               | ** ** | **and MTBE(1)**    | ** ** | **Chemicals and Polymers** | ** ** | **Effects** | ** ** | **Subtotal** | ** ** | **2005**              | ** ** | **(Decrease)** | ** ** | **Change**  | ** ** |
| **Current  assets:**               |       |                   |       |                    |       |                                 |       |        |       |         |       |                  |       |           |       |        |       |
| Cash and cash  equivalents         |       | $                      | 245.8      |                    | $          | —                               |       | $           | —     |         | $          | (65.3                 | )          | $              | 180.5      |        | $          | 142.8 |   | $ | 37.7 |   | 26 | % |
| Accounts  receivable, net          |       | 1,415.4                |       | 48.2                    |       | 186.1                                |       | (233.5      | )          | 1,416.2      |       | 1,482.6               |       | (66.4          | )          | (4          | )%         |
| Inventories, net                   |       | 1,422.2                |       | 20.0                    |       | 187.3                                |       | (229.6      | )          | 1,399.9      |       | 1,309.2               |       | 90.7           |       | 7           | %          |
| Prepaid expenses                   |       | 73.0                   |       | —                  |       | 20.1                                 |       | (2.9        | )          | 90.2         |       | 46.2                  |       | 44.0           |       | 95          | %          |
| Deferred income  taxes             |       | 59.3                   |       | —                  |       | —                               |       | (25.6       | )          | 33.7         |       | 31.2                  |       | 2.5            |       | 8           | %          |
| Other current  assets              |       | 134.2                  |       | —                  |       | 8.4                                  |       | (67.6       | )          | 75.0         |       | 84.0                  |       | (9.0           | )          | (11         | )%         |
| Current assets  held for sale      |       | 401.9                  |       | —                  |       | (401.9                               | )          | —      |       | —       |       | —                |       | —         |       | —      |       |
| Total current  assets              |       | 3,751.8                |       | 68.2                    |       | —                               |       | (624.5      | )          | 3,195.5      |       | 3,096.0               |       | 99.5           |       | 3           | %          |
|                               |       |                   |       |                    |       |                                 |       |        |       |         |       |                  |       |           |       |        |       |
| **Current  liabilities:**          |       |                   |       |                    |       |                                 |       |        |       |         |       |                  |       |           |       |        |       |
| Accounts payable                   |       | 1,046.8                |       | 45.3                    |       | 183.3                                |       | (141.2      | )          | 1,134.2      |       | 1,093.5               |       | 40.7           |       | 4           | %          |
| Accrued  liabilities               |       | 601.3                  |       | —                  |       | 131.3                                |       | (87.9       | )          | 644.7        |       | 747.2                 |       | (102.5         | )          | (14         | )%         |
| Deferred income  taxes             |       | 24.3                   |       | —                  |       | 8.6                                  |       | (27.6       | )          | 5.3          |       | 2.4                   |       | 2.9            |       | 121         | %          |
| Current portion  of long-term debt |       | 226.8                  |       | —                  |       | —                               |       | —      |       | 226.8        |       | 44.6                  |       | 182.2          |       | 409         | %          |
| Current liabilities  held for sale |       | 323.2                  |       | —                  |       | (323.2                               | )          | —      |       | —       |       | —                |       | —         |       | —      |       |
| Total current  liabilities         |       | 2,222.4                |       | 45.3                    |       | —                               |       | (256.7      | )          | 2,011.0      |       | 1,887.7               |       | 123.3          |       | 7           | %          |
| Working capital                    |       | $                      | 1,529.4    |                    | $          | 22.9                                 |       | $           | —     |         | $          | (367.8                | )          | $              | 1,184.5    |        | $          | 1,208.3 |   | $ | (23.8 | ) | (2 | )% |

 

----

(1)                                  RepresentsDecember 31, 2005 balances.

