**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-Q**

 

| **(Mark One)**                                                                                                                                       | ** ** | ** **                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                           | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                           | ** ** | ** **                                                                                    |
| **For the quarterly period ended March 31, 2006**                                                                                                    |
| ** **                                                                                                                                           | ** ** | ** **                                                                                    |
| **OR**                                                                                                                                               |
| ** **                                                                                                                                           | ** ** | ** **                                                                                    |
| **o**                                                                                                                                                | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                           | ** ** | ** **                                                                                    |
| **For the transition period from            to          ** |
|                                                                                                                                                      |            |                                                                                               |  |

 

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| **Commission  File Number** | ** ** | **Exact Name of Registrant as Specified in its  Charter, Principal Office Address and Telephone  Number** | ** ** | **State of Incorporation** | ** ** | **I.R.S. Employer Identification  No.** |
|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|
| **001-32427**               | ** ** | **Huntsman Corporation**

**500  Huntsman Way  Salt Lake City, Utah 84108  (801) 584-5700**               | ** ** | **Delaware**               | ** ** | **42-1648585**                          |
| ** **                  | ** ** | ** **                                                                                                | ** ** | ** **                 | ** ** | ** **                              |
| **333-85141**               | ** ** | **Huntsman International LLC**

**500  Huntsman Way  Salt Lake City, Utah 84108  (801) 584-5700**         | ** ** | **Delaware**               | ** ** | **87-0630358**                          |

 

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

 

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

 

Large accelerated filer o                Acceleratedfiler o                Non-acceleratedfiler ý

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

YES o  NO ý

 

OnMay 9, 2006, 221,569,596 shares of common stock of Huntsman Corporationwere outstanding and 2,113 units of membership interests of HuntsmanInternational LLC were outstanding. There is no established trading market forHuntsman International LLC’s units of membership interests. All of HuntsmanInternational LLC’s units of membership interests are held by HuntsmanCorporation.

 

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

 

 

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**HUNTSMAN CORPORATION AND SUBSIDIARIES**

**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD**

**ENDED MARCH 31,  2006**

 

**TABLE OF CONTENTS**

 
| PART I   | FINANCIAL INFORMATION                                                                        |   |
|----------|----------------------------------------------------------------------------------------------|--------|
| ITEM 1.  | Financial Statements:                                                                        |   |
|     |                                                                                         |   |
|     | Huntsman Corporation and Subsidiaries:                                                       |   |
|     | Condensed Consolidated Balance Sheets (Unaudited)                                            |   |
|     | Condensed Consolidated Statements of Operations and Comprehensive  Income (Loss) (Unaudited) |   |
|     | Condensed Consolidated Statements of Cash Flows (Unaudited)                                  |   |
|     |                                                                                         |   |
|     | Huntsman International LLC and Subsidiaries:                                                 |   |
|     | Condensed Consolidated Balance Sheets (Unaudited)                                            |   |
|     | Condensed Consolidated Statements of Operations and Comprehensive  Income (Unaudited)        |   |
|     | Condensed Consolidated Statements of Cash Flows (Unaudited)                                  |   |
|     |                                                                                         |   |
|     | Huntsman Corporation and Subsidiaries and Huntsman International LLC  and Subsidiaries:      |   |
|     | Notes to Condensed Consolidated Financial Statements (Unaudited)                             |   |
|     |                                                                                         |   |
| ITEM 2.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations  |   |
| ITEM 3.  | Quantitative and Qualitative Disclosures  About Market Risk                                  |   |
| ITEM 4.  | Controls and Procedures                                                                      |   |
| PART II  | OTHER INFORMATION                                                                            |   |
| ITEM 1.  | Legal Proceedings                                                                            |   |
| ITEM 1A. | Risk Factors                                                                                 |   |
| ITEM 2.  | Unregistered Sales of Equity Securities and  Use of Proceeds                                 |   |
| ITEM 4.  | Submission of Matters to a Vote of Security  Holders                                         |   |
| ITEM 5.  | Other Information                                                                            |   |
| ITEM 6.  | Exhibits                                                                                     |   |

 

ii

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**PARTI. FINANCIAL INFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

**HUNTSMANCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(In Millions, Except Share and Per ShareAmounts)**

 
| ** **                                                                                                                                                                         | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                         | ** ** | ** **          | ** ** | ** **             | ** ** |
| **Current assets:**                                                                                                                                                                | ** ** | ** **          | ** ** | ** **             | ** ** |
| Cash and cash equivalents                                                                                                                                                          |       | $                   | 150.3      |                   | $          | 142.8 |   |
| Accounts receivable (net of allowance for  doubtful accounts of $34.6 and $33.7, respectively)                                                                                     |       | 1,352.9             |       | 1,475.2                |       |
| Accounts receivable from affiliates                                                                                                                                                |       | 6.6                 |       | 7.4                    |       |
| Inventories, net                                                                                                                                                                   |       | 1,311.0             |       | 1,309.2                |       |
| Prepaid expenses                                                                                                                                                                   |       | 43.4                |       | 46.2                   |       |
| Deferred income taxes                                                                                                                                                              |       | 31.2                |       | 31.2                   |       |
| Other current assets                                                                                                                                                               |       | 42.1                |       | 84.0                   |       |
| Current assets held for sale                                                                                                                                                       |       | 79.9                |       | —                 |       |
| **Total current assets**                                                                                                                                                           |       | 3,017.4             |       | 3,096.0                |       |
| ** **                                                                                                                                                                         |       |                |       |                   |       |
| Property, plant and equipment, net                                                                                                                                                 |       | 4,585.6             |       | 4,643.2                |       |
| Investment in unconsolidated affiliates                                                                                                                                            |       | 197.3               |       | 175.6                  |       |
| Intangible assets, net                                                                                                                                                             |       | 208.7               |       | 216.3                  |       |
| Goodwill                                                                                                                                                                           |       | 91.2                |       | 91.2                   |       |
| Deferred income taxes                                                                                                                                                              |       | 99.4                |       | 94.2                   |       |
| Notes receivable from affiliates                                                                                                                                                   |       | 1.0                 |       | 3.0                    |       |
| Other noncurrent assets                                                                                                                                                            |       | 540.1               |       | 551.0                  |       |
| Noncurrent assets held for sale                                                                                                                                                    |       | 86.4                |       | —                 |       |
| **Total assets**                                                                                                                                                                   |       | $                   | 8,827.1    |                   | $          | 8,870.5 |   |
|                                                                                                                                                                               |       |                |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                      | ** ** | ** **          | ** ** | ** **             | ** ** |
| **Current liabilities:**                                                                                                                                                           | ** ** | ** **          | ** ** | ** **             | ** ** |
| Accounts payable                                                                                                                                                                   |       | $                   | 994.0      |                   | $          | 1,093.5 |   |
| Accrued liabilities                                                                                                                                                                |       | 589.8               |       | 747.2                  |       |
| Deferred income taxes                                                                                                                                                              |       | 2.5                 |       | 2.4                    |       |
| Current portion of long-term debt                                                                                                                                                  |       | 43.9                |       | 44.6                   |       |
| Current liabilities held for sale                                                                                                                                                  |       | 39.2                |       | —                 |       |
|                                                                                                                                                                               |       |                |       |                   |       |
| **Total current liabilities**                                                                                                                                                      |       | 1,669.4             |       | 1,887.7                |       |
| ** **                                                                                                                                                                         |       |                |       |                   |       |
| Long-term debt                                                                                                                                                                     |       | 4,465.9             |       | 4,413.3                |       |
| Deferred income taxes                                                                                                                                                              |       | 271.0               |       | 258.3                  |       |
| Other noncurrent liabilities                                                                                                                                                       |       | 769.7               |       | 770.2                  |       |
| Noncurrent liabilities held for sale                                                                                                                                               |       | 1.3                 |       | —                 |       |
| **Total liabilities**                                                                                                                                                              |       | 7,177.3             |       | 7,329.5                |       |
| ** **                                                                                                                                                                         |       |                |       |                   |       |
| Minority interests                                                                                                                                                                 |       | 27.4                |       | 20.4                   |       |
|                                                                                                                                                                               |       |                |       |                   |       |
| **Commitments and contingencies (Notes 12 and  13)**                                                                                                                               | ** ** | ** **          | ** ** | ** **             | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **          | ** ** | ** **             | ** ** |
| **Stockholders’ equity:**                                                                                                                                                     | ** ** | ** **          | ** ** | ** **             | ** ** |
| Common stock $0.01 par value, 1,200,000,000  shares authorized, 221,569,596 issued and 220,639,333 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 in  2006 and 2005                                          |       | 287.5               |       | 287.5                  |       |
| Additional paid-in capital                                                                                                                                                         |       | 2,790.2             |       | 2,779.8                |       |
| Unearned stock-based compensation                                                                                                                                                  |       | (19.0               | )          | (11.8                  | )          |
| Accumulated deficit                                                                                                                                                                |       | (1,438.2            | )          | (1,505.8               | )          |
| Accumulated other comprehensive loss                                                                                                                                               |       | (0.3                | )          | (31.3                  | )          |
| **Total stockholders’ equity**                                                                                                                                                |       | 1,622.4             |       | 1,520.6                |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                |       | $                   | 8,827.1    |                   | $          | 8,870.5 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

1

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**HUNTSMAN CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND**

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

**(In Millions, Except Per Share Amounts)**

 
| ** **                                                                                                 | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                                       |       |                             |       |   |   |
| **Revenues:**                                                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                                             |       | $                                | 3,173.7    |   | $ | 3,324.6 |   |
| Related party sales                                                                                        |       | 14.0                             |       | 24.7 |   |
| **Total revenues**                                                                                         |       | 3,187.7                          |       | 3,349.3 |   |
| **Cost of goods sold**                                                                                     |       | 2,809.3                          |       | 2,760.1 |   |
| ** **                                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Gross profit**                                                                                           |       | 378.4                            |       | 589.2 |   |
|                                                                                                       |       |                             |       |   |   |
| **Operating expenses:**                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Selling, general and administrative                                                                        |       | 173.2                            |       | 161.7 |   |
| Research and development                                                                                   |       | 27.3                             |       | 24.3 |   |
| Other operating expense                                                                                    |       | 2.6                              |       | 44.7 |   |
| Restructuring, impairment and plant closing  costs                                                         |       | 7.8                              |       | 10.4 |   |
| Total expenses                                                                                             |       | 210.9                            |       | 241.1 |   |
| **Operating income**                                                                                       |       | 167.5                            |       | 348.1 |   |
|                                                                                                       |       |                             |       |   |   |
| Interest expense, net                                                                                      |       | (86.8                            | )          | (139.6 | ) |
| Loss on accounts receivable securitization  program                                                        |       | (2.8                             | )          | (3.2 | ) |
| Equity in income of unconsolidated  affiliates                                                             |       | 0.7                              |       | 2.3 |   |
| Loss on early extinguishment of debt                                                                       |       | —                           |       | (233.0 | ) |
| Other (expense) income                                                                                     |       | (0.3                             | )          | 3.7 |   |
|                                                                                                       |       |                             |       |   |   |
| **Income (loss) from continuing operations  before income taxes, minority interest and accounting change** |       | 78.3                             |       | (21.7 | ) |
| Income tax expense                                                                                         |       | (8.4                             | )          | (32.1 | ) |
| Minority interest in subsidiaries’ income                                                             |       | (0.4                             | )          | — |   |
|                                                                                                       |       |                             |       |   |   |
| **Income (loss) from continuing operations**                                                               |       | 69.5                             |       | (53.8 | ) |
| Loss from discontinued operations, net of  tax of nil                                                      |       | (0.5                             | )          | (2.6 | ) |
|                                                                                                       |       |                             |       |   |   |
| **Income (loss) before accounting change**                                                                 |       | 69.0                             |       | (56.4 | ) |
| Cumulative effect of change in accounting  principle, net of tax of $1.9                                   |       | —                           |       | 4.0 |   |
|                                                                                                       |       |                             |       |   |   |
| **Net income (loss)**                                                                                      |       | 69.0                             |       | (52.4 | ) |
| Preferred stock dividends                                                                                  |       | —                           |       | (43.1 | ) |
| **Net income (loss) available to common  stockholders**                                                    |       | $                                | 69.0       |   | $ | (95.5 | ) |
| ** **                                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                                      |       | $                                | 69.0       |   | $ | (52.4 | ) |
| Other comprehensive income (loss)                                                                          |       | 31.0                             |       | (46.6 | ) |
| **Comprehensive income (loss)**                                                                            |       | $                                | 100.0      |   | $ | (99.0 | ) |
| ** **                                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Basic income (loss) per share:**                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Income (loss) from continuing operations                                                                   |       | $                                | 0.31       |   | $ | (0.44 | ) |
| Loss from discontinued operations, net of  tax                                                             |       | —                           |       | (0.01 | ) |
| Cumulative effect of change in accounting  principle, net of tax                                           |       | —                           |       | 0.02 |   |
|                                                                                                       |       |                             |       |   |   |
| Net income (loss)                                                                                          |       | $                                | 0.31       |   | $ | (0.43 | ) |
|                                                                                                       |       |                             |       |   |   |
| Weighted average shares                                                                                    |       | 220.6                            |       | 220.5 |   |
|                                                                                                       |       |                             |       |   |   |
| **Diluted income (loss) per share:**                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Income (loss) from continuing operations                                                                   |       | $                                | 0.30       |   | $ | (0.44 | ) |
| Loss from discontinued operations, net of  tax                                                             |       | —                           |       | (0.01 | ) |
| Cumulative effect of change in accounting  principle, net of tax                                           |       | —                           |       | 0.02 |   |
|                                                                                                       |       |                             |       |   |   |
| Net income (loss)                                                                                          |       | $                                | 0.30       |   | $ | (0.43 | ) |
|                                                                                                       |       |                             |       |   |   |
| Weighted average shares                                                                                    |       | 233.1                            |       | 220.5 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

2

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**HUNTSMAN CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Dollars in Millions)**

 
| ** **                                                                                | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Operating  Activities:**                                                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                        |       | $                                | 69.0       |   | $ | (52.4 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                             |       |   |   |
| Cumulative  effect of change in accounting principle, net of tax                          |       | —                           |       | (4.0 | ) |
| Equity in  income of unconsolidated affiliates                                            |       | (0.7                             | )          | (2.3 | ) |
| Depreciation  and amortization                                                            |       | 117.0                            |       | 125.9 |   |
| Provision for  (reversal of) losses on accounts receivable                                |       | 2.2                              |       | (1.0 | ) |
| (Gain) loss  on disposal of assets                                                        |       | (0.2                             | )          | 1.1 |   |
| Loss on  early extinguishment of debt                                                     |       | —                           |       | 233.0 |   |
| Noncash  interest (income) expense                                                        |       | (1.7                             | )          | 29.4 |   |
| Noncash  restructuring, impairment and plant closing costs                                |       | 2.0                              |       | — |   |
| Deferred  income taxes                                                                    |       | 7.3                              |       | 17.0 |   |
| Net  unrealized loss on foreign currency transactions                                     |       | 6.7                              |       | 23.6 |   |
| Stock-based  compensation                                                                 |       | 3.5                              |       | 1.0 |   |
| Minority  interest in subsidiaries’ income                                           |       | 0.4                              |       | — |   |
| Other, net                                                                                |       | (1.3                             | )          | (11.0 | ) |
| Changes in  operating assets and liabilities:                                             |       |                             |       |   |   |
| Accounts receivable                                                                       |       | 114.8                            |       | (47.4 | ) |
| Change in receivables sold, net                                                           |       | (45.4                            | )          | 64.9 |   |
| Inventories, net                                                                          |       | (12.7                            | )          | (115.1 | ) |
| Prepaid expenses                                                                          |       | 6.6                              |       | 2.9 |   |
| Other current assets                                                                      |       | 46.9                             |       | (16.4 | ) |
| Other noncurrent assets                                                                   |       | 10.5                             |       | 20.4 |   |
| Accounts payable                                                                          |       | (71.2                            | )          | 106.2 |   |
| Accrued liabilities                                                                       |       | (156.6                           | )          | (96.1 | ) |
| Other noncurrent liabilities                                                              |       | (16.8                            | )          | (39.0 | ) |
| **Net cash  provided by operating activities**                                            |       | 80.3                             |       | 240.7 |   |
| **Investing  Activities:**                                                                |       |                             |       |   |   |
| Capital  expenditures                                                                     |       | (104.1                           | )          | (59.8 | ) |
| Investment  in unconsolidated affiliates, net                                             |       | (17.1                            | )          | (8.9 | ) |
| Proceeds  from sale of assets                                                             |       | 8.5                              |       | 4.7 |   |
| Net proceeds  from (investment in) government securities, restricted as to use            |       | 3.6                              |       | (40.9 | ) |
| Change in  restricted cash                                                                |       | —                           |       | (0.4 | ) |
| **Net cash  used in investing activities**                                                |       | (109.1                           | )          | (105.3 | ) |
| **Financing  Activities:**                                                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  borrowings (repayments) under revolving loan facilities                              |       | 34.0                             |       | (60.9 | ) |
| Net  borrowings on overdraft                                                              |       | 8.1                              |       | — |   |
| Repayment of  long-term debt                                                              |       | (0.8                             | )          | (1,437.8 | ) |
| Proceeds  from long-term debt                                                             |       | 2.5                              |       | — |   |
| Call  premiums related to early extinguishment of debt                                    |       | —                           |       | (105.3 | ) |
| Repayment of  notes payable                                                               |       | (11.4                            | )          | (11.5 | ) |
| Dividend  paid to preferred stockholders                                                  |       | (3.6                             | )          | — |   |
| Net proceeds  from issuance of common and preferred stock                                 |       | —                           |       | 1,491.9 |   |
| Contribution  from minority shareholder                                                   |       | 6.2                              |       | 3.6 |   |
| Other, net                                                                                |       | 2.0                              |       | 0.1 |   |
| **Net cash  provided by (used in) financing activities**                                  |       | 37.0                             |       | (119.9 | ) |
| Effect of  exchange rate changes on cash                                                  |       | (0.7                             | )          | (2.3 | ) |
| Increase in  cash and cash equivalents                                                    |       | 7.5                              |       | 13.2 |   |
| Cash and  cash equivalents at beginning of period                                         |       | 142.8                            |       | 243.2 |   |
| Cash and  cash equivalents at end of period                                               |       | $                                | 150.3      |   | $ | 256.4 |   |
| **Supplemental  cash flow information:**                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                    |       | $                                | 123.2      |   | $ | 146.8 |   |
| Cash paid for income taxes                                                                |       | 5.0                              |       | 5.1 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**HUNTSMANINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(Dollars in Millions)**

 
| ** **                                                                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                     |       |                |       |                   |       |
| ** **                                                                                     |       |                |       |                   |       |
| **Current  assets:**                                                                           | ** ** | ** **          | ** ** | ** **             | ** ** |
| Cash and cash equivalents                                                                      |       | $                   | 136.6      |                   | $          | 132.5 |   |
| Accounts receivable (net of allowance for  doubtful accounts of $34.6 and $33.7, respectively) |       | 1,352.9             |       | 1,475.2                |       |
| Accounts receivable from affiliates                                                            |       | 12.1                |       | 10.4                   |       |
| Inventories, net                                                                               |       | 1,311.0             |       | 1,309.2                |       |
| Prepaid expenses                                                                               |       | 40.6                |       | 45.9                   |       |
| Deferred income taxes                                                                          |       | 31.2                |       | 31.2                   |       |
| Other current assets                                                                           |       | 28.0                |       | 69.9                   |       |
| Current assets held for sale                                                                   |       | 79.9                |       | —                 |       |
| **Total current assets**                                                                       |       | 2,992.3             |       | 3,074.3                |       |
|                                                                                           |       |                |       |                   |       |
| Property,  plant and equipment, net                                                            |       | 4,286.0             |       | 4,336.7                |       |
| Investment  in unconsolidated affiliates                                                       |       | 197.3               |       | 175.6                  |       |
| Intangible  assets, net                                                                        |       | 214.5               |       | 222.0                  |       |
| Goodwill                                                                                       |       | 91.2                |       | 91.2                   |       |
| Deferred  income taxes                                                                         |       | 99.4                |       | 94.2                   |       |
| Notes  receivable from affiliates                                                              |       | 1.0                 |       | 3.0                    |       |
| Other  noncurrent assets                                                                       |       | 627.7               |       | 636.0                  |       |
| Noncurrent  assets held for sale                                                               |       | 86.4                |       | —                 |       |
| **Total assets**                                                                               |       | $                   | 8,595.8    |                   | $          | 8,633.0 |   |
|                                                                                           |       |                |       |                   |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                      | ** ** | ** **          | ** ** | ** **             | ** ** |
|                                                                                           |       |                |       |                   |       |
| **Current  liabilities:**                                                                      | ** ** | ** **          | ** ** | ** **             | ** ** |
| Accounts payable                                                                               |       | $                   | 994.0      |                   | $          | 1,092.7 |   |
| Accounts payable to affiliates                                                                 |       | 6.3                 |       | 8.7                    |       |
| Accrued liabilities                                                                            |       | 574.3               |       | 732.3                  |       |
| Deferred income taxes                                                                          |       | 2.5                 |       | 2.4                    |       |
| Current portion of long-term debt                                                              |       | 42.0                |       | 44.6                   |       |
| Current liabilities held for sale                                                              |       | 39.2                |       | —                 |       |
| **Total current liabilities**                                                                  |       | 1,658.3             |       | 1,880.7                |       |
|                                                                                           |       |                |       |                   |       |
| Long-term  debt                                                                                |       | 4,465.9             |       | 4,413.3                |       |
| Deferred  income taxes                                                                         |       | 231.1               |       | 216.9                  |       |
| Other  noncurrent liabilities                                                                  |       | 775.1               |       | 770.0                  |       |
| Noncurrent  liabilities held for sale                                                          |       | 1.3                 |       | —                 |       |
| **Total liabilities**                                                                          |       | 7,131.7             |       | 7,280.9                |       |
| ** **                                                                                     | ** ** | ** **          | ** ** | ** **             | ** ** |
| Minority  interests                                                                            |       | 27.4                |       | 20.4                   |       |
|                                                                                           |       |                |       |                   |       |
| **Commitments  and contingencies (Notes 12 and 13)**                                           | ** ** | ** **          | ** ** | ** **             | ** ** |
|                                                                                           |       |                |       |                   |       |
| **Members’  equity:**                                                                     | ** ** | ** **          | ** ** | ** **             | ** ** |
| Members’ equity, 2,113 units issued and  outstanding                                      |       | 2,797.5             |       | 2,794.0                |       |
| Accumulated deficit                                                                            |       | (1,316.8            | )          | (1,384.0               | )          |
| Accumulated other comprehensive loss                                                           |       | (44.0               | )          | (78.3                  | )          |
| **Total members’ equity**                                                                 |       | 1,436.7             |       | 1,331.7                |       |
| **Total liabilities and members’ equity**                                                 |       | $                   | 8,595.8    |                   | $          | 8,633.0 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