During the nine months ended September 30, 2006, ourworking capital position was significantly impacted by the three transactions referencedabove. Excluding these transactions, our working capital decreased by $23.8 millionas a result of the net impact of the following significant changes:

·                  The increase in cash and cash equivalents of$37.7 million resulted from the matters identified in the ConsolidatedStatements of Cash Flows contained in our condensed consolidatedfinancial statements (unaudited) includedelsewhere in this report.

·                  Inventories increased $90.7 million primarily dueto an increase in raw materials costs.

·                  The increase in prepaid expenses of$44.0 million was mainly attributableto an increase in prepaid insurance.

69

----

·                  Accrued liabilities decreased by $102.5 milliondue primarily to lower income and other taxes payable, payroll, accruedinterest and rebate accruals.

·                  Current portion of long-term debt increased by$182.2 million primarily dueto an increase in the current classification of $55.6 million of non-recoursedebt in our Australian subsidiaries that becomes due in August 2007, $34.5million of insurance premium financing, $21.1 million of Term Loan debt and$69.0 million of borrowings under our Revolving Facility.

**Debt and Liquidity**

During 2005, we completed a series of transactionsdesigned to simplify our consolidated group’s financing and public reportingstructure, to reduce our cost of borrowings and to facilitate other organizationalefficiencies. On February 16, 2005, we completed our initial publicoffering of common and mandatory convertible preferred stock that resulted in approximately$1.5 billion in net proceeds, substantially all of which were used torepay indebtedness. On August 16, 2005, we completed the Huntsman LLCMerger and on December 20, 2005 we completed the Huntsman AdvancedMaterials Minority Interest Transaction. As a result of these transactions, wenow operate all of our businesses through Huntsman International andsubstantially all of our debt obligations are obligations of HuntsmanInternational and/or its subsidiaries.

***Subsidiary Debt***

With the exception of our guarantees of certain debtof our Chinese joint ventures and certain indebtedness incurred from time totime to finance certain insurance premiums, we have no direct debt or guaranteeobligations. Substantially all of our debt has been incurred by oursubsidiaries (primarily Huntsman International); such debt is non-recourse tous and we have no contractual obligation to fund our subsidiaries’ respectiveoperations.

***Credit Facilities***

As of September 30, 2006, our Senior CreditFacilities consisted of (i) the $650 million Revolving Facility,(ii) the $1,991.5 million Dollar Term Loan, and (iii) the €91.2 million($115.9 million) Euro Term Loan. As of September 30, 2006, there were$69.0 million borrowings outstanding under the Revolving Facility, and we had $39.4million in U.S. dollarequivalents of letters of credit and bank guarantees issued and outstandingunder the Revolving Facility. As of September 30, 2006, the weighted averageinterest rate on our Senior Credit Facilities was approximately 7%, excluding the impact of interest ratehedges.

OnAugust 1, 2006, we made a voluntary repayment of $50.0 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.

Weentered into the June 30, 2006 Amendment to our Senior Credit Facilities toprovide for an additional $100 million of borrowings under the Dollar TermLoan. We borrowed the additional amounts under the Dollar Term Loan on July 14,2006 and, on July 24, 2006, used the proceeds to redeem all of our $100 millionoutstanding senior floating rate notes due 2011 (the “2011 Senior Floating RateNotes”) at a call price of 104.0% of the aggregate principal amount thereof.The June 30, 2006 Amendment also modified certain other provisions in ourSenior Credit Facilities, including certain financial covenants.

70

----

***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 September 30, 2006, Huntsman International had outstanding $296.0 millionaggregate principal amount ($293.9 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 payablesemiannually in April and October of each year.