4

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVE INCOME (UNAUDITED)**

**(Dollars in Millions)**

 
| ** **                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                                |       |                             |       |   |   |
| **Revenues:**                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Trade sales, services and fees                                                                      |       | $                                | 3,173.7    |   | $ | 3,324.6 |   |
| Related party sales                                                                                 |       | 14.0                             |       | 24.7 |   |
| **Total revenues**                                                                                  |       | 3,187.7                          |       | 3,349.3 |   |
| **Cost of  goods sold**                                                                             |       | 2,805.3                          |       | 2,754.4 |   |
| ** **                                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                                   |       | 382.4                            |       | 594.9 |   |
|                                                                                                |       |                             |       |   |   |
| **Operating  expenses:**                                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Selling, general and administrative                                                                 |       | 172.4                            |       | 157.0 |   |
| Research and development                                                                            |       | 27.3                             |       | 24.3 |   |
| Other operating expense                                                                             |       | 2.6                              |       | 44.7 |   |
| Restructuring, impairment and plant closing  costs                                                  |       | 7.8                              |       | 10.4 |   |
| Total expenses                                                                                      |       | 210.1                            |       | 236.4 |   |
| **Operating  income**                                                                               |       | 172.3                            |       | 358.5 |   |
|                                                                                                |       |                             |       |   |   |
| Interest  expense, net                                                                              |       | (88.0                            | )          | (134.7 | ) |
| Loss on  accounts receivable securitization program                                                 |       | (2.8                             | )          | (3.2 | ) |
| Equity in  income of unconsolidated affiliates                                                      |       | 0.7                              |       | 2.3 |   |
| Loss on  early extinguishment of debt                                                               |       | —                           |       | (74.0 | ) |
| Other  expense                                                                                      |       | (0.3                             | )          | (0.2 | ) |
|                                                                                                |       |                             |       |   |   |
| **Income from continuing operations before  income taxes, minority interest and accounting change** |       | 81.9                             |       | 148.7 |   |
| ** **                                                                                          |       |                             |       |   |   |
| Income tax  expense                                                                                 |       | (13.7                            | )          | (28.2 | ) |
| Minority  interest in subsidiaries’ income                                                     |       | (0.4                             | )          | — |   |
| **Income  from continuing operations**                                                              |       | 67.8                             |       | 120.5 |   |
| Loss from  discontinued operations, net of tax of nil                                               |       | (0.5                             | )          | (2.6 | ) |
| **Income  before accounting change**                                                                |       | 67.3                             |       | 117.9 |   |
| Cumulative  effect of change in accounting principle, net of tax of $1.5                            |       | —                           |       | 4.2 |   |
| **Net  income**                                                                                     |       | 67.3                             |       | 122.1 |   |
| Other  comprehensive income (loss)                                                                  |       | 34.3                             |       | (50.3 | ) |
| ** **                                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Comprehensive  income**                                                                           |       | $                                | 101.6      |   | $ | 71.8 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

5

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Dollars in Millions)**

 
| ** **                                                                         | ** ** | **Three Months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 67.3       |   | $ | 122.1 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Cumulative  effect of change in accounting principle, net of tax                   |       | —                           |       | (4.2 | ) |
| Equity in  income of unconsolidated affiliates                                     |       | (0.7                             | )          | (2.3 | ) |
| Depreciation  and amortization                                                     |       | 110.2                            |       | 118.9 |   |
| Provision  for (reversal of) losses on accounts receivable                         |       | 2.2                              |       | (1.1 | ) |
| (Gain) loss  on disposal of assets                                                 |       | (0.2                             | )          | 1.1 |   |
| Loss on  early extinguishment of debt                                              |       | —                           |       | 74.0 |   |
| Noncash  interest (income) expense                                                 |       | (0.7                             | )          | 24.4 |   |
| Noncash  restructuring, impairment and plant closing costs                         |       | 2.0                              |       | — |   |
| Deferred  income taxes                                                             |       | 12.7                             |       | 16.9 |   |
| Net  unrealized loss on foreign currency transactions                              |       | 6.7                              |       | 23.5 |   |
| Other, net                                                                         |       | 2.4                              |       | 1.7 |   |
| Minority  interest in subsidiaries’ income                                    |       | 0.4                              |       | — |   |
| Changes in  operating assets and liabilities:                                      |       |                             |       |   |   |
| Accounts receivable                                                                |       | 114.8                            |       | (47.4 | ) |
| Change in receivables sold, net                                                    |       | (45.4                            | )          | 64.9 |   |
| Inventories, net                                                                   |       | (12.7                            | )          | (115.1 | ) |
| Prepaid expenses                                                                   |       | 6.1                              |       | 6.7 |   |
| Other current assets                                                               |       | 46.9                             |       | (16.4 | ) |
| Other noncurrent assets                                                            |       | 2.0                              |       | 12.9 |   |
| Accounts payable                                                                   |       | (71.2                            | )          | 106.2 |   |
| Accrued liabilities                                                                |       | (157.3                           | )          | (110.2 | ) |
| Other noncurrent liabilities                                                       |       | (9.6                             | )          | (37.9 | ) |
| **Net cash  provided by operating activities**                                     |       | 75.9                             |       | 238.7 |   |
|                                                                               |       |                             |       |   |   |
| **Investing  Activities:**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              |       | (104.1                           | )          | (59.8 | ) |
| Investment  in unconsolidated affiliates, net                                      |       | (17.1                            | )          | (8.9 | ) |
| Proceeds  from sale of assets                                                      |       | 8.5                              |       | 4.7 |   |
| Change in  restricted cash                                                         |       | —                           |       | (0.4 | ) |
| **Net cash  used in investing activities**                                         |       | (112.7                           | )          | (64.4 | ) |
|                                                                               |       |                             |       |   |   |
| **Financing  Activities:**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  borrowings (repayment) under revolving loan facilities                        |       | 34.0                             |       | (60.9 | ) |
| Net  borrowings on overdraft                                                       |       | 8.1                              |       | — |   |
| Repayment of  long-term debt                                                       |       | (0.8                             | )          | (886.7 | ) |
| Proceeds  from long-term debt                                                      |       | 2.5                              |       | 2.5 |   |
| Call  premiums related to early extinguishment of debt                             |       | —                           |       | (65.5 | ) |
| Repayment of  notes payable                                                        |       | (10.4                            | )          | (11.5 | ) |
| Contribution  from minority shareholder                                            |       | 6.2                              |       | 3.6 |   |
| Contribution  from parent                                                          |       | —                           |       | 837.6 |   |
| Other, net                                                                         |       | 2.0                              |       | (0.1 | ) |
| **Net cash  provided by (used in) financing activities**                           |       | 41.6                             |       | (181.0 | ) |
|                                                                               |       |                             |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | (0.7                             | )          | (2.3 | ) |
|                                                                               |       |                             |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       | 4.1                              |       | (9.0 | ) |
| Cash and  cash equivalents at beginning of period                                  |       | 132.5                            |       | 243.5 |   |
| Cash and  cash equivalents at end of period                                        |       | $                                | 136.6      |   | $ | 234.5 |   |
|                                                                               |       |                             |       |   |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid for interest                                                             |       | $                                | 123.5      |   | $ | 141.0 |   |
| Cash paid for income taxes                                                         |       | $                                | 5.0        |   | $ | 6.1 |   |

 

**Supplemental non-cash information:**

 

On February 28, 2005, HMP contributed the Huntsman InternationalHoldings senior subordinated discount notes at an accreted value of$422.8 million to Huntsman International in exchange for equity. Duringthe three months ended March 31, 2006 and 2005, Huntsman Corporationcontributed $3.5 million and $1.0 million, respectively, to HuntsmanInternational related to stock-based compensation.

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

6

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**HUNTSMANCORPORATION AND SUBSIDIARIES**

**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**1.****                                      General**

 

***Certain Definitions***

 

“Company,” “our,” “us,” of “we” may be used to refer to HuntsmanCorporation and, unless the context otherwise requires, its subsidiaries andpredecessors. Any references to our “Company,” “we,” “us” or “our” as of a dateprior to October 19, 2004 (the date of our formation) are to HuntsmanHoldings, LLC and its subsidiaries (including their respective predecessors).In this report, “Huntsman International Holdings” refers to HuntsmanInternational Holdings LLC (our 100% owned subsidiary that merged into HuntsmanInternational LLC on August 16, 2005) and, unless the context otherwiserequires, its subsidiaries; “Huntsman International” refers to HuntsmanInternational LLC (our 100% owned subsidiary) and, unless the context otherwiserequires, its subsidiaries; “Huntsman Advanced Materials” refers to HuntsmanAdvanced Materials Holdings LLC (our 100% owned indirect subsidiary, themembership interests of which we contributed to Huntsman International onDecember 20, 2005) and, unless the context otherwise requires, itssubsidiaries; “Huntsman LLC” refers to Huntsman LLC (our 100% owned subsidiarythat merged into Huntsman International on August 16, 2005); “HMP” refers toHMP Equity Holdings Corporation (our 100% owned subsidiary that merged into uson March 17, 2005); “Huntsman Family Holdings” refers to Huntsman FamilyHoldings Company LLC (an owner with MatlinPatterson of HMP Equity Trust); and “MatlinPatterson”refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPattersonGlobal Opportunities Partners (Bermuda) L.P. and MatlinPatterson GlobalOpportunities Partners B, L.P. (collectively, an owner with Huntsman FamilyHoldings of HMP Equity Trust).

 

***Description ofBusiness***

 

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

 

***Company***

 

Wewere formed in 2004 to hold, among other things, the equity interests ofHuntsman International, Huntsman Advanced Materials and Huntsman LLC. HuntsmanInternational was formed in 1999 to operate businesses acquired in atransaction among Huntsman International Holdings, Huntsman Specialty ChemicalsCorporation and Imperial Chemical Industries PLC.

 

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

 

•                    On August 16, 2005, Huntsman LLC mergedinto Huntsman International (the “Huntsman LLC Merger”). At that time, HuntsmanInternational Holdings also merged into Huntsman International 

 

7

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(collectively with theHuntsman LLC Merger, the “Affiliate Mergers”). As a result of the Huntsman LLCMerger, Huntsman International succeeded to the assets, rights and obligationsof Huntsman LLC. Huntsman International entered into supplemental indenturesunder which it assumed the obligations of Huntsman LLC under its outstandingdebt securities. The Huntsman International subsidiaries that guaranteeHuntsman International’s outstanding debt securities now provide guaranteeswith respect to these securities, and all of Huntsman LLC’s subsidiaries thatguaranteed its debt securities continue to provide guarantees with respect tothese debt securities. In addition, Huntsman LLC’s guarantor subsidiariesexecuted supplemental indentures to guarantee all of Huntsman International’soutstanding debt securities.

 

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

 

Asa result of these transactions, we now operate all of our businesses throughHuntsman International and substantially all of our debt obligations areobligations of Huntsman International and/or its subsidiaries.

 

HMPEquity Trust holds approximately 59% of our common stock. Jon M. Huntsman andPeter R. Huntsman control the voting of the shares of our common stock held byHMP Equity Trust. However, the shares of our common stock held by HMP EquityTrust will not be voted in favor of certain fundamental corporate actionswithout the consent of MatlinPatterson, through its representatives David J.Matlin or Christopher R. Pechock, and Jon M. Huntsman and Peter R. Huntsmanhave agreed to cause all of the shares of our common stock held by HMP EquityTrust to be voted in favor of the election to our board of directors of twonominees designated by MatlinPatterson.

 

***Accounting for Certain Transactions***

 

TheReorganization Transaction was accounted for as an exchange of shares betweenentities under common control similar to the pooling method. Our CondensedConsolidated Financial Statements (Unaudited) presented herein reflect the financial position, results of operationsand cash flows as if Huntsman Holdings, LLC and our Company were combined forall periods presented.

 

TheAffiliate Mergers and the Huntsman Advanced Materials Minority InterestTransaction were accounted for as an exchange of shares between entities undercommon control similar to the pooling method. Huntsman International’sCondensed Consolidated FinancialStatements (Unaudited) presented herein reflect the financial position, resultsof operations and cash flows as if Huntsman International Holdings, HuntsmanLLC, Huntsman Advanced Materials and Huntsman International were combined forall periods presented.

 

***Huntsman Corporation 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:

 

•                    purchase accounting recorded at our Companyfor the step-acquisition of Huntsman International Holdings in May 2003;

 

•                    HMP debt that was reflected at our Companyand that was repaid in 2005; and

 

8

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•                    the different capital structures.

 

***Principles ofConsolidation***

 

Our Condensed Consolidated Financial Statements (Unaudited) andHuntsman International’s Condensed Consolidated Financial Statements(Unaudited) include the accounts of our wholly-owned and majority-ownedsubsidiaries and any variable interest entities for which we are the primarybeneficiary. All intercompany accounts and transactions have been eliminated.

 

***Interim FinancialStatements***

 

Our interim Condensed Consolidated Financial Statements (Unaudited) andHuntsman International’s interim Condensed Consolidated Financial Statements(Unaudited) were prepared in accordance with accounting principles generallyaccepted in the United States of America (“GAAP” or “U.S. GAAP”) and inmanagement’s opinion, reflect all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of results ofoperations, financial position and cash flows for the periods presented.Results for interim periods are not necessarily indicative of those to beexpected for the full year. These condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and notes to consolidated financial statements included in our andHuntsman International’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

 

***Use of Estimates***

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

***Reclassifications***

 

Certain amounts in the consolidated financial statements for priorperiods have been reclassified to conform with the current presentation.

 

**2.****                                      RecentlyIssued Accounting Pronouncements**

 

Weadopted Statement of Financial Accounting Standards (“SFAS”) No. 151, *Inventory Costs—an amendment ofARB No. 43,*on January1, 2006*.*SFAS No. 151requires abnormal amounts of idle facility expense, freight, handling costs andwasted material to be recognized as current-period charges. It also requiresthat allocation of fixed production overhead to the costs of conversion bebased on the normal capacity of the production facilities. The adoption of SFASNo. 151 did not have an impact on our consolidated financial statements.

 

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

 

In September 2005, the Emerging Issues TaskForce (“EITF”) reached a consensus on issue No. 04-13, *Accounting for Purchase and Sales of Inventory withthe Same Counterparty,* that requires companies to recognize anexchange of finished goods for raw materials or work-in-process within the sameline of business at fair value. All other exchanges of inventory should bereflected at the recorded amount. This consensus is effective for transactions 

 

9

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completed afterMarch 31, 2006. We are evaluating this consensus to determine its impacton our consolidated financial statements.

 

**3.****                                      Inventories**

 

Inventories consisted of the following (dollars in millions):

 
| ** **                        | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|---------------------|------------|------------------------|------------|
| Raw  materials and supplies       |       | $                   | 339.6      |                   | $          | 374.1 |   |
| Work in  progress                 |       | 87.0                |       | 82.1                   |       |
| Finished  goods                   |       | 1,009.8             |       | 988.1                  |       |
| **Total**                         |       | 1,436.4             |       | 1,444.3                |       |
| ** **                        |       |                |       |                   |       |
| LIFO  reserves                    |       | (110.9              | )          | (119.7                 | )          |
| Lower of  cost or market reserves |       | (14.5               | )          | (15.4                  | )          |
| **Net**                           |       | $                   | 1,311.0    |                   | $          | 1,309.2 |   |

 

As of March31, 2006 and December 31, 2005, approximately 19% and 21%, respectively, ofinventories were recorded using the last-in, first-out cost method.

 

In the normal course of operations, we exchange raw materials withother companies. No gains or losses are recognized on these exchanges, and thenet open exchange positions are valued at our cost. The amount included ininventory under open exchange agreements payable by us at March 31, 2006 was$11.7 million (32.6 million pounds of feedstock and products). The amountincluded in inventory under open exchange agreements payable by us at December31, 2005 was $3.8 million (8.8 million pounds of feedstock and products).

 

**4.****                                      BusinessCombinations and Dispositions**

 

***Definitive Agreementto Sell the U.S. Butadiene and MTBE Business***

 

On April 6, 2006, we entered into a definitive agreement to sell theassets comprising our U.S. butadiene and MTBE business operated by our BaseChemicals segment for $269 million in cash, subject to customary adjustments.This transaction is expected to close by the third quarter of 2006, and weexpect to record a gain on the sale upon closing. This business was deemed tobe held for sale and the related assets and liabilities were classified as suchin our March 31, 2006 balance sheet. We ceased depreciation of the relatedassets beginning in March 2006. The following are the major classes of assetsand liabilities for this business that were reflected in our balance sheet asassets and liabilities held for sale at March 31, 2006 (dollars in millions):

 
| **ASSETS**                          | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| Accounts and  notes receivable, net |       | $          | 57.9       |   |
| Inventories,  net                   |       | 22.0       |       |
| Property,  plant and equipment, net |       | 82.5       |       |
| Other  noncurrent assets            |       | 3.9        |       |
| **Total assets**                    |       | 166.3      |       |
| **LIABILITIES**                     | ** ** | ** ** | ** ** |
| Accounts  payable                   |       | 37.1       |       |
| Accrued  liabilities                |       | 2.1        |       |
| Other  noncurrent liabilities       |       | 1.3        |       |
| **Total liabilities**               |       | 40.5       |       |
| **Net assets**                      |       | $          | 125.8      |   |

 

10

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The results of operations of this business are not classified asdiscontinued operations because of the expected continuing cash flows from ourremaining MTBE business.

 

***Pending Acquisition of Textile EffectsBusiness***

 

On February 20, 2006, we announced that we have entered into adefinitive agreement to acquire the global textile effects business of CibaSpecialty Chemicals Inc. for CHF 332 million ($253 million). The purchase pricewill be reduced (i) by approximately CHF 75 million ($57 million) in assumeddebt and unfunded pension and other post employment liabilities and (ii) up toapproximately CHF 40 million ($31 million) in unspent restructuring costs. Thefinal purchase price is subject to a working capital and net debt adjustment.The transaction is subject to customary terms and conditions and is expected tooccur by the end of the third quarter of 2006.

 

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

 

Whilewe continuously focus on identifying opportunities to reduce our operatingcosts and maximize our operating efficiency, we have now substantiallycompleted our comprehensive global cost reduction program, referred to as “ProjectCoronado.” Project Coronado was a program designed to reduce our annual fixedmanufacturing and selling, general and administrative costs, as measured at2002 levels, by $200 million. In connection with Project Coronado, weannounced the closure of eight smaller, less competitive manufacturing units inour Polyurethanes, Advanced Materials, Performance Products and Pigments segments.These and other actions have resulted in the reduction of approximately 1,500employees in these businesses since 2000.

 

As of March 31, 2006 and December 31, 2005, accrued restructuring,impairment and plant closing costs by type of cost and initiative consisted ofthe following (dollars in millions):

 
| ** **                                                           | ** ** | **Workforce  reductions(1)** | ** ** | **Demolition and  decommissioning** | ** ** | **Non-cancelable  lease costs** | ** ** | **Other  restructuring  costs** | ** ** | **Total(2)** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------|------------|
| ** **                                                           | ** ** | ** **                   | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **   | ** ** |
| Accrued  liabilities as of December 31, 2005                         |       | $                            | 54.2       |                                | $          | 5.8                             |       | $                               | 6.5        |         | $          | 11.8 |   | $ | 78.3 |   |
| 2006 charges  for 2003 initiatives                                   |       | 1.3                          |       | —                              |       | —                          |       | —                          |       | 1.3          |       |
| 2006 charges  for 2004 initiatives                                   |       | 2.1                          |       | —                              |       | —                          |       | 0.2                             |       | 2.3          |       |
| 2006 charges  for 2005 initiatives                                   |       | 0.9                          |       | —                              |       | —                          |       | —                          |       | 0.9          |       |
| 2006 charges  for 2006 initiatives                                   |       | 2.1                          |       | —                              |       | —                          |       | —                          |       | 2.1          |       |
| Reversals of  reserves no longer required                            |       | (0.8                         | )          | —                              |       | —                          |       | —                          |       | (0.8         | )          |
| Partial reversal of AdMat Transaction  opening balance sheet accrual |       | (1.4                         | )          | —                              |       | —                          |       | —                          |       | (1.4         | )          |
| 2006  payments for 2003 initiatives                                  |       | (4.1                         | )          | —                              |       | (0.1                            | )          | (0.1                            | )          | (4.3         | )          |
| 2006 payments  for 2004 initiatives                                  |       | (7.6                         | )          | (0.9                                | )          | (0.2                            | )          | (0.4                            | )          | (9.1         | )          |
| 2006  payments for 2005 initiatives                                  |       | (1.2                         | )          | —                              |       | —                          |       | (0.7                            | )          | (1.9         | )          |
| Foreign  currency effect on reserve balance                          |       | 0.9                          |       | —                              |       | —                          |       | —                          |       | 0.9          |       |
| Accrued  liabilities as of March 31, 2006                       |       | $                            | 46.4       |                                | $          | 4.9                             |       | $                               | 6.2        |         | $          | 10.8 |   | $ | 68.3 |   |

 

----

(1)                                  Substantiallyall of the positions terminated in connection with the restructuring programswere terminated under ongoing termination benefit arrangements. Accordingly,the related liabilities were accrued as a one-time charge to earnings inaccordance with SFAS No. 112,*“Employers’Accounting for Postemployment Benefits.”*

 

11

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

 
| ** **                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                        |       |                |       |                   |       |
| 2001  initiatives                           |       | $                   | 1.4        |                   | $          | 1.4 |   |
| 2003  initiatives                           |       | 24.3                |       | 28.4                   |       |
| 2004  initiatives                           |       | 39.9                |       | 47.7                   |       |
| 2005  initiatives                           |       | 10.5                |       | 11.6                   |       |
| 2006  initiatives                           |       | 2.1                 |       | —                 |       |
| Foreign  currency effect on reserve balance |       | (9.9                | )          | (10.8                  | )          |
| Total                                       |       | $                   | 68.3       |                   | $          | 78.3 |   |

 

Details with respect to our reserves for restructuring, impairment andplant closing costs are provided below by segment and initiative (dollars inmillions):

 
| ** **                                                               | ** ** | **Polyurethanes** | ** ** | **Advanced  Materials** | ** ** | **Performance  Products** | ** ** | **Pigments** | ** ** | **Polymers** | ** ** | **Base  Chemicals** | ** ** | **Corporate  & Other** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|---------------------------|------------|--------------|------------|--------------|------------|---------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **        | ** ** | ** **              | ** ** | ** **                | ** ** | ** **   | ** ** | ** **   | ** ** | ** **          | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Accrued liabilities as of December 31, 2005                              |       | $                 | 10.9       |                    | $          | 7.8                       |       | $            | 25.6       |         | $          | 16.6                |       | $                          | 3.4        |       | $          | 14.0 |   | $ | — |   | $ | 78.3 |   |
| 2006 charges for  2003 initiatives                                       |       | —            |       | 0.1                     |       | —                    |       | 1.2          |       | —       |       | —              |       | —                     |       | 1.3        |       |
| 2006 charges for  2004 initiatives                                       |       | 0.2               |       | 0.1                     |       | 0.6                       |       | 1.2          |       | —       |       | 0.1                 |       | 0.1                        |       | 2.3        |       |
| 2006 charges for  2005 initiatives                                       |       | —            |       | —                  |       | 0.4                       |       | —       |       | —       |       | 0.5                 |       | —                     |       | 0.9        |       |
| 2006 charges for  2006 initiatives                                       |       | —            |       | 2.1                     |       | —                    |       | —       |       | —       |       | —              |       | —                     |       | 2.1        |       |
| Reversals of  reserves no longer required                                |       | (0.2              | )          | —                  |       | —                    |       | —       |       | (0.6         | )          | —              |       | —                     |       | (0.8       | )          |
| Partial reversal  of AdMat Transaction opening balance sheet accrual     |       | —            |       | (1.4                    | )          | —                    |       | —       |       | —       |       | —              |       | —                     |       | (1.4       | )          |
| 2006 payments for  2003 initiatives                                      |       | (1.0              | )          | (1.2                    | )          | —                    |       | (2.1         | )          | —       |       | —              |       | —                     |       | (4.3       | )          |
| 2006 payments for  2004 initiatives                                      |       | (0.8              | )          | (0.3                    | )          | (3.6                      | )          | (3.0         | )          | (0.2         | )          | (1.1                | )          | (0.1                       | )          | (9.1       | )          |
| 2006 payments for  2005 initiatives                                      |       | —            |       | —                  |       | (0.7                      | )          | —       |       | —       |       | (1.2                | )          | —                     |       | (1.9       | )          |
| Foreign currency  effect on reserve balance                              |       | 0.2               |       | 0.1                     |       | 0.3                       |       | 0.2          |       | —       |       | 0.1                 |       | —                     |       | 0.9        |       |
| Accrued liabilities as of March 31, 2006                                 |       | $                 | 9.3        |                    | $          | 7.3                       |       | $            | 22.6       |         | $          | 14.1                |       | $                          | 2.6        |       | $          | 12.4 |   | $ | — |   | $ | 68.3 |   |
|                                                                     |       |              |       |                    |       |                      |       |         |       |         |       |                |       |                       |       |       |       |
| Current portion of restructuring reserve                                 |       | $                 | 5.0        |                    | $          | 6.4                       |       | $            | 15.4       |         | $          | 10.0                |       | $                          | 0.2        |       | $          | 11.3 |   | $ | — |   | $ | 48.3 |   |
| Long-term portion of restructuring reserve                               |       | 4.3               |       | 0.9                     |       | 7.2                       |       | 4.1          |       | 2.4          |       | 1.1                 |       | —                     |       | 20.0       |       |
|                                                                     |       |              |       |                    |       |                      |       |         |       |         |       |                |       |                       |       |       |       |
| Estimated  additional future charges for current restructuring projects: |       |              |       |                    |       |                      |       |         |       |         |       |                |       |                       |       |       |       |
| Estimated  additional charges within one year                            |       | $                 | —     |                    | $          | 0.3                       |       | $            | 0.5        |         | $          | 3.0                 |       | $                          | 11.2       |       | $          | — |   | $ | — |   | $ | 15.0 |   |
| Estimated  additional charges beyond one year                       |       | —            |       | —                  |       | —                    |       | 3.6          |       | 11.3         |       | —              |       | —                     |       | 14.9       |       |

 

As of March 31, 2006 and December 31, 2005, we had reserves forrestructuring, impairment and plant closing costs of $68.3 million and$78.3 million, respectively. During the three months ended March 31, 2006, werecorded additional net charges of $7.8 million (consisting of $5.8 millionpayable in cash and $2.0 million of non-cash charges) for workforce reductionsand other restructuring costs associated with closure or curtailment ofactivities at our smaller, less efficient manufacturing facilities. During thethree months ended March 31, 2006, we made cash payments against these reservesof $15.3 million.

 

During the three months ended March 31, 2006, our Polyurethanes segmentrecorded a restructuring, impairment and plant closing credit of $2.2 million,consisting primarily of a gain on the sale of our Shepton Mallet, U.K. site.

 

During the three months ended March 31, 2006, our Advanced Materialssegment recorded restructuring charges of $2.3 million, primarily related tothe realignment of the technical organization in Bergkamen, Germany. Thisrealignment and other existing initiatives are expected to result in additionalrestructuring charges of $0.3 million.

 

12

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**6.****                                      Debt**

 

Outstanding debt consisted of the following (dollars in millions):

 

**Huntsman Corporation:**

 
| ** **                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | ** **          | ** ** | ** **             | ** ** |
| Senior  Credit Facilities:       |       |                |       |                   |       |
| Term Loan B                      |       | $                   | 2,102.1    |                   | $          | 2,099.3 |   |
| Revolving Facility               |       | 34.0                |       | —                 |       |
| 2010 Secured  Notes              |       | 293.7               |       | 293.6                  |       |
| 2009 Senior  Notes               |       | 454.4               |       | 454.7                  |       |
| 2011 Senior  Floating Rate Notes |       | 100.0               |       | 100.0                  |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0               |       | 198.0                  |       |
| Subordinated  Notes              |       | 1,159.8             |       | 1,145.2                |       |
| Australian  Credit Facilities    |       | 62.4                |       | 63.8                   |       |
| HPS (China)  debt                |       | 45.7                |       | 42.6                   |       |
| Other                            |       | 59.7                |       | 60.7                   |       |
| Total debt                       |       | $                   | 4,509.8    |                   | $          | 4,457.9 |   |
|                             |       |                |       |                   |       |
| Current  portion                 |       | $                   | 43.9       |                   | $          | 44.6 |   |
| Long-term  portion               |       | 4,465.9             |       | 4,413.3                |       |
| Total debt                       |       | $                   | 4,509.8    |                   | $          | 4,457.9 |   |

 

**Huntsman International:**

 
| ** **                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | ** **          | ** ** | ** **             | ** ** |
| Senior  Credit Facilities:       |       |                |       |                   |       |
| Term Loan B                      |       | $                   | 2,102.1    |                   | $          | 2,099.3 |   |
| Revolving Facility               |       | 34.0                |       | —                 |       |
| 2010 Secured  Notes              |       | 293.7               |       | 293.6                  |       |
| 2009 Senior  Notes               |       | 454.4               |       | 454.7                  |       |
| 2011 Senior  Floating Rate Notes |       | 100.0               |       | 100.0                  |       |
| 2012 Senior  Fixed Rate Notes    |       | 198.0               |       | 198.0                  |       |
| Subordinated  Notes              |       | 1,159.8             |       | 1,145.2                |       |
| Australian  Credit Facilities    |       | 62.4                |       | 63.8                   |       |
| HPS (China)  debt                |       | 45.7                |       | 42.6                   |       |
| Other                            |       | 57.8                |       | 60.7                   |       |
| Total debt                       |       | $                   | 4,507.9    |                   | $          | 4,457.9 |   |
|                             |       |                |       |                   |       |
| Current  portion                 |       | $                   | 42.0       |                   | $          | 44.6 |   |
| Long-term  portion               |       | 4,465.9             |       | 4,413.3                |       |
| Total debt                       |       | $                   | 4,507.9    |                   | $          | 4,457.9 |   |

 

***Transactions Affecting our Debt***

 

InFebruary 2005, we completed our initial public offering of common stockand mandatory convertible preferred stock that resulted in approximately $1.5 billion in net proceeds,substantially all of which were used to repay indebtedness. Also during 2005,we completed a series of transactions designed to simplify our consolidatedgroup’s financing and public reporting structure, to reduce our cost ofborrowings and to facilitate other organizational efficiencies. Specifically,on August 16, 2005, we completed the Huntsman LLC Merger and on 

 

13

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December 20, 2005 we completed theHuntsman Advanced Materials Minority Interest Transaction. As a result of thesetransactions, we now operate all of our businesses through Huntsman Internationaland substantially all of our debt obligations are obligations of HuntsmanInternational and/or its subsidiaries. In connection with repayment ofindebtedness, Huntsman Corporation and Huntsman International recorded a losson early extinguishment of debt for the three months ended March 31, 2005of $233.0 million and $74.0 million, respectively.

 

Asof March 31, 2006, Huntsman International had outstanding $175 million7.375% senior subordinated notes due 2015 and €135 million($163.8 million) 7.5% senior subordinated notes due 2015 (collectively,the “2015 Subordinated Notes”). The 2015 Subordinated Notes are redeemable onor after January 1, 2010 at 103.688% and 103.750%, respectively, of theprincipal amount thereof, declining ratably to par on and after January 1,2013. Under the terms of a registration rights agreement among HuntsmanInternational, the subsidiary guarantors and the initial purchasers of the 2015Subordinated Notes, we were required to complete an exchange offer for the 2015Subordinated Notes on or before September 11, 2005. Under the terms of theregistration rights agreement, because we did not complete the exchange offerby this date, we are 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 increases by an additional 0.25% for eachsubsequent 90-day period, up to a maximum of 1.0%. As of March 31, 2006, wewere paying an additional 0.75% on the 2015 Subordinated Notes. On April 4,2006, Huntsman International filed a Registration Statement on Form S-4 withthe Securities and Exchange Commission with respect to the exchange offer. Webelieve that Huntsman International will complete the exchange offer within thenext several months.

 

***Compliance with Covenants***

 

Ourmanagement believes that we are in compliance with the covenants contained inthe agreements governing the Senior Credit Facilities, the A/R SecuritizationProgram (as defined in “Note 8. Securitization of Accounts Receivable”) and theindentures governing our notes.

 

**7.****                                      DerivativeInstruments and Hedging Activities**

 

Weare exposed to market risks, such as changes in interest rates, foreignexchange rates and commodity pricing risks. From time to time, we enter intotransactions, including transactions involving derivative instruments, tomanage certain of these exposures. We manage interest rate exposure through aprogram designed to reduce the impact of fluctuations in variable interestrates and to meet the requirements of certain credit agreements.

 

Allderivatives, whether designated in hedging relationships or not, are recordedon the balance sheet at fair value. If the derivative is designated as afair-value hedge, the changes in the fair value of the derivative and thehedged item are recognized in earnings. If the derivative is designated as acash-flow hedge, changes in the fair value of the derivative are recorded inaccumulated other comprehensive income (loss), to the extent effective, andwill be recognized in the income statement when the hedged item affectsearnings. We perform effectiveness assessments in order to use hedge accountingat each reporting period. For a derivative that does not qualify as a hedge,changes in fair value are recognized in earnings.

 

Wehave also participated in some derivatives that were classified asnon-designated derivative instruments and we hedge our net investment incertain European operations. Changes in the fair value of any non-designatedderivative instruments and any ineffectiveness in cash flow hedges are reportedin current period earnings. Changes in the fair value of the hedge in the netinvestment of certain European operations are recorded in accumulated othercomprehensive income (loss).

 

Wemay enter into foreign currency derivative instruments to minimize theshort-term impact of movements in foreign currency rates. These contracts arenot designated as hedges for financial reporting purposes and are recorded atfair value. As of March 31, 2006 and December 31, 2005, and for the threemonths ended March 31, 2006 and 2005, the fair value, change in fair value, andrealized gains (losses) of outstanding foreign currency rate hedging contractswere not significant.

 

14

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Inconnection with our pending acquisition of the global textile effects businessof Ciba Specialty Chemicals Inc., the purchase price of which is denominated inSwiss Francs, on March 16, 2006, we entered into two foreign currencyderivative instruments to limit a portion of our currency exposure resultingfrom the acquisition of the textile effects business. See “Note 4.Business Combinations and Dispositions.” One of the derivatives is an option topurchase CHF65 million at a strike price of 1.2915. This option expires on July14, 2006 and we paid approximately $1.4 million for this option. The otherderivative is a no cost option to purchase CHF65 million at a strike price of1.2673. However, this option has a “knock-in” strike price of 1.3500, meaningthat if at any time prior to its July 14, 2006 expiration the Swiss Franctrades at or above 1.3500, then the option must be exercised at the strikeprice of 1.2673. Neither of these two options are designated as hedges forfinancial reporting purposes. As of March 31, 2006, the fair value of theseoptions combined was $1.5 million.

 

**8.****                                      Securitizationof Accounts Receivable**

 

Underour accounts receivable securitization program (“A/R Securitization Program”),we grant an undivided interest in certain of our trade receivables to aqualified off-balance sheet entity (the “Receivables Trust”) at a discount.This undivided interest serves as security for the issuance by the ReceivablesTrust of commercial paper and, up until the A/R Securitization Program Amendment(as defined below), medium-term notes.

 

Asof March 31, 2006, our A/R Securitization Program had approximately $194.8million in U.S. dollar equivalents in medium-term notes outstanding andapproximately $152.9 million in U.S. dollar equivalents in commercial paperoutstanding. On April 18, 2006, we completed an amendment and expansionof our A/R Securitization Program(the “A/R Securitization Program Amendment”) and added certain additional U.S.subsidiaries as additional receivables originators under the A/R SecuritizationProgram. In connection with this amendment and expansion, the Receivables Trustredeemed in full all of the €90.5 million ($109.8 million) and $85.0 million inprincipal amount of the medium-term notes outstanding under the A/R SecuritizationProgram. The amended A/R Securitization Program currently provides forfinancing through the commercial paper conduit portion of the program (in bothU.S. dollars and euros). We also expanded the size of the commercial paperconduit portion of the A/R Securitization Program to a committed amount ofapproximately $500 million U.S. dollar equivalents for three years. The cost tothe Receivables Trust on amounts drawn under the commercial paper conduit areat a rate of LIBOR and/or EUROBOR, as applicable, plus 60 basis points perannum based upon a pricing grid which is dependent upon our credit rating.

 

In connection with the A/R Securitization Program Amendment, weinitially increased the amount of commercial paper outstanding to $475 millionU.S. dollar equivalents. A portion of the net increase was used to fund theredemption of the medium-term notes and to repay $50 million U.S. dollarequivalents of term debt outstanding under our senior credit facilities. Theagreements governing our senior credit facilities require us to prepay our termloan B borrowings with proceeds raised under the A/R Securitization Program inexcess of $425 million.

 

15

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**9.****                                      EmployeeBenefit Plans**

 

Components of the net periodic benefit costs for the three months endedMarch 31, 2006 and 2005 were as follows (dollars in millions):

 

**Huntsman Corporation:**

 
| ** **                             | ** ** | **Defined Benefit Plans  Three Months Ended  March 31,** | ** ** | **Other Postretirement  Benefit Plans  Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                 | ** ** | **2005**                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                                        | 20.3       |                                                                   | $          | 19.7 |   | $ | 1.1 |   | $ | 1.0 |   |
| Interest  cost                         |       | 31.7                                                     |       | 31.6                                                                   |       | 2.3 |   | 2.4 |   |
| Expected  return on assets             |       | (37.1                                                    | )          | (34.2                                                                  | )          | — |   | — |   |
| Amortization  of transition obligation |       | 0.4                                                      |       | 0.4                                                                    |       | — |   | — |   |
| Amortization  of prior service cost    |       | (1.7                                                     | )          | (1.3                                                                   | )          | (0.7 | ) | (0.6 | ) |
| Amortization  of actuarial loss        |       | 4.5                                                      |       | 5.8                                                                    |       | 0.8 |   | 0.8 |   |
| Curtailment  gain                      |       | —                                                   |       | (0.3                                                                   | )          | — |   | — |   |
| Settlement  loss                       |       | 0.4                                                      |       | 0.3                                                                    |       | — |   | — |   |
| Special  termination benefits          |       | —                                                   |       | 2.8                                                                    |       | — |   | — |   |
| **Net periodic benefit cost**          |       | $                                                        | 18.5       |                                                                   | $          | 24.8 |   | $ | 3.5 |   | $ | 3.6 |   |

 

**Huntsman International:**

 
| ** **                             | ** ** | **Defined Benefit Plans  Three Months Ended  March 31,** | ** ** | **Other Postretirement  Benefit Plans  Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                 | ** ** | **2005**                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                                        | 20.3       |                                                                   | $          | 19.7 |   | $ | 1.1 |   | $ | 1.0 |   |
| Interest  cost                         |       | 31.7                                                     |       | 31.6                                                                   |       | 2.3 |   | 2.4 |   |
| Expected  return on assets             |       | (37.1                                                    | )          | (34.2                                                                  | )          | — |   | — |   |
| Amortization  of transition obligation |       | 0.4                                                      |       | 0.4                                                                    |       | — |   | — |   |
| Amortization  of prior service cost    |       | (1.7                                                     | )          | (1.3                                                                   | )          | (0.7 | ) | (0.6 | ) |
| Amortization  of actuarial loss        |       | 6.9                                                      |       | 7.9                                                                    |       | 0.8 |   | 0.8 |   |
| Curtailment  gain                      |       | —                                                   |       | (0.3                                                                   | )          | — |   | — |   |
| Settlement  loss                       |       | 0.4                                                      |       | 0.3                                                                    |       | — |   | — |   |
| Special  termination benefits          |       | —                                                   |       | 2.8                                                                    |       | — |   | — |   |
| **Net periodic benefit cost**          |       | $                                                        | 20.9       |                                                                   | $          | 26.9 |   | $ | 3.5 |   | $ | 3.6 |   |

 

During the three months ended March 31, 2006 and 2005, we madecontributions to our pension plans of $22.0 million and $20.6 million,respectively. During the remainder of 2006, we expect to contribute anadditional $93.4 million to our pension plans.

 

16

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In2005, we changed the measurement date of our pension and postretirement benefitplans from December 31 to November 30. We believe the one-month change of themeasurement date is preferable because it provides us more time to review thecompleteness and accuracy of the actuarial benefit information which results inan improvement in our internal control procedures. The effect of the change inmeasurement date on the respective obligations and assets of the plan resultedin a cumulative effect of change in accounting principle credit for HuntsmanCorporation and Huntsman International of $4.0 million ($0.02 per dilutedshare) and $4.2 million, net of tax of $1.9 million and $1.5 million,respectively.