***Senior Notes***

As of September 30, 2006, Huntsman International hadoutstanding $250.0 million aggregate principal amount ($252.3 millionbook value) 9.875% 2009 Senior Notes that were issued at a premium. The 2009Senior Notes are unsecured obligations. Interest on the 2009 Senior Notes ispayable semiannually in March and September and these notes are redeemableafter March 1, 2006 at 104.937% of the original aggregate principal amountthereof, declining ratably to par on and after March 1, 2008. OnJuly 13, 2006, Huntsman International entered into a transaction to repurchase$37.5 million of its 2009 Senior Notes at a price of 105% of the aggregateprincipal amount thereof. In addition, on August 14, 2006 and on September 20,2006, we completed redemptions of $62.5 million and $100.0 million,respectively, of the 2009 Senior Notes at a call price of 104.937% plus accruedinterest. We funded these redemptions from available liquidity, including fromcash, borrowings under our Revolving Facility and issuance of commercial paperunder our off balance sheet A/R Securitization Program

As of September 30, 2006, Huntsman International hadoutstanding $198.0 million ($300 million original aggregate principalamount) of 11.5% senior unsecured fixed rate notes due 2012 (the “2012 SeniorFixed Rate Notes”). Interest on the 2012 Senior Fixed Rate Notes is payablesemiannually in January and July of each year. The 2012 Senior Fixed Rate Notesare redeemable after July 15, 2008 at 105.75% of the principal amountthereof, declining ratably to par on and after July 15, 2010.

As provided for in the June 30, 2006 Amendment and asnoted above, on July 14, 2006 we borrowed an additional $100 million under theDollar Term Loan and, on July 24, 2006, redeemed in full the outstanding 2011Senior Floating Rate Notes at 104.0% of the principal amount thereofoutstanding.

***Subordinated Notes***

As of September 30, 2006, we had outstanding$175.0 million 7.375% 2015 Subordinated Notes and €135.0 million($171.5 million) 7.5% 2015 Subordinated Notes. The 2015 Subordinated Notesare redeemable on or after January 1, 2010 at 103.688% and 103.750%,respectively, of the principal amount thereof, declining ratably to par on andafter January 1, 2013. Under the terms of a registration rights agreementamong Huntsman International, the subsidiary guarantors and the initialpurchasers of the 2015 Subordinated Notes, we were required to complete anexchange offer for the 2015 Subordinated Notes on or before September 11, 2005.Because we did not complete the exchange offer by this date, we were requiredto pay additional interest on the 2015 Subordinated Notes at a rate of 0.25%per year for the first 90-day period following this date, and this rateincreased by an additional 0.25% for each subsequent 90-day period, up to amaximum of 1.0%. As of September 30, 2006, we were paying an additional 1.0% onthe 2015 Subordinated Notes and had paid a total of $2.4 million inadditional interest. Additional interest will cease to accrue upon theearlier of the completion of the exchange offer or December 17, 2006. Since weare not able to complete the exchange offer before this date, we have withdrawnthe registration statement relating to the exchange offer.

As of September 30, 2006, we also had outstanding$366.1 million ($600 million original aggregate principal amount) and €372.0 million($472.7 million) (€450 millionoriginal aggregate principal amount) 10.125% 2009 Subordinated Notes. As ofSeptember 30, 2006, the 2009 Subordinated Notes have an unamortized premium of$3.3 million and, as of July 1, 2006, are redeemable at 101.688% decliningto par on and after July 1, 2007.

71

----

On November 13, 2006, we completed the New SubordinatedNotes Offering consisting of €400 million ($508.0 million) 6.875%euro-denominated 2013 Subordinated Notes and $200 million 7.875% U.S.dollar-denominated 2014 Subordinated Notes. We intend to use the estimated netproceeds of approximately $699 million to redeem all (approximately $366million) of our outstanding U.S. dollar-denominated 10.125% 2009 SubordinatedNotes and a portion (approximately €258 million) of our outstandingeuro-denominated 10.125% 2009 Subordinated Notes. The call price of the 2009Subordinated Notes is 101.688% plus accrued interest. As a result of theredemption of the 2009 Subordinated Notes, which is expected to be completed onDecember 1, 2006, we expect to record a loss on early extinguishment of debt inthe fourth quarter of 2006 of approximately $12 million, and we expect toreduce our annual interest expense by approximately $17 million.