 

**10.****                               Dividendson 5% Mandatory Convertible Preferred Stock**

 

In connection with the initial public offering of our 5% mandatoryconvertible preferred stock on February 16, 2005, we declared alldividends that will be payable on such preferred stock from the issuancethrough the mandatory conversion date, which is February 16, 2008.Accordingly, we recorded dividends payable of $43.1 million and acorresponding charge to net income available to common stockholders during thefirst quarter of 2005. As of March 31, 2006, we had $27.8 million invested ingovernment securities that are restricted for satisfaction of our dividendpayment obligations through the mandatory conversion date. We expect to paydividends in cash on February 16, May 16, August 16 andNovember 16 of each year prior to February 16, 2008. Under certaincircumstances, we may not be allowed to pay dividends in cash. If this were tooccur, any unpaid dividend would be payable in shares of common stock onFebruary 16, 2008 based on the market value of common stock at that time.

 

**11.****                               OtherComprehensive Income (Loss)**

 

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

 

**Huntsman Corporation:**

 
| ** **                                                                                                                          | ** ** | **Accumulated  other comprehensive  loss** | ** ** | **Other  comprehensive income   (loss)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | ** **                                 | ** ** | ** **                               | ** ** | **Three  Months Ended** | ** ** |
| ** **                                                                                                                          | ** ** | **March  31,  2006**                       | ** ** | **December  31,  2005**                  | ** ** | **March  31,  2006** | ** ** | **March  31,  2005** | ** ** |
| Foreign currency  translation adjustments, net of tax of $31.8 million as of March 31, 2006 and  December 31, 2005                  |       | $                                          | 90.1       |                                     | $          | 62.4 |   | $ | 27.7 |   | $ | (50.7 | ) |
| Unrealized gain (loss) on nonqualified plan investments                                                                             |       | 2.2                                        |       | 1.9                                      |       | 0.3 |   | (0.1 | ) |
| Unrealized gain (loss) on derivative instruments                                                                                    |       | 0.5                                        |       | —                                   |       | 0.5 |   | 1.0 |   |
| Minimum pension  liability, net of tax of $32.1 million and $30.0 million as of March 31, 2006  and December 31, 2005, respectively |       | (99.6                                      | )          | (102.1                                   | )          | 2.5 |   | (2.2 | ) |
| Minimum pension liability of unconsolidated affiliate                                                                               |       | (0.8                                       | )          | (0.8                                     | )          | — |   | 5.8 |   |
| Unrealized loss on securities                                                                                                       |       | —                                     |       | —                                   |       | — |   | (0.4 | ) |
| Other comprehensive income of unconsolidated  affiliates                                                                            |       | 7.3                                        |       | 7.3                                      |       | — |   | — |   |
| Total                                                                                                                               |       | $                                          | (0.3       | )                                        | $          | (31.3 | ) | $ | 31.0 |   | $ | (46.6 | ) |

 

17

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**Huntsman International:**

 
| ** **                                                                                                                                       | ** ** | **Accumulated  other comprehensive  loss** | ** ** | **Other  comprehensive income  (loss)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | ** **                                 | ** ** | ** **                              | ** ** | **Three  Months Ended** | ** ** |
| ** **                                                                                                                                       | ** ** | **March  31,  2006**                       | ** ** | **December  31,  2005**                 | ** ** | **March  31,  2006** | ** ** | **March  31,  2005** | ** ** |
| Foreign currency  translation adjustments, net of tax of $3.9 million and $0.2 million as of  March 31, 2006 and December 31, 2005, respectively |       | $                                          | 100.8      |                                    | $          | 69.9 |   | $ | 30.9 |   | $ | (47.5 | ) |
| Unrealized gain  (loss) on nonqualified plan investments                                                                                         |       | 1.1                                        |       | 0.8                                     |       | 0.3 |   | (0.1 | ) |
| Unrealized gain  (loss) on derivative instruments                                                                                                |       | (1.6                                       | )     | (2.2                                    | )     | 0.6 |   | 6.5 |   |
| Minimum pension  liability, net of tax of $46.4 million and $45.4 million as of March 31, 2006  and December 31, 2005, respectively              |       | (150.8                                     | )          | (153.3                                  | )          | 2.5 |   | (17.6 | ) |
| Minimum pension  liability of unconsolidated affiliate                                                                                           |       | (0.8                                       | )          | (0.8                                    | )          | — |   | 8.8 |   |
| Unrealized loss  on securities                                                                                                                   |       | —                                     |       | —                                  |       | — |   | (0.4 | ) |
| Other  comprehensive income of unconsolidated affiliates                                                                                         |       | 7.3                                        |       | 7.3                                     |       | — |   | — |   |
| Total                                                                                                                                            |       | $                                          | (44.0      | )                                       | $          | (78.3 | ) | $ | 34.3 |   | $ | (50.3 | ) |

 

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.

 

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

 

**Legal Matters**

 

**Discoloration Claims**

 

Certain claims have been filed against us relating to discoloration ofunplasticized polyvinyl chloride products allegedly caused by our titaniumdioxide (“Discoloration Claims”). Substantially all of the titanium dioxidethat is the subject of these claims was manufactured prior to our acquisitionof our titanium dioxide business from ICI in 1999. Net of amounts we havereceived from insurers and pursuant to contracts of indemnity, we have paid anaggregate of approximately $16 million in costs and settlement amounts forDiscoloration Claims as of March 31, 2006.

 

The following table presents information about the number ofDiscoloration Claims for the periods indicated. Claims include all claims forwhich service has been received by us, and each such claim represents aplaintiff who is pursuing a claim against us.

 
| ** **                                | ** ** | **Three months ended  March 31, 2006** | ** ** | **Three months ended  March 31, 2005** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Claims  unresolved at beginning of period |       | 2                                      |       | 3                                      |       |
| Claims filed  during period               |       | 0                                      |       | 0                                      |       |
| Claims  resolved during period            |       | 0                                      |       | 1                                      |       |
| Claims  unresolved at end of period       |       | 2                                      |       | 2                                      |       |

 

During the three months ended March 31, 2005, we settled a claimfor approximately $0.9 million, all of which was paid by ICI. The twoDiscoloration Claims unresolved as of March 31, 2006 asserted aggregatedamages of approximately $64 million. An appropriate liability has beenaccrued for these claims. Based on our understanding of the merits of theseclaims and our rights under contracts of indemnity and insurance, we do notbelieve that the net impact on our financial condition, results of operationsor liquidity will be material.

 

While additional Discoloration Claims may be made in the future, wecannot reasonably estimate the amount of loss related to such claims. Althoughwe may incur additional costs as a result of future claims (including 

 

18

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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 Claims wasmanufactured and sold more than six years ago, and the fact that we have rightsunder contract to indemnity, including from ICI, we do not believe that anyunasserted Discoloration Claims will have a material impact on our financialcondition, results of operations, or liquidity. Based on this conclusion andour inability to reasonably estimate our expected costs with respect to theseunasserted claims, we have made no accruals in our financial statements as ofMarch 31, 2006 for costs associated with unasserted Discoloration Claims.

 

**Asbestos Litigation**

 

We have been named as a “premises defendant” in a number of asbestosexposure cases, typically a claim by a non-employee of exposure to asbestoswhile at a facility. In the past, these cases typically have involved multipleplaintiffs bringing actions against multiple defendants, and the complaint hasnot indicated which plaintiffs were making claims against which defendants,where or how the alleged injuries occurred, or what injuries each plaintiff claimed.These facts, which would be central to any estimate of probable loss, generallyhave been learned only through discovery. Recent changes in Texas tortprocedures have required many pending cases to be split into multiple cases,one for each claimant, increasing the number of pending cases reported belowfor the three months ended March 31, 2006. Nevertheless, the complaints inthese cases provide little additional information. We do not believe that theincreased number of cases reflects an increase in the number of underlyingclaims.

 

Where the alleged exposure occurred prior to our ownership or operationof the relevant “premises,” the prior owners and operators generally havecontractually agreed to retain liability for, and to indemnify us against, asbestosexposure claims. This indemnification is not subject to any time or dollaramount limitations. Upon service of a complaint in one of these cases, wetender it to the prior owner or operator. None of the complaints in these casesstate the amount of damages being sought. The prior owner or operator acceptsresponsibility for the conduct of the defense of the cases and payment of anyamounts due to the claimants. In our eleven-year experience with tenderingthese cases, we have not made any payment with respect to any tendered asbestoscases. We believe that the prior owners or operators have the intention andability to continue to honor their indemnities, although we cannot assure youthat they will continue to do so or that we will not be liable for these casesif they do not.

 

The following table presents for the period indicated certaininformation about cases for which service has been received that we havetendered to the prior owner or operator, all of which have been accepted.

 
| ** **                         | ** ** | **Three months ended  March 31, 2006** | ** ** | **Three months ended  March 31, 2005** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Unresolved  at beginning of period |       | 576                                    |       | 398                                    |       |
| Tendered  during period            |       | 822                                    |       | 19                                     |       |
| Resolved  during period            |       | 51                                     |       | 9                                      |       |
| Unresolved  at end of period       |       | 1,347                                  |       | 408                                    |       |

 

We have never made any payments with respect to these cases. As ofMarch 31, 2006, we had an accrued liability of $12.5 million relating tothese cases and a corresponding receivable of $12.5 million relating toour indemnity protection with respect to these cases. We cannot assure you thatour liability will not exceed our accruals or that our liability associatedwith these cases would not be material to our financial condition, results ofoperations or liquidity; however, we are not able to estimate the amount orrange of loss in excess of our accruals. Additional asbestos exposure claimsmay be made against us in the future, and such claims could be material.However, because we are not able to estimate the amount or range of lossesassociated with such claims, we have made no accruals with respect tounasserted asbestos exposure claims as of March 31, 2006.

 

Certain cases in which we are a “premises defendant” are not subject toindemnification by prior owners or operators. The following table presents forthe period indicated certain information about these cases. Cases include allcases for which service has been received by us.

 

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| ** **                         | ** ** | **Three months ended  March 31, 2006** | ** ** | **Three months ended  March 31, 2005** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Unresolved at beginning of  period |       | 34                                     |       | 29                                     | ** ** |
| Filed during  period               |       | 3                                      |       | 4                                      |       |
| Resolved  during period            |       | 4                                      |       | 1                                      |       |
| Unresolved  at end of period       |       | 33                                     |       | 32                                     |       |

 

We paid gross settlement costs for asbestos exposure cases that are notsubject to indemnification of $5,000 during each of the three months endedMarch 31, 2006 and 2005. As of March 31, 2006, we had an accrual of $0.5million relating to these cases. We cannot assure you that our liability willnot exceed our accruals or that our liability associated with these cases wouldnot be material to our financial condition, results of operations or liquidity;however, we are not able to estimate the amount or range of loss in excess ofour accruals. Additional asbestos exposure claims may be made against us in thefuture, and such claims could be material. However, because we are not able toestimate the amount or range of losses associated with such claims, we havemade no accruals with respect to unasserted asbestos exposure claims as ofMarch 31, 2006.

 

**EnvironmentalEnforcement Proceedings**

 

On occasion, we receive notices of violation, enforcement and othercomplaints from regulatory agencies alleging non-compliance with applicable EHSlaw. By way of example, we are aware of the individual matters set out below,which we believe to be the most significant presently pending matters andunasserted claims. Although we may incur costs or penalties in connection withthe governmental proceedings discussed below, based on currently availableinformation and our past experience, we believe that the ultimate resolution ofthese matters will not have a material impact on our financial condition,results of operations or cash flows.

 

In May 2003, the State of Texas settled an air enforcement casewith us relating to our Port Arthur plant. Under the settlement, we arerequired to pay a civil penalty of $7.5 million over more than four years,undertake environmental monitoring projects totaling about $1.5 million incosts, and pay $0.4 million in attorney’s fees to the Texas AttorneyGeneral. As of March 31, 2006, we have paid $3.5 million toward thepenalty and $0.4 million for the attorney’s fees. The monitoring projectsare underway and on schedule. We do not anticipate that this settlement willhave a material adverse effect on our financial condition, results of operationsor cash flows.

 

Beginning in the third quarter of 2004 and extending throughDecember 2005, we have received notifications of approximately eightseparate enforcement actions from the Texas Commission on Environmental Quality(“TCEQ”) for alleged violations related to air emissions at our Port Neches orour Port Arthur plant. These alleged violations primarily relate to specificupset emissions, emissions from cooling towers, or flare operations occurringat particular times and at particular operating units during 2004 and 2005.These notices of violation appear to be part of a larger enforcement initiativeby the TCEQ regional office focused on upset emissions at chemical and refiningindustry plants located within the Beaumont/Port Arthur region. TCEQ is seekinga combined penalty of approximately $0.6 million for five of these notices.TCEQ has not made a penalty proposal for two other notices, and the finalnotice is seeking a penalty of less than $5,000. Final resolution of thesematters is subject to further negotiation between us and TCEQ. We do notbelieve that the resolution of these matters will result in the imposition ofcosts material to our financial condition, results of operations or cash flows.

 

During the first quarter of 2006, we disclosed to the TCEQ that ourConroe, Texas, facility has been out of compliance with Hazardous Air Pollutant(“HAP”) regulations. Prior calculations performed by outside consultantserroneously showed that the facility was not a “major” facility for HAP programpurposes; that has now been shown to have been incorrect. The agency hasindicated that there will likely be a penalty imposed, although the TCEQ hasnot proposed a specific penalty at this time.

 

By letter dated September 13, 2005, the Tamil Nadu PollutionControl Board (the “TNPCB”) issued an Order in follow-up to a Show Cause noticedated June 30, 2005, requiring a manufacturing facility of Petro AralditePrivate Limited, a subsidiary of Huntsman Advanced Materials in Chennai, India,to close for one week and to submit an action plan and timeline to reducechemical oxygen demand in its wastewater effluent. The facility complied withthe order and submitted an action plan to the TNPCB, which has been acceptedpending installation of assets to remedy the issue. The TNPCB has issuedconsents allowing the facility to stay in operation until September 30, 2006.Under these consents, the facility must have the wastewater controls installedand fully operational by that 

 

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date in order to be allowed tocontinue operations. The proposed changes are being installed and we expectthese modifications to resolve the current issues with the TNPCB. Ultimately,if the asset modifications do not resolve the effluent issue, or the TNPCBbelieves the plan or its implementation is inadequate, the TNPCB has the powerto take further enforcement action, including shutting down the facility for alonger period or permanently, initiating criminal sanctions or imposing fines.Nevertheless, we believe that the investments in progress will fully resolvethis matter. If they do not, however, the ultimate resolution will not have amaterial impact on our financial condition, results of operations or cashflows.

 

**Antitrust Matters**

 

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

 

These consolidated cases are in the early stages of class certificationdiscovery. The pleadings of the plaintiffs provide few specifics about anyalleged illegal conduct of the defendants and we are not aware of any evidenceof illegal conduct by us or any of our employees. For these reasons, we cannotestimate the possible loss or range of loss relating to these claims, andtherefore we have not accrued a liability for these claims. Nevertheless, wecould incur losses due to these claims in the future and those losses could bematerial.

 

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

 

**Tax Dispute**

 

In connection with the audit of our income tax returns for the yearsended 1998 through 2001, we received a Notice of Proposed Adjustment from theInternal Revenue Service and, in 2005, we initiated an administrative appealbefore the Internal Revenue Service. The potential liability and the potentialreduction to our net operating losses have been reserved in our financialstatements.

 

**Other Proceedings**

 

We are a party to various other proceedings instituted by privateplaintiffs, governmental authorities and others arising under provisions ofapplicable laws, including various environmental, products liability and otherlaws. Except as otherwise disclosed in this report, we do not believe that theoutcome of any of these matters will have a material adverse effect on ourfinancial condition, results of operations or liquidity. See “Note 13.Environmental, Health and Safety Matters—Remediation Liabilities” below for adiscussion of environmental remediation liabilities.

 

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

 

***General***

 

We are subject to extensive federal, state, local and foreign laws,regulations, rules and ordinances relating to safety, pollution, protection ofthe environment and the generation, storage, handling, transportation,treatment, disposal and remediation of hazardous substances and wastematerials. In the ordinary course of business, we are subject to frequentenvironmental inspections and monitoring and occasional investigations bygovernmental enforcement authorities. In addition, our production facilitiesrequire operating permits that are subject to renewal, modification and, incertain circumstances, revocation. Actual or alleged violations of safety laws,environmental laws or permit requirements could result in restrictions orprohibitions on plant operations, substantial civil or 

 

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criminal sanctions, as well as,under some environmental laws, the assessment of strict liability and/or jointand several liability. Moreover, changes in environmental regulations couldinhibit or interrupt our operations, or require us to modify our facilities oroperations. Accordingly, environmental or regulatory matters may cause us toincur significant unanticipated losses, costs or liabilities.

 

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

 

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

 

***EHS CapitalExpenditures***

 

We may incur future costs for capital improvements and generalcompliance under EHS laws, including costs to acquire, maintain and repairpollution control equipment. For the three months ended March 31, 2006 and2005, our capital expenditures for EHS matters totaled $6.7 million and$5.4 million, respectively. Since capital expenditures for these mattersare subject to evolving regulatory requirements and depend, in part, on thetiming, promulgation and enforcement of specific requirements, we cannotprovide assurance that our recent expenditures will be indicative of futureamounts required under EHS laws.

 

***Environmental Litigation and EnforcementProceedings***

 

See “Note 12. Commitments and Contingencies—Legal Matters” for adiscussion of environmental litigation and enforcement proceedings.

 

***RemediationLiabilities***

 

We have incurred, and we may in the future incur, liability toinvestigate and clean up waste or contamination at our current or formerfacilities or facilities operated by third parties at which we may havedisposed of waste or other materials. Similarly, we may incur costs for thecleanup of wastes that were disposed of prior to the purchase of ourbusinesses. Under some circumstances, the scope of our liability may extend todamages to natural resources. Specifically, under the U.S. ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”),and similar state laws, a current or former owner or operator of real propertymay be liable for remediation costs regardless of whether the release ordisposal of hazardous substances was in compliance with law at the time itoccurred, and a current owner or operator may be liable regardless of whetherit owned or operated the facility at the time of the release. In addition,under the U.S. Resource Conservation and Recovery Act of 1976, as amended (“RCRA”),and similar state laws, we may be required to remediate contaminationoriginating from our properties as a condition to our hazardous waste permit.For example, our Odessa, Port Arthur, and Port Neches facilities in Texas arethe subject of ongoing remediation requirements under RCRA authority. In manycases, our potential liability arising from historical contamination is basedon operations 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 remediation liability. We cannot assure you, however, that all ofsuch matters will be subject to indemnity or that our existing indemnities willbe sufficient to cover our liabilities for such matters.

 

Some of our manufacturing sites have an extended history of industrialchemical manufacturing and use, including on-site waste disposal. We are awareof soil, groundwater and surface water contamination from past operations atsome of our sites, and we may find contamination at other sites in the future.Based on available information and the indemnification rights we believe arelikely to be available, we believe that the costs to 

 

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

 

We have been notified by third parties of claims against us or oursubsidiaries for cleanup liabilities at approximately 12 former facilities andthird party sites, including but not limited to sites listed under CERCLA.Based on current information and past experience at other CERCLA sites, we donot expect any of these third party claims to result in a material liability tous.

 

***EnvironmentalReserves***

 

We have established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and closure costs and knownpenalties. Liabilities are recorded when potential liabilities are either knownor considered probable and can be reasonably estimated. Our liability estimatesare based upon available facts, existing technology and past experience. Wehave accrued approximately $18 million and $25 million forenvironmental liabilities as of March 31, 2006 and December 31, 2005,respectively. These amounts do not include amounts recorded as asset retirementobligations. Of these amounts, approximately $6 million and$7 million are classified as accrued liabilities on our condensedconsolidated balance sheets as of March 31, 2006 and December 31, 2005,respectively, and approximately $12 million and $18 million areclassified as other noncurrent liabilities on our condensed consolidatedbalance sheets as of March 31, 2006 and December 31, 2005, respectively.In certain cases, 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. We may be subject to additional environmentalremediation liabilities in the future, and such liabilities could be material.However, because we are not able to estimate the amount or range of lossesassociated with such liabilities, we have made no accruals with respect tounasserted environmental remediation liabilities as of March 31, 2006.

 

***RegulatoryDevelopments***

 

Under the European Union (“EU”) Integrated Pollution Prevention andControl Directive (“IPPC”), EU member governments are to adopt rules andimplement a cross media (air, water and waste) environmental permitting programfor individual facilities. While the EU countries are at varying stages intheir respective implementation of the IPPC permit program, we have submittedall necessary IPPC permit applications required to date, and in some casesreceived completed permits from the applicable government agency. We expect tosubmit all other IPPC applications and related documents on a timely basis asthe various countries implement the IPPC permit program. Although we do notknow with certainty what each IPPC permit will require, we believe, based uponour experience with the permits received to date, that the costs of compliancewith the IPPC permit program will not be material to our financial condition,results of operations or cash flows.

 

In October 2003, the European Commission (“EC”) adopted a proposalfor a new EU regulatory framework for chemicals. Under this proposed new systemcalled “REACH” (Registration, Evaluation and Authorization of Chemicals),companies that manufacture or import more than one ton of a chemical substanceper year would be required to register such manufacture or import in a centraldatabase. On November 17, 2005, the European Parliament completed itsfirst reading of the EC-drafted REACH legislation. Ministers from EU’s 25member states (sitting as the Council) finalized their own position on the texton December 13, 2005, paving the way for final agreement betweenParliament and the Council in late 2006 and for REACH to become law in early2007. As proposed, REACH would require risk assessment of chemicals,preparations (e.g., soaps and paints) and articles (e.g., consumer products)before those materials could be manufactured or imported into EU countries.Where warranted by a risk assessment, hazardous substances would requireauthorizations for their use. This regulation could impose risk controlstrategies that would require expenditures by us. As currently envisioned,REACH would take effect in three primary stages over eleven years following thefinal effective date (assuming final approval). The impacts of REACH on thechemical industry and on us are unclear at this time because the parameters ofthe program are still in development.

 

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***MTBE Developments***

 

We produce MTBE, an oxygenate that is blended with gasoline to reducevehicle air emissions and to enhance the octane rating of gasoline. BecauseMTBE has contaminated some water supplies, its use has become controversial inthe U.S. and elsewhere and has been curtailed and may be eliminated in thefuture by legislation or regulatory action. For example, about 25 states haveadopted rules that prohibit or restrict the use of MTBE in gasoline sold inthose states. Those states account for a substantial portion of the “pre-ban”U.S. MTBE market. In addition, the Energy Policy Act of 2005 is now having anadverse impact on our MTBE business in the U.S., since it mandates increaseduse of renewable fuels and eliminates, as of May 6, 2006, the oxygenaterequirement for reformulated gasoline established by the 1990 Clean Air ActAmendments. Although the full extent of the potential impact of the new law isstill unclear, most gasoline refiners and distributors in the U.S. appear tohave stopped using MTBE. A significant loss in demand for our MTBE in the U.S.could result in a material loss in revenues or material costs or expenditures.

 

In 2005, sales of MTBE comprised approximately 5% of our totalrevenues, and we marketed approximately 95% of our MTBE to customers located inthe U.S. for use as a gasoline additive. Most of our 2005 sales of MTBE to U.S.customers were made pursuant to long-term agreements. During 2006 (andconcluding by the first quarter of 2007), our long-term MTBE sales agreementsin the U.S. will terminate. We anticipate that our 2006 sales of MTBE in theU.S. will decrease substantially as compared to 2005 levels. We have enteredinto sales agreements to sell a significant percentage of our MTBE into theLatin American market, and we currently believe that we could also sell MTBErelatively efficiently in Europe and Asia. Nevertheless, as a result of varyingmarket prices and transportation costs, sales of MTBE in markets outside theU.S. may produce lower margins than the sale of MTBE in the U.S. We may alsoelect to use all or a portion of our precursor TBA to produce saleable productsother than MTBE. If we opt to produce products other than MTBE, necessarymodifications to our facilities will require us to make significant capitalexpenditures and the sale of such other products may produce a lower level ofcash flow than the sale of MTBE.

 

A number of lawsuits have been filed, primarily against gasolinemanufacturers, marketers and distributors, by persons seeking to recoverdamages allegedly arising from the presence of MTBE in groundwater. While wehave not been named as a defendant in any litigation concerning theenvironmental effects of MTBE, we cannot provide assurances that we will not beinvolved in any such litigation or that such litigation will not have a materialadverse effect on our business, financial condition, results of operations orcash flows. However, because we are not able to estimate the amount or range oflosses associated with such litigation, we have made no accruals with respectto unasserted claims concerning the environmental effects of MTBE as of March31, 2006.

 

**14.****                               OtherOperating Expense**

 

Other operating expense consisted of the following (dollars inmillions):

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Foreign  exchange losses      |       | $                                | 1.1        |   | $ | 37.8 |   |
| Other, net                    |       | 1.5                              |       | 6.9 |   |
| Total other operating expense |       | $                                | 2.6        |   | $ | 44.7 |   |

 

**15.****                               Stock-BasedCompensation Plans**

 

We have one stock-based compensation plan, described below. Thecompensation cost for that plan was $3.5 million and $1.0 million forthe three months ended March 31, 2006 and 2005, respectively. The total incometax benefit recognized in the statement of operations for stock-basedcompensation arrangements was nil for each of the three months ended March 31,2006 and 2005.

 

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Under the Huntsman Stock Incentive Plan (the “Stock Incentive Plan”), aplan approved by shareholders, we may grant non-qualified stock options,incentive stock options, stock appreciation rights, restricted stock, phantomstock, performance awards and other stock-based awards to our employees anddirectors and to employees and directors of our subsidiaries, provided thatincentive stock options may be granted solely to employees. The terms of thegrants are fixed at the grant date. As of March 31, 2006, we were authorized togrant up to 21,590,909 shares under the Stock Incentive Plan. Option awardshave a maximum contractual term of 10 years and generally must have anexercise price at least equal to the market price of our common stock on thedate the option award is granted. Stock-based awards generally vest over athree-year period.

 

The fair value of each stock option award is estimated on the date ofgrant using the Black-Scholes valuation model that uses the assumptions notedin the following table. Because we became a publicly-held company in February2005, expected volatilities are based on implied volatilities from tradedoptions on the stock of comparable companies and other factors. The expectedterm of options granted is estimated based on the contractual term of theinstruments and employees’ expected exercise and post-vesting employmenttermination behavior. The risk-free rate for periods within the contractuallife of the option is based on the U.S. Treasury yield curve in effect at thetime of grant.

 
| ** **                                                | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| Dividend  yield                                           |       | 0.0                    | %          | 0.0 | % |
| Expected  volatility                                      |       | 23.1                   | %          | 22.4 | % |
| Risk-free  interest rate                                  |       | 4.6                    | %          | 3.9 | % |
| Expected  life of stock options granted during the period |       | 6.6 years              |       | 6.6 years |   |

 

**Stock Options**

 

A summary of stock option activity under the Stock Incentive Plan as ofMarch 31, 2006 and changes during the three months then ended is presentedbelow:

 
| **Option Awards**               | ** ** | **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                         |       | 1,660      |       | 20.50                                  |       |                                                |       |                            |       |
| Exercised                       |       | —     |       | —                                 |       |                                                |       |                            |       |
| Forfeited/Expired               |       | (28        | )          | 23.00                                  |       |                                                |       |                            |       |
| Outstanding  at March 31, 2006  |       | 4,211      |       | 21.74                                  |       | 9.34                                                |       | $                               | 17         |   |
| Exercisable  at March 31, 2006  |       | 758        |       | 23.00                                  |       | 8.87                                                |       | —                          |       |
|                                 |            |            |            |                                        |            |                                                     |            |                                 |            |  |  |

 

The weighted-average grant-date fair value of stock options grantedduring the three months ended March 31, 2006 was $7.29 per option. As of March31, 2006, there was $23.6 million of total unrecognized compensation costrelated to nonvested stock option arrangements granted under the StockIncentive Plan. That cost is expected to be recognized over a weighted-averageperiod of approximately 2.3 years. No option awards were exercised during thethree months ended March 31, 2006 or 2005.

 

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**Nonvested shares**

 

Nonvested shares granted under the plan consist of restricted stock,which is accounted for as an equity award, and phantom stock, which isaccounted for as a liability award because it can be settled in either stock orcash. A summary of the status of our nonvested shares as of March 31, 2006 andchanges during the three months then ended is presented below:

 
| ** **                    | ** ** | **Equity Awards** | ** ** | **Liability Awards**                          | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **Shares**        | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
| ** **                    | ** ** | **(000)**         | ** ** | ** **                                    | ** ** | **(000)** | ** ** | ** ** | ** ** |
| Nonvested at  January 1, 2006 |       | 737               |       | $                                             | 22.99      |   | 33 |   | $ | 23.00 |   |
| Granted                       |       | 459               |       | 20.50                                         |       | 24 |   | 20.50 |   |
| Vested                        |       | (245              | )          | 23.00                                         |       | (11 | ) | 23.00 |   |
| Forfeited/Expired             |       | (9                | )          | 23.00                                         |       | — |   | — |   |
| Nonvested at  March 31, 2006  |       | 942               |       | 21.77                                         |       | 46 |   | 21.72 |   |
|                               |            |                   |            |                                               |            |  |  |  |  |  |  |

 

As of March 31, 2006, there was $19.9 million of totalunrecognized compensation cost related to nonvested share compensationarrangements granted under the Stock Incentive Plan. That cost is expected tobe recognized over a weighted-average period of approximately 2.4 years.The total fair value of shares that vested during the three months ended March31, 2006 and 2005 was $5.9 million and nil, respectively.

 

**16.****                               IncomeTaxes**

 

We use the asset and liability method of accounting for income taxes.Deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial and taxreporting purposes. We evaluate deferred tax assets to determine whether it ismore likely than not that they will be realized. Valuation allowances have beenestablished against the entire U.S. and a material portion of the non-U.S. netdeferred tax assets due to the uncertainty of realization. Valuation allowancesare reviewed each period on a tax jurisdiction by jurisdiction basis to analyzewhether there is sufficient positive or negative evidence to support a changein judgment about the realizability of the related deferred tax assets.

 

**Huntsman Corporation:**

 

Income tax expense was $8.4 million for the three months ended March31, 2006 and $32.1 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 effective income tax rates were 11% and 148% for the three monthsended March 31, 2006 and March 31, 2005, respectively. Excluding the impact ofthe charge in 2005 for loss on early extinguishment of debt of $233 million,which is not benefited for tax purposes because of valuation allowances on netdeferred tax assets, our effective income tax rate would have been 15% for thethree months ended March 31, 2005. These effective tax rates of 11% and 15% arelower than the U.S. statutory rate of 35% primarily due to our mix of earningsin tax jurisdictions where no tax expense is provided due to the release ofvaluation allowances, as well as earnings in tax jurisdictions with lowerstatutory rates.

 

**Huntsman International:**

 

Income tax expense was $13.7 million for the three months ended March31, 2006 and $28.2 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.

 

26

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Our effective income tax rates were 17% and 19% for the three monthsended March 31, 2006 and March 31, 2005, respectively. Excluding the impact ofthe charge in 2005 for loss on early extinguishment of debt of $74 million,which is not benefited for tax purposes because of valuation allowances on netdeferred tax assets, our effective income tax rate would have been 13% for thethree months ended March 31, 2005. These effective tax rates of 17% and 13% arelower than the U.S. statutory rate of 35% primarily due to our mix of earningsin tax jurisdictions where no tax expense is provided due to the release ofvaluation allowances, as well as earnings in tax jurisdictions with lowerstatutory rates. Additionally, onAugust 16, 2005, we completed the Affiliate Mergers. Prior to the AffiliateMergers, Huntsman International Holdings, including Huntsman International, wastreated as a partnership for U.S. federal income tax purposes and as such wasgenerally not subject to U.S. income tax, but rather such income was taxeddirectly to its owners. After the Affiliate Mergers, Huntsman International istreated as a corporate subsidiary and is subject to U.S. income tax. Therefore,the tax expense at March 31, 2006 and March 31, 2005 are not comparable.

 

**17.****                               DiscontinuedOperations**

 

On July 6, 2005, we sold our toluene di-isocyanate (“TDI”) business.The sale involved the transfer of our TDI customer list and sales contracts. Wefurther agreed to discontinue the use of our remaining TDI assets. TDI has beenaccounted for as a discontinued operation under SFAS No. 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets*.” Accordingly, the following results of TDI havebeen presented as discontinued operations in the accompanying unauditedcondensed consolidated statements of operations (dollars in millions):

 
| ** **                                     | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenues                                       |       | $                                | —     |   | $ | 13.6 |   |
| Costs and  expenses                            |       | (0.5                             | )          | (16.2 | ) |
| Operating  loss                                |       | (0.5                             | )          | (2.6 | ) |
| Income tax  expense                            |       | —                           |       | — |   |
| Loss from  discontinued operations, net of tax |       | $                                | (0.5       | ) | $ | (2.6 | ) |

 

We expect to incur approximately $1.0 million of additional costsrelated to the TDI transaction by the end of the second quarter of 2006. TheTDI business is reported in our Polyurethanes operating segment in ouraccompanying Condensed Consolidated Financial Statements (Unaudited).

 

**18.****                               NetIncome (Loss) per Share**

 

Basic income (loss) per share excludes dilution and is computed bydividing net income (loss) available to common stockholders by the weightedaverage number of shares outstanding during the period. Diluted income (loss)per share reflects potential dilution and is computed by dividing net income(loss) available to common stockholders by the weighted average number ofshares outstanding during the period, increased by the number of additionalshares that would have been outstanding if the potential dilutive units hadbeen exercised or converted.

 

In connection with our Reorganization Transaction and initial publicoffering of common stock on February 16, 2005, we issued 203,604,545shares of common stock. On March 14, 2005, we issued 16,846,939 shares ofcommon stock in exchange for the HMP Warrants. Also on February 16, 2005,we issued 5,750,000 shares of 5% mandatory convertible preferred stock. Thispreferred stock is convertible into between 10,162,550 shares and 12,499,925shares of our common stock, subject to anti-dilution adjustments, depending onthe average market price of our common stock over the 20 trading-day periodending on the third trading day prior to conversion. All share and per sharedata reflected in our Condensed Consolidated Financial Statements (Unaudited)have been retroactively restated to give effect to the shares issued inconnection with the Reorganization Transaction, the initial public offering ofcommon stock and the shares issued in connection with the exchange of the HMPWarrants on March 14, 2005, as if such shares had been issued at thebeginning of the period. As a result of the change in capital 

 

27

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structure and declaration ofdividends on our mandatorily convertible preferred shares in the first quarterof 2005, per share results for the three months ended March 31, 2006 and 2005are not comparable.

 

Basic and diluted income (loss) per share is calculated as follows (inmillions, except share amounts):

 
| ** **                                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Basic and diluted income (loss) from  continuing operations available to common stockholders (numerator): |       |                             |       |   |   |
| Income (loss) from continuing operations  before accounting change                                        |       | $                                | 69.5       |   | $ | (53.8 | ) |
| Preferred stock dividends                                                                                 |       | —                           |       | (43.1 | ) |
| Income (loss) from continuing operations  available to common stockholders                                |       | $                                | 69.5       |   | $ | (96.9 | ) |
| Basic and diluted net income (loss)  available to common stockholders (numerator):                        |       |                             |       |   |   |
| Net income (loss)                                                                                         |       | $                                | 69.0       |   | $ | (52.4 | ) |
| Preferred stock dividends                                                                                 |       | —                           |       | (43.1 | ) |
| Net income (loss) available to common stockholders                                                        |       | $                                | 69.0       |   | $ | (95.5 | ) |
|                                                                                                      |       |                             |       |   |   |
| Shares (denominator):                                                                                     |       |                             |       |   |   |
| Weighted average shares outstanding                                                                       |       | 220,554,906                      |       | 220,451,484 |   |
| Dilutive securities:                                                                                      |       |                             |       |   |   |
| Stock-based awards                                                                                        |       | 49,093                           |       | — |   |
| Preferred stock conversion                                                                                |       | 12,499,925                       |       | — |   |
| Total dilutive shares outstanding assuming  conversion                                                    |       | 233,103,924                      |       | 220,451,484 |   |

 

Additionalstock-based awards of 3,291,828 weighted average equivalent shares of stockwere outstanding during the three months ended March 31, 2006 and were notincluded in the computation of diluted earnings per share because the effectwould be anti-dilutive.

 

**19.****                               OperatingSegment Information**

 

We report our operations through six operating segments: Polyurethanes, Advanced Materials, Performance Products, Pigments, Polymers andBase Chemicals.

 

The major products of each reportable operating segment are as follows:

 

28

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

 

----

(1)           The propyleneoxide/MTBE operations in our Polyurethanes segment are not included in theannounced sale of our U.S. butadiene and MTBE business (operated in the BaseChemicals segment). See “Note 4. Business Combinations and Dispositions.”

 

(2)           We have announced thesale of our U.S. butadiene and MTBE business operated in our Base Chemicalssegment; this transaction is expected to close in mid-2006. See “Note 4.Business Combinations and Dispositions.”

 

Sales between segments are generally recognized at external marketprices and are eliminated in consolidation. We use EBITDA to measure thefinancial performance of our global business units and for reporting theresults of our operating segments. This measure includes all operating itemsrelating to the businesses. The EBITDA of operating segments excludes itemsthat principally apply to our company as a whole. The revenues and EBITDA foreach of our reportable operating segments are as follows (dollars in millions):

 

29

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| ** **                     | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Net  Sales:**                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Polyurethanes                  |       | $                                | 809.1      |   | $ | 879.9 |   |
| Advanced Materials             |       | 307.2                            |       | 311.5 |   |
| Performance Products           |       | 490.3                            |       | 520.7 |   |
| Pigments                       |       | 258.8                            |       | 263.2 |   |
| Polymers                       |       | 439.4                            |       | 413.6 |   |
| Base Chemicals                 |       | 1,090.6                          |       | 1,187.0 |   |
| Eliminations                   |       | (207.7                           | )          | (226.6 | ) |
| Total                          |       | $                                | 3,187.7    |   | $ | 3,349.3 |   |
|                           |       |                             |       |   |   |
| **Huntsman  Corporation:**     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Segment  EBITDA****(1):**    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Polyurethanes                  |       | $                                | 159.2      |   | $ | 185.7 |   |
| Advanced Materials (2)         |       | 34.9                             |       | 49.0 |   |
| Performance Products           |       | 45.6                             |       | 66.9 |   |
| Pigments                       |       | 33.3                             |       | 39.3 |   |
| Polymers                       |       | 35.2                             |       | 44.9 |   |
| Base Chemicals                 |       | 20.1                             |       | 161.6 |   |
| Corporate and other (2) (3)    |       | (47.1                            | )          | (300.3 | ) |
| Total EBITDA                   |       | 281.2                            |       | 247.1 |   |
| Interest  expense, net         |       | (86.8                            | )          | (139.6 | ) |
| Income tax  expense (4)        |       | (8.4                             | )          | (34.0 | ) |
| Depreciation  and amortization |       | (117.0                           | )          | (125.9 | ) |
| Net income (loss)              |       | $                                | 69.0       |   | $ | (52.4 | ) |
| ** **                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Huntsman International:**    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Segment  EBITDA****(1):**    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Polyurethanes                  |       | $                                | 159.2      |   | $ | 185.7 |   |
| Advanced Materials (2)         |       | 34.9                             |       | 49.0 |   |
| Performance Products           |       | 45.6                             |       | 66.9 |   |
| Pigments                       |       | 33.3                             |       | 39.3 |   |
| Polymers                       |       | 35.2                             |       | 44.9 |   |
| Base Chemicals                 |       | 20.1                             |       | 161.6 |   |
| Corporate and other (2) (3)    |       | (49.1                            | )          | (142.0 | ) |
| Total EBITDA                   |       | 279.2                            |       | 405.4 |   |
| Interest  expense, net         |       | (88.0                            | )          | (134.7 | ) |
| Income tax  expense (4)        |       | (13.7                            | )          | (29.7 | ) |
| Depreciation  and amortization |       | (110.2                           | )          | (118.9 | ) |
| Net income                     |       | $                                | 67.3       |   | $ | 122.1 |   |

 

----

(1)                                 Segment EBITDA isdefined as net income (loss) before interest, income tax and depreciation andamortization.

 

(2)                                 Beginning in thesecond quarter of 2005, we began reporting foreign exchange gains or losses andallocated corporate overhead relating to the Advanced Materials segment inCorporate and other in order to be 

 

30

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consistent with the EBITDA presentation of our other segments. Allprior period amounts have been reclassified to conform with the currentpresentation.

 

(3)                                 EBITDA from corporateand other items includes unallocated corporate overhead, loss on earlyextinguishment of debt, loss on sale of accounts receivable, unallocatedforeign exchange gains or losses and other non-operating income (expense).

 

(4)                                 Includes a tax expenseof $1.9 million and $1.5 million for Huntsman Corporation and HuntsmanInternational, respectively, in 2005 on the cumulative effect of change inaccounting principle.

 

**20.****                               SubsequentEvent**

 

On April 29, 2006, our Port Arthur, Texas olefinsmanufacturing plant experienced a major fire and the facility is notoperational. Though investigators are in the very early stages of assessing theimpact of the fire, it appears that the damage is significant and the plantcould be off line for at least several months. The 50 employees and contractorsworking at the facility at the time of the incident were safely evacuated. Noneof our other Jefferson County, Texas manufacturing sites were damaged. However,we have been forced to idle our ethylene glycol unit at a neighboring facilitydue to the disruption of feedstocks provided by the damaged unit.

 

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 capacity. It also has an annual capacity of 800 million pounds ofpropylene, 680 million pounds of cyclohexane and 460 million pounds of benzene.

 

We carry normal and customary insurance coverage forproperty damage and business interruption. The deductible for property damageis $10 million, while, generally, business interruption coverage does not applyfor the first 60 days.

 

**21.****                               CondensedConsolidating Financial Statements of Huntsman International**

 

The following unaudited condensed consolidating financial statements ofHuntsman International present, in separate columns, financial information forthe following:  Huntsman International LLC (on a parent only basis), withits investment in subsidiaries recorded under the equity method; the guarantorsof Huntsman 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 March 31, 2006 and December 31, 2005and for the three months ended March 31, 2006 and 2005. There are nocontractual restrictions limiting transfers of cash from Huntsman International’sguarantors to Huntsman International. Each of Huntsman International’sguarantors is 100% owned by Huntsman International and has fully andunconditionally guaranteed Huntsman International’s notes on a joint andseveral basis.