The2013 Subordinated Notes are redeemable on or after November 15, 2009 at105.156%, declining ratably to par on or after November 15, 2012. The 2014 SubordinatedNotes are redeemable on or after November 15, 2012. The New Subordinated Notesare unsecured and interest is payable semiannually on November 15 and May 15 ofeach year. The indentures governing the New Subordinated Notes containcovenants relating to, among other things, the incurrence of debt, limitationson asset sales, limitations on distributions and limitations on affiliatetransactions. The indentures also contain change of control provisionsrequiring us to offer to repurchase the New Subordinated Notes upon a change ofcontrol. The New Subordinated Notes are guaranteed by the same guarantors asour outstanding notes.

As of September 30, 2006, we had outstanding acombined total of $541.1 million and €507.0 million ($644.2 million) Subordinated Notes, plus$3.3 million of unamortized premium. Interest on the 2009 SubordinatedNotes and the 2015 Subordinated Notes is payable semiannually in January andJuly of each year.

***Other Debt***

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

InJanuary 2003, Huntsman International entered into two related joint ventureagreements to build MDI production facilities near Shanghai, China. SLIC, ourmanufacturing joint venture with BASF AG and three Chinese chemical companies,operates three plants that manufacture MNB, aniline and crude MDI. Weeffectively own 35% of SLIC and it is an unconsolidated affiliate. HPS, oursplitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd,operates a plant that manufactures pure MDI, polymeric MDI and MDI variants. Weown 70% of HPS and it is a consolidated affiliate.

HPS has obtained secured loans for the constructionof its MDI production facility. This debt consists of various committed loansin the aggregate amount of approximately $121 million. As of September 30,2006, HPS had $20.5 million outstanding in U.S. dollar borrowings and 350.0 millionin RMB borrowings ($44.3 million) under these facilities. The interestrate on these facilities is LIBOR plus 0.48% for U.S. dollar borrowings and 90%of the Peoples Bank of China rate for RMB borrowings. As of September 30, 2006,the interest rate was approximately 5.8% for U.S. dollar borrowings and 5.0%for RMB borrowings. The loans are secured by substantially all the assets ofHPS and will be repaid in 16 semiannual installments beginning no later thanSeptember 30, 2007. We have guaranteed 70% of any amount due and unpaid by HPSunder the loans described above (except for the VAT facility, which is notguaranteed). Our guarantees remain in effect until HPS has commenced productionof at least 70% of capacity for at least 30 days and achieved a debtservice cost ratio of at least 1.5:1. Our Chinese MDI joint ventures areunrestricted subsidiaries under the Senior Credit Facilities and under theindentures governing our outstanding notes. HPS commenced operations on June 30,2006.

Our Australian subsidiaries maintain creditfacilities that had an aggregate outstanding balance of A$78.4 million($58.8 million) as of September 30, 2006. These facilities arenon-recourse to us and bear interest at the Australian index rate plus a marginof 2.9%. As of September 30, 2006, the interest rate for these facilities was9.1%. The Australian credit facilities mature in August 2007 and all borrowingsunder such facilities have been classified as current portion of debt.

In July 2006, in conjunction with our annual renewalof property and liability insurance programs, we financed substantially all ofour premiums for the 2006/2007 renewal period and at such date HuntsmanInternational entered into notes payable in the amount of $65.6 milliondue in the next twelve months. As of September 30, 2006, the outstanding amountdue under these notes is $55.1 million. Insurance premium financings aregenerally secured by the unearned premiums under such policies.