 

31

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**HUNTSMAN INTERNATIONAL LLC ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCESHEET (UNAUDITED)**

**AS OF MARCH 31, 2006**

** **

**(Dollars in Millions)**

 

 
| ** **                                     | ** ** | **Parent Company** | ** **    | **Guarantors** | ** ** | **Non- guarantors** | ** ** | **Eliminations** | ** **    | **Consolidated  Huntsman  International   LLC** | ** ** |
|------------------------------------------------|------------|-------------------------|---------------|----------------|------------|--------------------------|------------|------------------|---------------|------------------------------------------------------|------------|
| **ASSETS**                                     | ** ** | ** **              | ** **    | ** **     | ** ** | ** **               | ** ** | ** **       | ** **    | ** **                                           | ** ** |
| **Current assets:**                            |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Cash and cash equivalents                      |       | $                       | 8.1           |           | $          | 11.7                     |       | $                | 116.8         |                                                 | $          | — |   | $ | 136.6 |   |
| Accounts and notes receivables, net            |       | 91.5                    |          | 478.7          |       | 782.7                    |       | —           |          | 1,352.9                                              |       |
| Accounts receivable from affiliates            |       | 518.8                   |          | 1,111.5        |       | 485.0                    |       | (2,103.2         | )             | 12.1                                                 |       |
| Inventories, net                               |       | 126.2                   |          | 376.8          |       | 811.2                    |       | (3.2             | )             | 1,311.0                                              |       |
| Prepaid expenses                               |       | 4.4                     |          | 18.4           |       | 25.0                     |       | (7.2             | )             | 40.6                                                 |       |
| Deferred income taxes                          |       | 45.5                    |          | —         |       | 0.3                      |       | (14.6            | )             | 31.2                                                 |       |
| Other current assets                           |       | 4.4                     |          | 1.3            |       | 31.1                     |       | (8.8             | )             | 28.0                                                 |       |
| Current assets held for sale                   |       | —                  |          | 79.9           |       | —                   |       | —           |          | 79.9                                                 |       |
| **Total current assets**                       |       | 798.9                   |          | 2,078.3        |       | 2,252.1                  |       | (2,137.0         | )             | 2,992.3                                              |       |
| ** **                                     |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Property, plant and equipment, net             |       | 554.3                   |          | 1,284.6        |       | 2,443.9                  |       | 3.2              |          | 4,286.0                                              |       |
| Investment in unconsolidated affiliates        |       | 3,632.7                 |          | 2,307.8        |       | 84.6                     |       | (5,827.8         | )             | 197.3                                                |       |
| Intangible assets, net                         |       | 164.3                   |          | (4.5           | )          | 54.7                     |       | —           |          | 214.5                                                |       |
| Goodwill                                       |       | —                  |          | 88.0           |       | 7.3                      |       | (4.1             | )             | 91.2                                                 |       |
| Deferred income taxes                          |       | —                  |          | 19.8           |       | 94.2                     |       | (14.6            | )             | 99.4                                                 |       |
| Notes receivable from affiliates               |       | 2,160.8                 |          | 1,831.8        |       | 1.0                      |       | (3,992.6         | )             | 1.0                                                  |       |
| Other noncurrent assets                        |       | 83.5                    |          | 134.3          |       | 409.9                    |       | —           |          | 627.7                                                |       |
| Noncurrent assets held for sale                |       | —                  |          | 86.4           |       | —                   |       | —           |          | 86.4                                                 |       |
| **Total assets**                               |       | $                       | 7,394.5       |           | $          | 7,826.5                  |       | $                | 5,347.7       |                                                 | $          | (11,972.9 | ) | $ | 8,595.8 |   |
| ** **                                     |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| **LIABILITIES AND MEMBERS’ EQUITY**       | ** ** | ** **              | ** **    | ** **     | ** ** | ** **               | ** ** | ** **       | ** **    | ** **                                           | ** ** |
| **Current liabilities:**                       |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Accounts payable                               |       | $                       | 58.3          |           | $          | 324.3                    |       | $                | 611.4         |                                                 | $          | — |   | $ | 994.0 |   |
| Accounts payable to affiliates                 |       | 1,237.5                 |          | 296.1          |       | 575.6                    |       | (2,102.9         | )             | 6.3                                                  |       |
| Accrued liabilities                            |       | 109.6                   |          | 139.8          |       | 340.9                    |       | (16.0            | )             | 574.3                                                |       |
| Deferred income taxes                          |       | —                  |          | 19.8           |       | (2.7                     | )          | (14.6            | )             | 2.5                                                  |       |
| Current portion of long-term debt              |       | 10.0                    |          | 9.1            |       | 22.9                     |       | —           |          | 42.0                                                 |       |
| Current liabilities held for sale              |       | —                  |          | 39.2           |       | —                   |       | —           |          | 39.2                                                 |       |
| **Total current liabilities**                  |       | 1,415.4                 |          | 828.3          |       | 1,548.1                  |       | (2,133.5         | )             | 1,658.3                                              |       |
|                                           |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Long-term debt                                 |       | 4,369.9                 |          | 2,131.3        |       | 1,957.3                  |       | (3,992.6         | )             | 4,465.9                                              |       |
| Deferred income taxes                          |       | 42.3                    |          | 8.3            |       | 195.1                    |       | (14.6            | )             | 231.1                                                |       |
| Other noncurrent liabilities                   |       | 130.2                   |          | 199.5          |       | 446.3                    |       | (0.9             | )             | 775.1                                                |       |
| Noncurrent liabilities held for sale           |       | —                  |          | 1.3            |       | —                   |       | —           |          | 1.3                                                  |       |
| **Total liabilities**                          |       | 5,957.8                 |          | 3,168.7        |       | 4,146.8                  |       | (6,141.6         | )             | 7,131.7                                              |       |
|                                           |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Minority interests                             |       | —                  |          | 94.8           |       | 22.2                     |       | (89.6            | )             | 27.4                                                 |       |
| **Members’ equity:**                      |       |                    |          |           |       |                     |       |             |          |                                                 |       |
| Members’ equity                           |       | 2,797.5                 |          | 3,846.1        |       | 1,262.0                  |       | (5,108.1         | )             | 2,797.5                                              |       |
| Subsidiary preferred stock                     |       | —                  |          | 73.5           |       | 1.4                      |       | (74.9            | )             | —                                               |       |
| (Accumulated deficit) retained earnings        |       | (1,316.8                | )             | 532.7          |       | 13.3                     |       | (546.0           | )             | (1,316.8                                             | )          |
| Accumulated other comprehensive (loss) income  |       | (44.0                   | )             | 110.7          |       | (98.0                    | )          | (12.7            | )             | (44.0                                                | )          |
| **Total members’ equity**                 |       | 1,436.7                 |          | 4,563.0        |       | 1,178.7                  |       | (5,741.7         | )             | 1,436.7                                              |       |
| **Total liabilities and members’ equity** |       | $                       |  7,394.5 |           | $          |  7,826.5            |       | $                |  5,347.7 |                                                 | $          |  (11,972.9 | ) | $ |  8,595.8 |   |
|                                                |            |                         |               |                |            |                          |            |                  |               |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

32

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF 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 and notes receivables, 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 |   |

 

33

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS (UNAUDITED)**

**THREE MONTHS ENDED MARCH 31, 2006**

** ****(Dollars in Millions)**

 
| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non- guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                    | ** ** | ** **          | ** ** | ** **     | ** ** | ** **               | ** ** | ** **       | ** ** | ** **                                     | ** ** |
| Trade sales, services and fees                                                   |       | $                   | 347.0      |           | $          | 1,229.5                  |       | $                | 1,597.2    |                                           | $          | — |   | $ | 3,173.7 |   |
| Related party sales                                                              |       | 59.1                |       | 80.6           |       | 225.3                    |       | (351.0           | )          | 14.0                                           |       |
| **Total revenues**                                                               |       | 406.1               |       | 1,310.1        |       | 1,822.5                  |       | (351.0           | )          | 3,187.7                                        |       |
|                                                                             |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Cost of goods sold**                                                           |       | 323.2               |       | 1,162.9        |       | 1,668.4                  |       | (349.2           | )          | 2,805.3                                        |       |
| ** **                                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Gross profit**                                                                 |       | 82.9                |       | 147.2          |       | 154.1                    |       | (1.8             | )          | 382.4                                          |       |
| ** **                                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Operating expenses:**                                                          |       |                |       |           |       |                     |       |             |       |                                           |       |
| Selling, general and administrative                                              |       | 60.6                |       | 25.9           |       | 86.1                     |       | (0.2             | )          | 172.4                                          |       |
| Research and development                                                         |       | 11.4                |       | 6.7            |       | 9.2                      |       | —           |       | 27.3                                           |       |
| Other operating expense (income)                                                 |       | 8.6                 |       | (8.9           | )          | 2.9                      |       | —           |       | 2.6                                            |       |
| Restructuring, impairment and plant closing (credits) costs                      |       | (0.1                | )          | 0.9            |       | 7.0                      |       | —           |       | 7.8                                            |       |
| **Total expenses**                                                               |       | 80.5                |       | 24.6           |       | 105.2                    |       | (0.2             | )          | 210.1                                          |       |
|                                                                             |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Operating income**                                                             |       | 2.4                 |       | 122.6          |       | 48.9                     |       | (1.6             | )          | 172.3                                          |       |
| Interest expense, net                                                            |       | (49.2               | )          | (3.3           | )          | (35.5                    | )          | —           |       | (88.0                                          | )          |
| Gain (loss) on accounts receivable securitization program                        |       | 2.1                 |       | (0.7           | )          | (4.2                     | )          | —           |       | (2.8                                           | )          |
| Equity in income of unconsolidated affiliates and subsidiaries                   |       | 113.6               |       | 10.6           |       | 0.7                      |       | (124.2           | )          | 0.7                                            |       |
| Other expense                                                                    |       | —              |       | —         |       | (0.3                     | )          | —           |       | (0.3                                           | )          |
| **Income from continuing operations before income  taxes and minority interest** |       | 68.9                |       | 129.2          |       | 9.6                      |       | (125.8           | )          | 81.9                                           |       |
| Income tax expense                                                               |       | (1.1                | )          | (8.1           | )          | (4.5                     | )          | —           |       | (13.7                                          | )          |
| Minority interest in subsidiaries’ income                                   |       | —              |       | (10.1          | )          | (0.3                     | )          | 10.0             |       | (0.4                                           | )          |
| **Income from continuing operations**                                            |       | 67.8                |       | 111.0          |       | 4.8                      |       | (115.8           | )          | 67.8                                           |       |
| Loss from discontinued operations, net of tax of nil                             |       | (0.5                | )          | —         |       | —                   |       | —           |       | (0.5                                           | )          |
| **Net income**                                                                   |       | $                   | 67.3       |           | $          | 111.0                    |       | $                | 4.8        |                                           | $          | (115.8 | ) | $ | 67.3 |   |

 

34

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**THREE MONTHS ENDED MARCH 31, 2005**

**(Dollars in Millions)**

 
| ** **                                                                                          | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non- guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Revenues:**                                                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| Trade sales, services and fees                                                                      |       | $                   | 338.1      |           | $          | 1,202.2                  |       | $                | 1,784.3    |                                           | $          | — |   | $ | 3,324.6 |   |
| Related party sales                                                                                 |       | 85.2                |       | 70.9           |       | 268.4                    |       | (399.8           | )          | 24.7                                           |       |
| **Total revenues**                                                                                  |       | 423.3               |       | 1,273.1        |       | 2,052.7                  |       | (399.8           | )          | 3,349.3                                        |       |
|                                                                                                |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Cost of goods sold**                                                                              |       | 322.0               |       | 1,093.8        |       | 1,737.2                  |       | (398.6           | )          | 2,754.4                                        |       |
| ** **                                                                                          |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Gross profit**                                                                                    |       | 101.3               |       | 179.3          |       | 315.5                    |       | (1.2             | )          | 594.9                                          |       |
|                                                                                                |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Operating expenses:**                                                                             |       |                |       |           |       |                     |       |             |       |                                           |       |
| Selling, general and administrative                                                                 |       | 40.5                |       | 28.6           |       | 88.1                     |       | (0.2             | )          | 157.0                                          |       |
| Research and development                                                                            |       | 8.9                 |       | 6.6            |       | 8.8                      |       | —           |       | 24.3                                           |       |
| Other operating expense                                                                             |       | 9.2                 |       | 5.5            |       | 30.0                     |       | —           |       | 44.7                                           |       |
| Restructuring, impairment and plant closing costs                                                   |       | —              |       | 3.3            |       | 7.1                      |       | —           |       | 10.4                                           |       |
| **Total expenses**                                                                                  |       | 58.6                |       | 44.0           |       | 134.0                    |       | (0.2             | )          | 236.4                                          |       |
|                                                                                                |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Operating income**                                                                                |       | 42.7                |       | 135.3          |       | 181.5                    |       | (1.0             | )          | 358.5                                          |       |
| Interest expense, net                                                                               |       | (72.4               | )          | (21.7          | )          | (40.6                    | )          | —           |       | (134.7                                         | )          |
| Gain (loss) on accounts receivable securitization program                                           |       | 3.3                 |       | (0.7           | )          | (5.8                     | )          | —           |       | (3.2                                           | )          |
| Equity in income of unconsolidated affiliates and subsidiaries                                      |       | 216.8               |       | 191.0          |       | 2.3                      |       | (407.8           | )          | 2.3                                            |       |
| Loss on early extinguishment of debt                                                                |       | (74.0               | )          | —         |       | —                   |       | —           |       | (74.0                                          | )          |
| Other income (expense)                                                                              |       | 0.2                 |       | —         |       | (0.4                     | )          | —           |       | (0.2                                           | )          |
| **Income from continuing operations before income  taxes, minority interest and accounting change** |       | 116.6               |       | 303.9          |       | 137.0                    |       | (408.8           | )          | 148.7                                          |       |
| Income tax benefit (expense)                                                                        |       | 8.2                 |       | (8.2           | )          | (28.2                    | )          | —           |       | (28.2                                          | )          |
| Minority interest in subsidiaries’ income                                                      |       | (0.1                | )          | (16.6          | )          | (0.2                     | )          | 16.9             |       | —                                         |       |
| **Income from continuing operations**                                                               |       | 124.7               |       | 279.1          |       | 108.6                    |       | (391.9           | )          | 120.5                                          |       |
| Loss from discontinued operations, net of tax of nil                                                |       | (2.6                | )          | —         |       | —                   |       | —           |       | (2.6                                           | )          |
| **Income before accounting change**                                                                 |       | 122.1               |       | 279.1          |       | 108.6                    |       | (391.9           | )          | 117.9                                          |       |
| Cumulative effect of change in accounting principle, net of tax of  $1.5                            |       | —              |       | —         |       | 4.2                      |       | —           |       | 4.2                                            |       |
| **Net income**                                                                                      |       | $                   | 122.1      |           | $          | 279.1                    |       | $                | 112.8      |                                           | $          | (391.9 | ) | $ | 122.1 |   |

 

35

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS (UNAUDITED)**

**THREE MONTHS ENDED MARCH 31, 2006**

**(Dollars in Millions)**

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

 

36

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**HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)**

**THREE MONTHS ENDED MARCH 31, 2005**

**(Dollars in Millions)**

 
| ** **                                                 | ** ** | **Parent  Company** | ** ** | **Guarantors** | ** ** | **Non- Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Huntsman  International  LLC** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------------|------------|------------------|------------|------------------------------------------------|------------|
| **Net cash provided by operating activities**              |       | $                   | 25.0       |           | $          | 31.9                     |       | $                | 181.8      |                                           | $          | — |   | $ | 238.7 |   |
| ** **                                                 |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Investing activities:**                                  |       |                |       |           |       |                     |       |             |       |                                           |       |
| Capital expenditures                                       |       | (13.4               | )          | (8.7           | )          | (37.7                    | )          | —           |       | (59.8                                          | )          |
| Investment in affiliates, net                              |       | (0.8                | )          | —         |       | (8.1                     | )          | —           |       | (8.9                                           | )          |
| Proceeds from sale of assets                               |       | 4.6                 |       | —         |       | 0.1                      |       | —           |       | 4.7                                            |       |
| Change in restricted cash                                  |       | —              |       | (0.4           | )          | —                   |       | —           |       | (0.4                                           | )          |
| **Net cash used in investing activities**                  |       | (9.6                | )          | (9.1           | )          | (45.7                    | )          | —           |       | (64.4                                          | )          |
|                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| **Financing activities:**                                  |       |                |       |           |       |                     |       |             |       |                                           |       |
| Net (repayment) borrowings under revolving loan facilities |       | (63.6               | )          | —         |       | 2.7                      |       | —           |       | (60.9                                          | )          |
| Repayment of long-term debt                                |       | (886.4              | )          | (0.3           | )          | —                   |       | —           |       | (886.7                                         | )          |
| Intercompany borrowings (repayments)                       |       | 170.1               |       | (7.9           | )          | (162.2                   | )          | —           |       | —                                         |       |
| Proceeds from long term debt                               |       | 2.5                 |       | —         |       | —                   |       | —           |       | 2.5                                            |       |
| Call premiums related to early extinguishment of debt      |       | (65.5               | )          | —         |       | —                   |       | —           |       | (65.5                                          | )          |
| Repayment of notes payable                                 |       | (10.2               | )          | (0.5           | )          | (0.8                     | )          | —           |       | (11.5                                          | )          |
| Contribution from parent                                   |       | 837.6               |       | —         |       | —                   |       | —           |       | 837.6                                          |       |
| Contribution from minority shareholder                     |       | —              |       | —         |       | 3.6                      |       | —           |       | 3.6                                            |       |
| Other, net                                                 |       | (0.2                | )          | —         |       | 0.1                      |       | —           |       | (0.1                                           | )          |
| **Net cash used in financing activities**                  |       | (15.7               | )          | (8.7           | )          | (156.6                   | )          | —           |       | (181.0                                         | )          |
|                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| Effect of exchange rate changes on cash                    |       | (0.2                | )          | —         |       | (2.1                     | )          | —           |       | (2.3                                           | )          |
|                                                       |       |                |       |           |       |                     |       |             |       |                                           |       |
| (Decrease) increase in cash and cash equivalents           |       | (0.5                | )          | 14.1           |       | (22.6                    | )          | —           |       | (9.0                                           | )          |
| Cash and cash equivalents at beginning of period           |       | 7.3                 |       | 14.0           |       | 222.2                    |       | —           |       | 243.5                                          |       |
| Cash and cash equivalents at end of period                 |       | $                   | 6.8        |           | $          | 28.1                     |       | $                | 199.6      |                                           | $          | — |   | $ | 234.5 |   |

 

37

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

 

**Forward-lookingStatements**

 

Certain information setforth in this report contains “forward-looking statements” within the meaningof the federal securities laws. Forward-looking statements include statementsconcerning our plans, objectives, goals, strategies, future events, futurerevenues or performance, capital expenditures, financing needs, plans or intentionsrelating to acquisitions and other information that is not historicalinformation. In some cases, forward-looking statements can be identified byterminology such as “believes,” “expects,” “may,” “will,” “should,” “anticipates,”or “intends” or the negative of such terms or other comparable terminology, orby discussions of strategy. We may also make additional forward-lookingstatements from time to time. All such subsequent forward-looking statements,whether written or oral, by us or on our behalf, are also expressly qualifiedby these cautionary statements.

 

All forward-lookingstatements, including without limitation, management’s examination ofhistorical operating trends, are based upon our current expectations andvarious assumptions. Our expectations, beliefs and projections are expressed ingood faith and we believe there is a reasonable basis for them, but, there canbe no assurance that management’s expectations, beliefs and projections willresult or be achieved. All forward-looking statements apply only as of the datemade. We undertake no obligation to publicly update or revise forward-lookingstatements which may be made to reflect events or circumstances after the datemade or to reflect the occurrence of unanticipated events.

 

There are a number of risksand uncertainties that could cause our actual results to differ materially fromthe forward-looking statements contained in or contemplated by this report. Anyforward-looking statements should be considered in light of the risks referencedin “Part II. Item 1A. Risk Factors” below and in “Part I. Item 1A.Risk Factors” included in our Annual Report on Form 10-K.

 

**Overview**

 

We are among the world’slargest global manufacturers of differentiated and commodity chemical products.We manufacture a broad range of chemical products and formulations, which wemarket in more than 100 countries to a diversified group of consumer andindustrial customers. Our products are used in a wide range of applications,including those in the adhesives, aerospace, automotive, construction products,durable and non-durable consumer products, electronics, medical, packaging,paints and coatings, power generation, refining and synthetic fiber industries.We are a leading global producer in many of our key product lines, includingMDI, amines, surfactants, epoxy-based polymer formulations, maleic anhydrideand titanium dioxide. Our administrative, research and development andmanufacturing operations are primarily conducted at the 67 facilities that weown or lease. Our facilities are located in 24 countries and we employapproximately 10,800 associates worldwide. Our businesses benefit fromsignificant vertical integration, large production scale and proprietarymanufacturing technologies, which allow us to maintain a low-cost position. Wehad revenues for the three months ended March 31, 2006 and 2005 of$3,187.7 million and $3,349.3 million, respectively.

 

Our business is organizedaround our six segments: Polyurethanes, Advanced Materials, PerformanceProducts, Pigments, Polymers and Base Chemicals. These segments can be dividedinto two broad categories: differentiated and commodity. Our Polyurethanes,Advanced Materials and Performance Products segments produce differentiatedproducts, and our Pigments, Polymers and Base Chemicals segments producecommodity chemicals. Among our commodity products, our Pigments business, whilecyclical, is influenced largely by seasonal demand patterns in the coatingsindustry. Certain products in our Polymers segment also follow different trendsthan petrochemical commodities as a result of our niche marketing strategy forsuch products that focuses on supplying customized formulations. Nevertheless,each of our six operating segments is impacted to some degree by economicconditions, prices of raw materials and global supply and demand pressures.

 

38

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Growth in our Polyurethanesand Advanced Materials segments has been driven by the continued substitutionof other materials by our products across a broad range of applications as wellas the level of global economic activity. Historically, demand for many ofthese products has grown at rates in excess of GDP growth. In Polyurethanes,this growth, particularly in Asia, has recently resulted in improved demand andhigher industry capacity utilization rates for many of our key products,including MDI.

 

In our Performance Productssegment, demand for our performance specialties has generally continued to growat rates in excess of GDP as overall demand is significantly influenced by newproduct and application development. Overall demand for most of our performanceintermediates has generally been stable or improving, but excess surfactantmanufacturing capacity in Europe and a decline in the use of LAB in newdetergent formulations have continued to impair our ability to increase pricesin response to higher raw material costs. EG industry operating rates andprofitability have declined during 2005 and during the first quarter of 2006due to additional capacity coming on stream.

 

Historically, demand fortitanium dioxide pigments has grown at rates approximately equal to global GDPgrowth. Pigment prices have historically reflected industry-wide operatingrates but have typically lagged behind movements in these rates by up to twelvemonths due to the effects of product stocking and destocking by customers andproducers, contract arrangements and seasonality. The industry experiences someseasonality in its sales because sales of paints, the largest end use fortitanium dioxide, generally peak during the spring and summer months in thenorthern hemisphere. This results in greater sales volumes in the second andthird quarters of the year.

 

The profitability of ourPolymers and Base Chemicals segments has historically been cyclical in nature.The industry has recently operated in an up cycle that resulted primarily fromstrong demand reflecting global economic conditions and the fact that therehave been no recent North American or European capacity additions. However,volatile crude oil and natural gas-based raw materials costs and a recentweakening in demand could negatively impact the profitability of our Polymersand Base Chemicals segments.

 

On February 24, 2006, weannounced that we are evaluating strategic options for our business. Thisevaluation may lead to the sale of certain of our Base Chemicals or Polymersassets or a spin off of these segments and is consistent with our previouslyannounced pending sale of our U.S. butadiene and MTBE business operated in ourBase Chemicals segment. We are currently evaluating alternatives and there canbe no assurance that we will spin off or otherwise divest our Base Chemicalsand Polymers segments.

 

**MTBE Developments**

 

The global propylene oxidemarket is influenced by supply and demand imbalances. Propylene oxide demand islargely driven by growth in the polyurethane industry, and, as a result, growthrates for propylene oxide have generally exceeded GDP growth rates. As aco-product of our propylene oxide manufacturing process, we also produce MTBE.MTBE is an oxygenate that is blended with gasoline to reduce harmful vehicleemissions and to enhance the octane rating of gasoline. For a discussion oflegal and regulatory developments that have resulted in the curtailment andpotential elimination of MTBE in gasoline in the U.S. and elsewhere see “Note13. Environmental, Health and Safety Matters—MTBE Developments” to ourCondensed Consolidated Financial Statements (Unaudited) included elsewhere inthis report. We have announced the sale of our U.S. butadiene and MTBE businessoperated in our Base Chemicals segment; however, the propylene oxide/MTBEoperations in our Polyurethanes segment are not included in this transaction,which is expected to close during the third quarter of 2006. See “—RecentDevelopments—Definitive Agreement to sell U.S. butadiene and MTBE business”below.

 

In 2005, sales of MTBEcomprised approximately 5% of our total revenues, and we marketed approximately95% of our MTBE to customers located in the U.S. for use as a gasolineadditive. Most of our 2005 sales of MTBE to U.S. customers were made pursuantto long-term agreements. During 2006 (and concluding by the first quarter of2007), our long-term MTBE sales agreements in the U.S. will terminate. Weanticipate that our 2006 sales of MTBE in the U.S. will decrease substantiallyas compared to 2005 levels. We have entered into sales agreements to sell asignificant percentage of our MTBE into the Latin American market, and wecurrently believe that we could also sell MTBE relatively efficiently in Europeand Asia. Nevertheless, as a result of varying market 

 

39

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pricesand transportation costs, sales of MTBE in markets outside the U.S. may producelower margins than the sale of MTBE in the U.S. We may also elect to use all ora portion of our precursor TBA to produce saleable products other than MTBE. Ifwe opt to produce products other than MTBE, necessary modifications to ourfacilities will require us to make significant capital expenditures and thesale of such other products may produce a lower level of cash flow than thesale of MTBE.

 

**Outlook**

 

Ourresults for the first quarter of 2006 show improvement as compared to thehurricane-impacted results achieved in the fourth quarter of 2005. Salesvolumes improved across most of our differentiated product lines as end-marketdemand continues to grow in North America, Europe and Asia. We expect that theimproving trends that we experienced during the course of the first quarterwill continue into the second quarter. In addition, margins in our BaseChemicals business in Europe should improve as pricing is expected to bestronger. However, our operations in North America will be negatively impactedby the fire damage at our Port Arthur, Texas olefins facility. For more information, see “RecentDevelopments—Fire Damage at Port Arthur, Texas Olefins Facility” below. Raw material and energy costs remain high andvolatile and although the chemical industry has proven its ability toeffectively manage through this type of environment, we remain concerned aboutthe long-term impact that these high prices will have on global macroeconomicconditions.

 

**Recent Developments**

** **

**Amendment and Expansion of AccountsReceivable Securitization Program**

 

As of March 31, 2006, ourA/R Securitization Program had approximately $194.8 million in U.S. dollarequivalents in medium-term notes outstanding and approximately $152.9 millionin U.S. dollar equivalents in commercial paper outstanding. On April 18, 2006,we completed an amendment and expansion of our A/R Securitization Program andadded certain additional U.S. subsidiaries as additional receivablesoriginators under the A/R Securitization Program. In connection with thisamendment and expansion, the Receivables Trust redeemed in full all of the€90.5 million ($109.8 million) and $85.0 million in principal amount of themedium-term notes outstanding under the A/R Securitization Program. The amendedA/R Securitization Program currently provides for financing through thecommercial paper conduit portion of the program (in both U.S. dollars andeuros). We also expanded the size of the commercial paper conduit portion ofthe A/R Securitization Program to a committed amount of approximately $500million U.S. dollar equivalents for three years. The cost to the ReceivablesTrust on amounts drawn under the commercial paper conduit are at a rate ofLIBOR and/or EUROBOR, as applicable, plus 60 basis points per annum based upona pricing grid which is dependent upon our credit rating.

 

In connection with theamendment of the A/R Securitization Program, on April 18, 2006, we initiallyincreased the amount of commercial paper outstanding to $475 million U.S.dollar equivalents. A portion of the net increase was used to fund theredemption of the medium-term notes and to repay $50 million U.S. dollarequivalents of term debt outstanding under our senior credit facilities. Theagreements governing our senior credit facilities require us to prepay our termloan B borrowings with proceeds raised under the A/R Securitization Program inexcess of $425 million.

 

**Definitive Agreement to Sell theU.S. Butadiene and MTBE Business**

 

On April 6, 2006, we enteredinto a definitive agreement to sell the assets comprising our U.S. butadieneand MTBE business operated by our Base Chemicals segment for $269 million incash, subject to customary adjustments. This transaction is expected to closeby the third quarter of 2006, and we expect to record a gain on the sale uponclosing. This business was deemed to be held for sale and the related assetsand liabilities were classified as such in our March 31, 2006 balance sheet. Weceased depreciation of the related assets beginning in March 2006. The resultsof operations of this business are not classified as discontinued operationsbecause of the expected continuing cash flows from our remaining MTBE business.

 

40

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**Pending Acquisition of TextileEffects Business**

 

On February 20, 2006, weannounced that we have entered into a definitive agreement to acquire theglobal textile effects business of Ciba Specialty Chemicals Inc. for CHF 332million ($253 million). The purchase price will be reduced (i) by approximatelyCHF 75 million ($57 million) in assumed debt and unfunded pension and otherpost employment liabilities and (ii) up to approximately CHF 40 million ($31million) in unspent restructuring costs. The final purchase price is subject toa working capital and net debt adjustment. The transaction is subject tocustomary terms and conditions and is expected to occur by the end of the thirdquarter of 2006.

 

**Fire at the Port Arthur, TexasOlefins Manufacturing Plant**

 

OnApril 29, 2006, our Port Arthur, Texas olefins manufacturing plant experienceda major fire and the facility is not operational. Though investigators are inthe very early stages of assessing the impact of the fire, it appears that thedamage is significant and the plant could be off line for at least severalmonths. The 50 employees and contractors working at the facility at the time ofthe incident were safely evacuated. None of our other Jefferson County, Texas manufacturingsites were damaged. However, we have been forced to idle our ethylene glycolunit at a neighboring facility due to the disruption of feedstocks provided bythe damaged unit.

 

ThePort Arthur facility, also known as the Light Olefins Unit, is part of our BaseChemicals segment and has an annual production capacity of 1.4 billion poundsof ethylene, or about 30% of our global capacity. It also has an annualcapacity of 800 million pounds of propylene, 680 million pounds of cyclohexaneand 460 million pounds of benzene.

 

We carry normal andcustomary insurance coverage for property damage and business interruption. Thedeductible for property damage is $10 million, while, generally, businessinterruption coverage does not apply for the first 60 days.

 

41

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**Huntsman Corporation Results of Operations**

 

The following sets forth theunaudited condensed consolidated results of operations for Huntsman Corporationfor the three months ended March 31, 2006 and 2005 (dollars in millions):

 
| ** **                                                                                                 | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                                 | ** ** | **2006**                                             | ** ** | **2005**    | ** ** | **Change** | ** ** |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| **Revenues**                                                                                               |       | $                                                    | 3,187.7    |        | $          | 3,349.3 |   | (5 | )% |
| Cost of goods sold                                                                                         |       | 2,809.3                                              |       | 2,760.1     |       | 2 | % |
| **Gross profit**                                                                                           |       | 378.4                                                |       | 589.2       |       | (36 | )% |
| Operating expense                                                                                          |       | 203.1                                                |       | 230.7       |       | (12 | )% |
| Restructuring, impairment and plant closing costs                                                          |       | 7.8                                                  |       | 10.4        |       | (25 | )% |
| **Operating income**                                                                                       |       | 167.5                                                |       | 348.1       |       | (52 | )% |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| Interest expense, net                                                                                      |       | (86.8                                                | )          | (139.6      | )          | (38 | )% |
| Loss on accounts receivable securitization program                                                         |       | (2.8                                                 | )          | (3.2        | )          | (13 | )% |
| Equity in income of unconsolidated affiliates                                                              |       | 0.7                                                  |       | 2.3         |       | (70 | )% |
| Loss on early extinguishment of debt                                                                       |       | —                                               |       | (233.0      | )          | NM |   |
| Other (expense) income                                                                                     |       | (0.3                                                 | )          | 3.7         |       | NM |   |
| **Income (loss) from continuing operations before  income taxes, minority interest and accounting change** |       | 78.3                                                 |       | (21.7       | )          | NM |   |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| Income tax expense                                                                                         |       | (8.4                                                 | )          | (32.1       | )          | (74 | )% |
| Minority interest in subsidiaries’ income                                                             |       | (0.4                                                 | )          | —      |       | NM |   |
| **Income (loss) from continuing operations**                                                               |       | 69.5                                                 |       | (53.8       | )          | NM |   |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| Loss from discontinued operations, net of tax of nil                                                       |       | (0.5                                                 | )          | (2.6        | )          | (81 | )% |
| Cumulative effect of change in accounting principle, net of tax of  $1.9                                   |       | —                                               |       | 4.0         |       | NM |   |
| **Net income (loss)**                                                                                      |       | 69.0                                                 |       | (52.4       | )          | NM |   |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| Interest expense, net                                                                                      |       | 86.8                                                 |       | 139.6       |       | (38 | )% |
| Income tax expense (1)                                                                                     |       | 8.4                                                  |       | 34.0        |       | (75 | )% |
| Depreciation and amortization                                                                              |       | 117.0                                                |       | 125.9       |       | (7 | )% |
| **EBITDA (2)**                                                                                             |       | $                                                    | 281.2      |        | $          | 247.1 |   | 14 | % |
|                                                                                                       |       |                                                 |       |        |       |   |   |
| Net cash provided by operating activities                                                                  |       | $                                                    | 80.3       |        | $          | 240.7 |   | (67 | )% |
| Net cash used in investing activites                                                                       |       | (109.1                                               | )          | (105.3      | )          | 4 | % |
| Net cash provided by (used in) financing activities                                                        |       | 37.0                                                 |       | (119.9      | )          | NM |   |

 

----

NM—Not Meaningful

 

42

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Includedin EBITDA are the following items of (expense) income (dollars in millions):

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                         |       |                                                 |       |   |   |
| Loss on early extinguishment of debt                         |       | $                                                    | —     |   | $ | (233.0 | ) |
| Loss on accounts receivable securitization program           |       | (2.8                                                 | )          | (3.2 | ) |
| Loss from discontinued operations                            |       | (0.5                                                 | )          | (2.6 | ) |
| Cumulative effect of change in accounting principle          |       | —                                               |       | 5.9 |   |
|                                                         |       |                                                 |       |   |   |
| Restructuring, impairment and plant closing (costs) credits: |       |                                                 |       |   |   |
| Polyurethanes                                                |       | 2.2                                                  |       | (1.9 | ) |
| Advanced Materials                                           |       | (2.3                                                 | )          | — |   |
| Performance Products                                         |       | (1.0                                                 | )          | (1.0 | ) |
| Pigments                                                     |       | (2.5                                                 | )          | (2.9 | ) |
| Polymers                                                     |       | (3.5                                                 | )          | (1.9 | ) |
| Base Chemicals                                               |       | (0.6                                                 | )          | (2.7 | ) |
| Corporate and other                                          |       | (0.1                                                 | )          | — |   |
|                                                         |       |                                                 |       |   |   |
| Total restructuring, impairment and plant closing costs      |       | (7.8                                                 | )          | (10.4 | ) |
|                                                         |       |                                                 |       |   |   |
| **Total**                                                    |       | $                                                    | (11.1      | ) | $ | (243.3 | ) |
|                                                              |            |                                                      |            |  |  |  |  |  |

 

----

(1)                                 Includes tax expense of $1.9 million on thecumulative effect of an accounting change in 2005.

 

(2)                                 EBITDA is defined as net income (loss) beforeinterest, income taxes, depreciation and amortization. We believe that EBITDAenhances an investor’s understanding of our financial performance and ourability to satisfy principal and interest obligations with respect to ourindebtedness. However, EBITDA should not be considered in isolation or viewedas a substitute for net income, cash flow from operations or other measures ofperformance as defined by GAAP. Moreover, EBITDA as used herein is notnecessarily comparable to other similarly titled measures of other companiesdue to potential inconsistencies in the method of calculation. Our managementuses EBITDA to assess financial performance and debt service capabilities. Inassessing financial performance, our management reviews EBITDA as a generalindicator of economic performance compared to prior periods. Because EBITDAexcludes interest, income taxes, depreciation and amortization, EBITDA providesan indicator of general economic performance that is not affected by debtrestructurings, fluctuations in interest rates or effective tax rates, orlevels of depreciation and amortization. Accordingly, our management believesthis type of measurement is useful for comparing general operating performancefrom period to period and making certain related management decisions. EBITDAis also used by securities analysts, lenders and others in their evaluation ofdifferent companies because it excludes certain items that can vary widelyacross different industries or among companies within the same industry. Forexample, interest expense can be highly dependent on a company’s capitalstructure, debt levels and credit ratings. Therefore, the impact of interestexpense on earnings can vary significantly among companies. In addition, thetax positions of companies can vary because of their differing abilities totake advantage of tax benefits and because of the tax policies of the variousjurisdictions in which they operate. As a result, effective tax rates and taxexpense can vary considerably among companies. Finally, companies employproductive assets of different ages and utilize different methods of acquiringand depreciating such assets. This can result in considerable variability inthe relative costs of productive assets and the depreciation and amortizationexpense among companies. Our management also believes that our investors useEBITDA as a measure of our ability to service indebtedness as well as to fundcapital expenditures and working capital requirements. Nevertheless, ourmanagement recognizes that there are material limitations associated with theuse of EBITDA in the evaluation of our Company as compared to

 

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netincome, which reflects overall financial performance, including the effects ofinterest, income taxes, depreciation and amortization. EBITDA excludes interestexpense. Because we have borrowed money in order to finance our operations,interest expense is a necessary element of our costs and ability to generaterevenue. Therefore, any measure that excludes interest expense has materiallimitations. EBITDA also excludes taxes. Because the payment of taxes is anecessary element of our operations, any measure that excludes tax expense hasmaterial limitations. Finally, EBITDA excludes depreciation and amortizationexpense. Because we use capital assets, depreciation and amortization expenseis a necessary element of our costs and ability to generate revenue. Therefore,any measure that excludes depreciation and amortization expense has materiallimitations. Our management compensates for the limitations of using EBITDA byusing it to supplement GAAP results to provide a more complete understanding ofthe factors and trends affecting the business than GAAP results alone. Ourmanagement also uses other metrics to evaluate capital structure, tax planningand capital investment decisions. For example, our management uses creditratings and net debt ratios to evaluate capital structure, effective tax rateby jurisdiction to evaluate tax planning, and payback period and internal rateof return to evaluate capital investments. Our management also uses tradeworking capital to evaluate its investment in accounts receivable andinventory, net of accounts payable.

 

Webelieve that net income (loss) is the performance measure calculated andpresented in accordance with GAAP that is most directly comparable to EBITDAand that cash provided by operating activities is the liquidity measurecalculated and presented in accordance with GAAP that is most directlycomparable to EBITDA. The following table reconciles EBITDA to HuntsmanCorporation’s net income (loss) and to Huntsman Corporation’s net cash providedby operations (dollars in millions):

 
| ** **                                                | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**   | ** ** | **Percent Change** | ** ** |
|                                                      |       |                                                 |       |       |       |   |   |
| EBITDA                                                    |       | $                                                    | 281.2      |       | $          | 247.1 |   | 14 | % |
| Depreciation and amortization                             |       | (117.0                                               | )          | (125.9     | )          | (7 | )% |
| Interest expense, net                                     |       | (86.8                                                | )          | (139.6     | )          | (38 | )% |
| Income tax expense (1)                                    |       | (8.4                                                 | )          | (34.0      | )          | (75 | )% |
| Net income (loss)                                         |       | 69.0                                                 |       | (52.4      | )          | NM |   |
| Cumulative effect of change in accounting principle       |       | —                                               |       | (4.0       | )          | NM |   |
| Equity in income of unconsolidated affiliates             |       | (0.7                                                 | )          | (2.3       | )          | (70 | )% |
| Depreciation and amortization                             |       | 117.0                                                |       | 125.9      |       | (7 | )% |
| Noncash restructuring, impairment and plant closing costs |       | 2.0                                                  |       | —     |       | NM |   |
| Loss on early extinguishment of debt                      |       | —                                               |       | 233.0      |       | NM |   |
| Noncash interest (income) expense                         |       | (1.7                                                 | )          | 29.4       |       | NM |   |
| Deferred income taxes                                     |       | 7.3                                                  |       | 17.0       |       | (57 | )% |
| Net unrealized loss on foreign currency transactions      |       | 6.7                                                  |       | 23.6       |       | (72 | )% |
| Other, net                                                |       | 4.6                                                  |       | (9.9       | )          | NM |   |
| Changes in operating assets and liabilites                |       | (123.9                                               | )          | (119.6     | )          | 4 | % |
| Net cash provided by operating activities                 |       | $                                                    | 80.3       |       | $          | 240.7 |   | (67 | )% |

 

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NM—Not Meaningful

 

(1)                                 Includes tax expense of $1.9 million on thecumulative effect of an accounting change in 2005.

 

**ThreeMonths Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005****—****Huntsman Corporation**

 

For the three months endedMarch 31, 2006, we had net income of $69.0 million on revenues of$3,187.7 million compared to a net loss of $52.4 million on revenuesof $3,349.3 million for the 2005 period. The improvement of$121.4 million in net income was the result of the following items:

 

44

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•                  Revenues for the three months ended March 31,2006 decreased by $161.6 million, or 5%, as compared with the 2005 perioddue principally to lower average selling prices in our Advanced Materials andPigments segments and lower sales volumes in our Polyurethanes, PerformanceProducts and Base Chemicals segments. For further information regarding sellingprices and sales volumes, see the discussion of our operating segments below.

 

•                  Gross profit for the three months ended March31, 2006 decreased by $210.8 million, or 36%, as compared with the 2005period. This decrease in gross profit, which occurred in all of our operatingsegments, was mainly due to lower margins, as raw material and energy costsincreased more than average selling prices during the three months ended March31, 2006 as compared with the 2005 period.

 

•                  Operating expenses for the three months endedMarch 31, 2006 decreased by $27.6 million, or 12%, as compared with the2005 period, primarily due to lower foreign currency losses.