**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.

72

----

**Short-Term and Long-TermLiquidity**

Wedepend upon our credit facilities and other debt instruments to provideliquidity for our operations and working capital needs. As of September 30,2006, we had approximately $808.9 million of combined cash and combinedunused borrowing capacity, consisting of $245.8 million in cash, $541.6 millionin availability under our Revolving Facility, $15.0 million attributableto our European Overdraft Facility and approximately $6.5 million inavailability under our A/R Securitization Program. With the expected sale ofour European base chemicals and polymers business, we anticipate that ouravailability under our $500 million A/R Securitization Program will benegatively impacted during several months of the year when our receivables underthe program are expected to be seasonally low, such as near year end and latesummer. We anticipate this impact to be approximately $50 million during suchperiods.

As aresult of the fire damage at our Port Arthur, Texas facility that occurred onApril 29, 2006, we have experienced a temporary decline in working capital asit relates to this facility. As of September 30, 2006, we believe this declinein working capital improved liquidity by approximately $40 million, and weexpect our working capital to return to normal operating levels at the time thefacility is restarted.

Wecarry normal and customary insurance coverage for property damage and businessinterruption. With respect to coverage for the outage caused by the fire damageat our Port Arthur, Texas facility, the deductible for property damage is $10million, while business interruption coverage does not apply for the first 60days. We are filing claims under our insurance policies for property damage andbusiness interruption. We currently estimate that the total cost to repair andreplace damaged equipment, including costs for a required turnaround andinspection, will be approximately $130 million. For the nine months endedSeptember 30, 2006, we estimate that we have incurred approximately $10.7million of related expenses, and we recorded a corresponding receivable. As ofSeptember 30, 2006, we have also recorded a receivable of $20.7 million for theprobable recovery of fixed costs. We will continue to incur certain fixed costsduring the business interruption period and certain other costs to respond andclean up the facility. We expect to record receivables for anticipatedrecoveries of such costs to the extent these costs are incurred, net ofdeductibles. Any insurance recoveries received in excess of costs alreadyincurred, for which receivables are recorded, are expected to be recorded asincome in the period of receipt. Through September 30, 2006, we estimate thatour business interruption lost profits were $142.3 million, and we estimatethat $91.1 million of such lost profits were incurred after the 60 daydeductible period. Although we can provide no assurances, we expect to receiveinterim partial progress payments from our insurers beginning late in thefourth quarter of 2006. Nevertheless, we expect to receive most of theinsurance proceeds in 2007. While we can provide no assurances, on apreliminary basis, we expect to restart the Port Arthur, Texas facility late inthe second quarter of 2007.

Wehave filed claims under our insurance policies for the recovery of damages,including for property damage and business interruption, resulting from the2005 U.S. Gulf Cost storms. Our insurers have agreed to an interim progresspayment of $12.5 million. As of September 30, 2006, we have received$1.5 million and have recorded receivables for the remaining $11.0million. We expect to collect this amount prior to year end. While we canprovide no assurances that we will recover additional damages, we anticipateobtaining additional partial recoveries, net of insurance deductibles, untilfinal settlement of the claims are reached with our insurers. Any suchrecoveries in excess of previously recorded receivables will be recorded asother operating income.

Inconnection with the sale of our U.S. butadiene and MTBE business, a portion($70 million) of the purchase price will be payable to us after therestart of our Port Arthur, Texas facility that was damaged by fire and therelated resumption of crude butadiene supply, provided that we achieve certainintermediate steps toward restarting the facility within 30 months of thesale.

Werecently finalized the working capital settlement of $12.0 million related tothe sale of our U.S. butadiene and MTBE business. As of September 30, 2006, wehad received $7.9 million of the settlement amount, and we recorded areceivable of $4.1 million for the remaining amount, which we received inOctober 2006. We are currently finalizing the working capital settlement relatedto the Textile Effects Acquisition. As of September 30, 2006, we had recorded areceivable for the working capital settlement of $21.4 million related to the TextileEffects Acquisition. We expect the working capital settlement amounts to becollected during the fourth quarter of 2006.

Asdiscussed in “—Recent Developments—Announced Divestiture of European BaseChemicals and Polymers Business” above, we expect to close the announced saleof our European base chemicals and polymers business to SABIC by the end of2006 for an aggregate purchase price of $700 million in cash plus theassumption by the purchaser of approximately $126 million in unfunded pensionliabilities. We intend to use the net proceeds to redeem in full the remaining$250 million outstanding principal amount of our 9.875% 2009 Senior Notes andto repay a portion of the debt under our Senior Credit Facilities.

Webelieve our current liquidity, together with funds generated by our businesses,is sufficient to meet the short-term and long-term needs of our businesses,including funding operations, making capital expenditures and servicing our debtobligations in the ordinary course.

**Capital Expenditures**

Excludingcapital expenditures relating to the fire damage at our Port Arthur, Texasfacility discussed below, we expect to spend between approximately $500 millionand $550 million on capital projects in 2006, including approximately $200million in capital expenditures on our LDPE facility at Wilton, U.K. (whichwill be sold as part of the sale of our European base chemicals and polymersbusiness). We incurred approximately $40 million in capital expendituresassociated with the LDPE project prior to 2006. We expect to finance our capital expenditurecommitments through a combination of cash flows from operations and financingarrangements. With respect to expenditures related to the fire damage atour Port Arthur, Texas facility, based on preliminary inspection and review, weestimate that the costs to repair and replace damaged equipment will beapproximately $130 million.

Capital expenditures for the nine months endedSeptember 30, 2006 were $327.0 million as compared with$202.0 million in the 2005 period. The increase in capital expenditures inthe 2006 period was largely attributable to increased capital expenditures atour Wilton, U.K. LDPE project which had approximately $130.1 million incapital spending during the nine months ended September 30, 2006 as compared toapproximately $12.9 million spent in the comparable period in 2005. Duringthe nine months ended September 30, 2006, we completed our equity investmentsin HPS, our consolidated Chinese joint venture, and SLIC, our unconsolidatedChinese joint venture, and during 2006, funded approximately $15 millionas equity in HPS and $14 million as equity in SLIC. HPS commencedoperations on June 30, 2006 and SLIC commenced operations during the thirdquarter of 2006.

73

----

**Off-Balance SheetArrangements**

***ReceivablesSecuritization***

For a discussion of our A/R Securitization Program,see “Note 9. Securitization ofAccounts Receivable” toour condensed consolidated financial statements (unaudited) included elsewherein this report and incorporated herein by reference.

***Financing ofChinese MDI Facilities***

OnSeptember 19, 2003, our Chinese joint ventures, HPS and SLIC, obtainedsecured financing for the construction of production facilities. Detailsconcerning HPS’s financing are described in “—Debt and Liquidity—Other Debt”above. SLIC obtained various committed loans in the aggregate amount ofapproximately $229 million in U.S. dollar equivalents. As of September 30,2006, there were $87.7 millionoutstanding in U.S. dollar borrowings and 1,015.9 millionin outstanding RMB ($128.6 million)borrowings under these facilities. The interest rate on these facilities isLIBOR plus 0.48% for U.S. dollar borrowings and 90% of the Peoples Bank ofChina rate for RMB borrowings. The loans are secured by substantially all theassets of SLIC and will be paid in 16 semiannual installments, beginning notlater than June 30, 2007. We unconditionally guarantee 35% of any amountsdue and unpaid by SLIC under the loans described above (except for a$1.5 million VAT facility which is not guaranteed). Our guarantee remainsin effect until SLIC has commenced production of at least 70% of capacity forat least 30 days and achieved a debt service coverage ratio of at least1:1. SLIC commenced operations in the third quarter of 2006.

**Restructuring,Impairment and Plant Closing Costs**

For a discussion of restructuring, impairment andplant closing costs, see “Note 6. Restructuring, Impairment and Plant ClosingCosts” to our condensed consolidated financial statements (unaudited) includedelsewhere in this report and incorporated herein by reference.

**LegalProceedings**

For adiscussion of legal proceedings, see “Note 13. 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 adiscussion of environmental, health and safety matters, see “Note 14.Environmental, Health and Safety Matters” to our condensed consolidatedfinancial statements (unaudited) included elsewhere in this report and incorporated herein by reference.

**RecentlyIssued Accounting Pronouncements**

For adiscussion of recently issued accounting pronouncements, see “Note 2. RecentlyIssued Accounting Pronouncements” to our condensed consolidated financial statements (unaudited) includedelsewhere in this report and incorporated herein by reference.

**CriticalAccounting Policies**

Therehave been no changes in the second quarter of 2006 with respect to our criticalaccounting policies as presented in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for the year ended December 31,2005 included in our 2005 Annual Report on Form 10-K.

74

----

 

**ITEM 4. CONTROLS AND PROCEDURES**

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, had previously evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30,2006 and had concluded that, as of September 30, 2006, our disclosure controlsand procedures were effective in ensuring 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.

 

However, asdisclosed in Note 23 to the unaudited condensed consolidated financialstatements, we have restated our consolidated financial statements for thethree- and nine-month periods ended September 30, 2006 to reflect an additionalnon-cash impairment loss of $99 million. This restatement resulted from an error in the third quarter calculationof an impairment loss on the sale of our European base chemicals and polymersbusiness, which closed on December 29, 2006.

 

Based on theforegoing, we reassessed our prior evaluation and have concluded that as ofSeptember 30, 2006, we had a material weakness in the financial reportingprocess related to the accounting for the complex, non-routine sale of theEuropean base chemicals and polymers business, and therefore our disclosurecontrols and procedures were not effective. As of December 31, 2006, we had amaterial weakness in the financial reporting process related to the accountingfor this complex, non-routine transaction. This control deficiency resulted in errors in the aforementioned thirdquarter calculation of the impairment loss and the corresponding recording ofthe sale transaction in the fourth quarter of 2006.

 

Managementtakes its role in establishing, maintaining and evaluating internal controlsover financial reporting seriously and has identified and is implementing thefollowing steps to address and remediate the material weakness described above:

 

·                  Involve accounting personnel withappropriate technical accounting expertise early in evaluation of complex,non-routine transactions to determine how such transactions will affect thefinancial statements.

·                  Reorganizing the accounting and financedepartment to ensure that accounting management with adequate technicalexpertise, skills and knowledge of the complex, non-routine transactions aredirectly involved in the review and accounting evaluation of such transactions.

·                  The Internal Audit Department will reviewthe accounting for all material, complex and non-routine transactions.

·                  Properly document and evidence thereviews performed by management and Internal Audit. 

 

The SEC’srules under Section 404 of the Sarbanes-Oxley Act of 2002 become applicable tous beginning this year with our Annual Report on Form 10-K to be filed in thefirst quarter of 2007.

 

No changes to our internal controls over financialreporting occurred during the quarter ended September 30, 2006 that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act).

75

----

**PART II. OTHER INFORMATION**

**ITEM 6.EXHIBITS**
| 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 |

76

----

**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: February 21, 2007
|        |   | HUNTSMAN CORPORATION       |
|--------|--------|----------------------------|
|   |   | HUNTSMAN INTERNATIONAL LLC |
|   |   |                       |   |   |
|   |   |                       |   |   |
|   |   | By:                        |   | /s/ J. KIMO ESPLIN |
|   |   | * *                   | * * | J. Kimo Esplin*Executive Vice President and Chief Financial  Officer  (Authorized Signatory and Principal Financial  Officer)* |
|   |   |                       |   |   |
|   |   | By:                        |   | /s/ L. RUSSELL HEALY |
|   |   | * *                   | * * | L. Russell Healy*Vice President and Controller  (Authorized Signatory and Principal Accounting  Officer)* |

77

----

**EXHIBITINDEX**
| 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 |

 

78

----