 

•                  Restructuring, impairment and plant closingcosts for the three months ended March 31, 2006 decreased to $7.8 millionfrom $10.4 million in the 2005 period. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

 

•                  Net interest expense for the three monthsended March 31, 2006 decreased by $52.8 million, or 38%, as compared withthe 2005 period, primarily due to lower average debt balances resulting fromthe repayment of debt during 2005 from the proceeds of our initial publicoffering in February 2005 and from our operating cash flows, and fromlower average interest rates (despite higher underlying interest rates onvariable rate borrowings).

 

•                  The loss on early extinguishment of debtduring the three months ended March 31, 2005 resulted from the repayment ofdebt during 2005 from the proceeds of our initial public offering inFebruary 2005 and from our operating cash flows.

 

•                  Income tax expense decreased by $23.7 millionto an expense of $8.4 million for the three months ended March 31, 2006 ascompared to an expense of $32.1 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. Tax expense decreased while pre-tax incomeincreased largely due to increased income in jurisdictions where no tax expenseis provided because of the release of valuation allowances and due to decreasedincome in jurisdictions where tax expense would have been provided.

 

**•**                  In 2005, wechanged the measurement date of our pension and postretirement benefit plansfrom December 31 to November 30. We believe the one-month change of themeasurement date is preferable because it provides us more time to review thecompleteness and accuracy of the actuarial benefit information which results inan improvement in our internal control procedures. The effect of the change inmeasurement date on the respective obligations and assets of the plan resultedin a cumulative effect of a change in accounting principle credit of $4.0 million ($0.02 per diluted share),net of tax of $1.9 million, recordedeffective January 1, 2005.

 

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**Huntsman International Results of Operations**

 

The following sets forth theunaudited condensed consolidated results of operations for HuntsmanInternational for the three months ended March 31, 2006 and 2005 (dollars inmillions):

 
| ** **                                                                                          | ** ** | **Three months ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                                                                          | ** ** | **March 31,**               | ** ** | **Percent** | ** ** |
| ** **                                                                                          | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change** | ** ** |
|                                                                                                |       |                             |       |        |       |   |   |
| **Revenues**                                                                                        |       | $                                | 3,187.7    |        | $          | 3,349.3 |   | (5 | )% |
| Cost of goods sold                                                                                  |       | 2,805.3                          |       | 2,754.4     |       | 2 | % |
| **Gross profit**                                                                                    |       | 382.4                            |       | 594.9       |       | (36 | )% |
| Operating expenses                                                                                  |       | 202.3                            |       | 226.0       |       | (10 | )% |
| Restructuring, impairment and plant closing costs                                                   |       | 7.8                              |       | 10.4        |       | (25 | )% |
|                                                                                                |       |                             |       |        |       |   |   |
| **Operating income**                                                                                |       | 172.3                            |       | 358.5       |       | (52 | )% |
|                                                                                                |       |                             |       |        |       |   |   |
| Interest expense, net                                                                               |       | (88.0                            | )          | (134.7      | )          | (35 | )% |
| Loss on accounts receivable securitization program                                                  |       | (2.8                             | )          | (3.2        | )          | (13 | )% |
| Equity in income of unconsolidated affiliates                                                       |       | 0.7                              |       | 2.3         |       | (70 | )% |
| Loss on early extinguishment of debt                                                                |       | —                           |       | (74.0       | )          | NM |   |
| Other expense                                                                                       |       | (0.3                             | )          | (0.2        | )          | 50 | % |
|                                                                                                |       |                             |       |        |       |   |   |
| **Income from continuing operations before income  taxes, minority interest and accounting change** |       | 81.9                             |       | 148.7       |       | (45 | )% |
| Income tax expense                                                                                  |       | (13.7                            | )          | (28.2       | )          | (51 | )% |
| Minority interest in subsidiaries’ income                                                      |       | (0.4                             | )          | —      |       | NM |   |
| **Income from continuing operations**                                                               |       | 67.8                             |       | 120.5       |       | (44 | )% |
| Loss from discontinued operations, net of tax of nil                                                |       | (0.5                             | )          | (2.6        | )          | (81 | )% |
| Cumulative effect of change in accounting principle, net of tax of  $1.5                            |       | —                           |       | 4.2         |       | NM |   |
| **Net income**                                                                                      |       | 67.3                             |       | 122.1       |       | (45 | )% |
|                                                                                                |       |                             |       |        |       |   |   |
| Interest expense, net                                                                               |       | 88.0                             |       | 134.7       |       | (35 | )% |
| Income tax expense (1)                                                                              |       | 13.7                             |       | 29.7        |       | (54 | )% |
| Depreciation and amortization                                                                       |       | 110.2                            |       | 118.9       |       | (7 | )% |
| **EBITDA (2)**                                                                                      |       | $                                | 279.2      |        | $          | 405.4 |   | (31 | )% |
|                                                                                                |       |                             |       |        |       |   |   |
| Net cash provided by operating activities                                                           |       | 75.9                             |       | 238.7       |       | (68 | )% |
| Net cash used in investing activities                                                               |       | (112.7                           | )          | (64.4       | )          | 75 | % |
| Net cash provided by (used in) financing activities                                                 |       | 41.6                             |       | (181.0      | )          | NM |   |

 

----

NM—Not Meaningful

 

46

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Included in EBITDA are thefollowing items of (expense) income (dollars in millions):

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                         |       |                                                 |       |   |   |
| Loss on early extinguishment of debt                         |       | $                                                    | —     |   | $ | (74.0 | ) |
| Loss on accounts receivable securitization program           |       | (2.8                                                 | )          | (3.2 | ) |
| Loss from discontinued operations                            |       | (0.5                                                 | )          | (2.6 | ) |
| Cumulative effect of change in accounting principle          |       | —                                               |       | 5.7 |   |
|                                                         |       |                                                 |       |   |   |
| Restructuring, impairment and plant closing (costs) credits: |       |                                                 |       |   |   |
| Polyurethanes                                                |       | 2.2                                                  |       | (1.9 | ) |
| Advanced Materials                                           |       | (2.3                                                 | )          | — |   |
| Performance Products                                         |       | (1.0                                                 | )          | (1.0 | ) |
| Pigments                                                     |       | (2.5                                                 | )          | (2.9 | ) |
| Polymers                                                     |       | (3.5                                                 | )          | (1.9 | ) |
| Base Chemicals                                               |       | (0.6                                                 | )          | (2.7 | ) |
| Corporate and other                                          |       | (0.1                                                 | )          | — |   |
|                                                         |       |                                                 |       |   |   |
| Total restructuring, impairment and plant closing costs      |       | (7.8                                                 | )          | (10.4 | ) |
| **Total**                                                    |       | $                                                    | (11.1      | ) | $ | (84.5 | ) |

 

----

(1)                                 Includes tax expense of $1.5 million on thecumulative effect of an accounting change in 2005.

 

(2)                                 EBITDA is defined as net income (loss) beforeinterest, income taxes, depreciation and amortization. We believe that EBITDAenhances an investor’s understanding of our financial performance and ourability to satisfy principal and interest obligations with respect to ourindebtedness. However, EBITDA should not be considered in isolation or viewedas a substitute for net income, cash flow from operations or other measures ofperformance as defined by generally GAAP. Moreover, EBITDA as used herein isnot necessarily comparable to other similarly titled measures of othercompanies due to potential inconsistencies in the method of calculation. Ourmanagement uses EBITDA to assess financial performance and debt servicecapabilities. In assessing financial performance, our management reviews EBITDAas a general indicator of economic performance compared to prior periods.Because EBITDA excludes interest, income taxes, depreciation and amortization,EBITDA provides an indicator of general economic performance that is notaffected by debt restructurings, fluctuations in interest rates or effectivetax rates, or levels of depreciation and amortization. Accordingly, ourmanagement believes this type of measurement is useful for comparing generaloperating performance from period to period and making certain relatedmanagement decisions. EBITDA is also used by securities analysts, lenders andothers in their evaluation of different companies because it excludes certainitems that can vary widely across different industries or among companieswithin the same industry. For example, interest expense can be highly dependenton a company’s capital structure, debt levels and credit ratings. Therefore,the impact of interest expense on earnings can vary significantly amongcompanies. In addition, the tax positions of companies can vary because oftheir differing abilities to take advantage of tax benefits and because of thetax policies of the various jurisdictions in which they operate. As a result,effective tax rates and tax expense can vary considerably among companies.Finally, companies employ productive assets of different ages and utilizedifferent methods of acquiring and depreciating such assets. This can result inconsiderable variability in the relative costs of productive assets and thedepreciation and amortization expense among companies. Our management alsobelieves that our investors use EBITDA as a measure of our ability to serviceindebtedness as well as to fund capital expenditures and working capitalrequirements. Nevertheless, our

 

47

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managementrecognizes that there are material limitations associated with the use ofEBITDA in the evaluation of Huntsman International as compared to net income,which reflects overall financial performance, including the effects ofinterest, income taxes, depreciation and amortization. EBITDA excludes interestexpense. Because we have borrowed money in order to finance our operations,interest expense is a necessary element of our costs and ability to generaterevenue. Therefore, any measure that excludes interest expense has material limitations.EBITDA also excludes taxes. Because the payment of taxes is a necessary elementof our operations, any measure that excludes tax expense has materiallimitations. Finally, EBITDA excludes depreciation and amortization expense.Because we use capital assets, depreciation and amortization expense is anecessary element of our costs and ability to generate revenue. Therefore, anymeasure that excludes depreciation and amortization expense has materiallimitations. Our management compensates for the limitations of using EBITDA byusing it to supplement GAAP results to provide a more complete understanding ofthe factors and trends affecting the business than GAAP results alone. Ourmanagement also uses other metrics to evaluate capital structure, tax planningand capital investment decisions. For example, our management uses creditratings and net debt ratios to evaluate capital structure, effective tax rateby jurisdiction to evaluate tax planning, and payback period and internal rateof return to evaluate capital investments. Our management also uses tradeworking capital to evaluate its investment in accounts receivable andinventory, net of accounts payable.

 

Webelieve that net income (loss) is the performance measure calculated andpresented in accordance with GAAP that is most directly comparable to EBITDAand that cash provided by operating activities is the liquidity measurecalculated and presented in accordance with GAAP that is most directlycomparable to EBITDA. The following table reconciles EBITDA to HuntsmanInternational’s net income (loss) and to Huntsman International’s net cashprovided by operations (dollars in millions):

 
| ** **                                                | ** ** | **Three Months ended March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**   | ** ** | **Percent Change** | ** ** |
|                                                      |       |                                                 |       |       |       |   |   |
| EBITDA                                                    |       | $                                                    | 279.2      |       | $          | 405.4 |   | (31 | )% |
| Depreciation and amortization                             |       | (110.2                                               | )          | (118.9     | )          | (7 | )% |
| Interest expense, net                                     |       | (88.0                                                | )          | (134.7     | )          | (35 | )% |
| Income tax expense (1)                                    |       | (13.7                                                | )          | (29.7      | )          | (54 | )% |
| Net income                                                |       | 67.3                                                 |       | 122.1      |       | (45 | )% |
| Cumulative effect of change in accounting principle       |       | —                                               |       | (4.2       | )          | NM |   |
| Equity in income of unconsolidated affiliates             |       | (0.7                                                 | )          | (2.3       | )          | (70 | )% |
| Depreciation and amortization                             |       | 110.2                                                |       | 118.9      |       | (7 | )% |
| Loss on early extinguishment of debt                      |       | —                                               |       | 74.0       |       | NM |   |
| Noncash interest (income) expense                         |       | (0.7                                                 | )          | 24.4       |       | NM |   |
| Noncash restructuring, impairment and plant closing costs |       | 2.0                                                  |       | —     |       | NM |   |
| Deferred income taxes                                     |       | 12.7                                                 |       | 16.9       |       | (25 | )% |
| Net unrealized loss on foreign currency transactions      |       | 6.7                                                  |       | 23.5       |       | (71 | )% |
| Other, net                                                |       | 4.8                                                  |       | 1.7        |       | NM |   |
| Changes in operating assets and liabilites                |       | (126.4                                               | )          | (136.3     | )          | (7 | )% |
| Net cash provided by operating activities                 |       | $                                                    | 75.9       |       | $          | 238.7 |   | (68 | )% |

 

----

NM—Not Meaningful

 

(1)                                 Includes tax expense of $1.5 million on thecumulative effect of an accounting change in 2005.

 

48

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**ThreeMonths Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005****— Huntsman International**

 

For the three months endedMarch 31, 2006, Huntsman International had net income of $67.3 million onrevenues of $3,187.7 million compared to net income of $122.1 millionon revenues of $3,349.3 million for the 2005 period. The decrease of$54.8 million in net income was the result of the following items:

 

•                  Revenues for the three months ended March 31,2006 decreased by $161.6 million, or 5%, as compared with the 2005 perioddue principally to lower average selling prices in our Advanced Materials andPigments segments and lower sales volumes in our Polyurethanes, PerformanceProducts and Base Chemicals segments. For further information regarding sellingprices and sales volumes, see the discussion of our operating segments below.

 

•                  Gross profit for the three months ended March31, 2006 decreased by $212.5 million, or 36%, as compared with the 2005period. This decrease in gross profit, which occurred in all of our operatingsegments, was mainly due to lower margins as raw material and energy costsincreased more than average selling prices during the three months ended March31, 2006 as compared with the 2005 period.

 

•                  Operating expenses for the three months endedMarch 31, 2006 decreased by $23.7 million, or 10%, as compared with the2005 period, primarily due to lower foreign currency losses.

 

•                  Restructuring, impairment and plant closingcosts for the three months ended March 31, 2006 decreased to $7.8 millionfrom $10.4 million in the 2005 period. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to Huntsman International’s Condensed Consolidated FinancialStatements (Unaudited) included elsewhere in this report.

 

•                  Net interest expense for the three monthsended March 31, 2006 decreased by $46.7 million, or 35%, as compared withthe 2005 period, primarily due to lower average debt balances resulting fromthe repayment of debt in 2005 from the proceeds Huntsman International receivedfrom Huntsman Corporation’s initial public offering in February 2005 andfrom operating cash flows, and from lower average interest rates (despitehigher underlying interest rates on variable rate borrowings).

 

•                  The loss on early extinguishment of debt inthe three months ended March 31, 2005 resulted from the repayment of debt in2005 from the proceeds Huntsman International received from HuntsmanCorporation’s initial public offering in February 2005 and from operating cashflows.

 

•                  Income tax expense decreased by $14.5 millionto an expense of $13.7 million for the three months ended March 31, 2006 ascompared to an expense of $28.2 million for the same period in 2005. HuntsmanInternational’s tax obligations are affected by the mix of income and losses inthe tax jurisdictions in which it operates. Tax expense decreased while pre-taxincome increased largely due to increased income in jurisdictions where no taxexpense is provided because of the release of valuation allowances and due todecreased income in jurisdictions where tax expense would have been provided.Additionally, on August 16, 2005, we completed the Affiliate Mergers. Prior tothe Affiliate Mergers, Huntsman International Holdings, including HuntsmanInternational, was treated as a partnership for U.S. federal income taxpurposes and as such was generally not subject to U.S. income tax, but rathersuch income was taxed directly to its owners. After the Affiliate Mergers,Huntsman International is treated as a corporate subsidiary and is subject toU.S. income tax. Therefore, the tax expense at March 31, 2006 and March 31,2005 are not comparable.

 

•                  In 2005, wechanged the measurement date of our pension and postretirement benefit plansfrom December 31 to November 30. We believe the one-month change of themeasurement date is preferable because it provides us more time to review thecompleteness and accuracy of the actuarial benefit information which results inan improvement in our internal control procedures. The effect of the

 

49

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changein measurement date on the respective obligations and assets of the planresulted in a cumulative effect of a change in accounting principle credit of $4.2 million, net of tax of $1.5 million, recorded effective January 1, 2005.

 

**SegmentResults of Operations**

 

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

 
| ** **                                | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                                | ** ** | **2006**                                             | ** ** | **2005**    | ** ** | **Change** | ** ** |
| **Revenues**                              |       |                                                 |       |        |       |   |   |
| Polyurethanes                             |       | $                                                    | 809.1      |        | $          | 879.9 |   | (8 | )% |
| Advanced Materials                        |       | 307.2                                                |       | 311.5       |       | (1 | )% |
| Performance Products                      |       | 490.3                                                |       | 520.7       |       | (6 | )% |
| Pigments                                  |       | 258.8                                                |       | 263.2       |       | (2 | )% |
| Polymers                                  |       | 439.4                                                |       | 413.6       |       | 6 | % |
| Base Chemicals                            |       | 1,090.6                                              |       | 1,187.0     |       | (8 | )% |
| Eliminations                              |       | (207.7                                               | )          | (226.6      | )          | (8 | )% |
| **Total**                                 |       | $                                                    | 3,187.7    |        | $          | 3,349.3 |   | (5 | )% |
|                                      |       |                                                 |       |        |       |   |   |
| **Huntsman Corporation Segment EBITDA**   |       |                                                 |       |        |       |   |   |
| Polyurethanes                             |       | $                                                    | 159.2      |        | $          | 185.7 |   | (14 | )% |
| Advanced Materials                        |       | 34.9                                                 |       | 49.0        |       | (29 | )% |
| Performance Products                      |       | 45.6                                                 |       | 66.9        |       | (32 | )% |
| Pigments                                  |       | 33.3                                                 |       | 39.3        |       | (15 | )% |
| Polymers                                  |       | 35.2                                                 |       | 44.9        |       | (22 | )% |
| Base Chemicals                            |       | 20.1                                                 |       | 161.6       |       | (88 | )% |
| Corporate and other                       |       | (47.1                                                | )          | (300.3      | )          | (84 | )% |
| **Total**                                 |       | $                                                    | 281.2      |        | $          | 247.1 |   | 14 | % |
|                                      |       |                                                 |       |        |       |   |   |
| **Huntsman International Segment EBITDA** |       |                                                 |       |        |       |   |   |
| Polyurethanes                             |       | $                                                    | 159.2      |        | $          | 185.7 |   | (14 | )% |
| Advanced Materials                        |       | 34.9                                                 |       | 49.0        |       | (29 | )% |
| Performance Products                      |       | 45.6                                                 |       | 66.9        |       | (32 | )% |
| Pigments                                  |       | 33.3                                                 |       | 39.3        |       | (15 | )% |
| Polymers                                  |       | 35.2                                                 |       | 44.9        |       | (22 | )% |
| Base Chemicals                            |       | 20.1                                                 |       | 161.6       |       | (88 | )% |
| Corporate and other                       |       | (49.1                                                | )          | (142.0      | )          | (65 | )% |
| **Total**                                 |       | $                                                    | 279.2      |        | $          | 405.4 |   | (31 | )% |
|                                           |            |                                                      |            |             |            |  |  |  |  |  |  |

 

***Polyurethanes***

 

For the three months endedMarch 31, 2006, Polyurethanes segment revenues decreased by $70.8 million,or 8%, as compared with the 2005 period, primarily as a result of lower salesvolumes and lower average selling prices for MDI, offset somewhat by higherMTBE revenues. MDI revenues decreased by 11% due to 6% lower average sellingprices and 5% lower sales volumes. The decrease in MDI sales volumes was drivenmainly by slower construction activity related to colder than anticipatedweather and slower demand in Asia. Lower average MDI prices resulted from theeffects of currency fluctuation as the U.S. dollar strengthened againstEuropean currencies and lower global MDI capacity utilization. MTBE revenuesincreased by 10% as a result of 27% higher average selling prices, partiallyoffset by 13% lower sales volumes. The increase in MTBE average selling priceswas 

 

50

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principallydue to strong demand and tight supplies in the market. MTBE sales volumesdecreased primarily due to an unplanned production outage at our propyleneoxide/MTBE facility. Our propylene oxide/MTBE facility is now operating.

 

For the three months endedMarch 31, 2006, Polyurethanes segment EBITDA decreased by $26.5 million,or 14%, as compared with the 2005 period. Segment EBITDA decreased primarilydue to lower sales volumes but was also negatively impacted by foreign exchangeeffects and higher raw material and energy costs. During the three months endedMarch 31, 2006, our Polyurethanes segment recorded a restructuring, impairmentand plant closing credit of $2.2 million as compared with costs of$1.9 million in the 2005 period. For further discussion of restructuringactivities, see “Note 5. Restructuring, Impairment and Plant Closing Costs” toour Condensed Consolidated Financial Statements (Unaudited) included elsewherein this report.

 

***Advanced Materials***

 

Advanced Materials revenuesfor the three months ended March 31, 2006 decreased by $4.3 million, or1%, as compared with the 2005 period, primarily as a result of a 7% decrease inaverage selling prices, partially offset by a 6% increase in sales volumes.Average selling prices were lower due to negative impacts of currencyfluctuation as the U.S. dollar strengthened against European currencies, lowerprices in certain markets and a negative value product mix in Asia, partiallyoffset by higher average selling prices in the Americas. Sales volumesincreased as a result of improved demand in our coatings, construction andadhesive market group and our power and electronics market groups.

 

Advanced Materials segmentEBITDA for the three months ended March 31, 2006 decreased by$14.1 million, or 29%, as compared with the 2005 period. Segment EBITDAdecreased primarily as a result of lower contribution margins from loweraverage selling prices, increases in raw material and energy costs and highermanufacturing costs. During the three months ended March 31, 2006 and 2005, ourAdvanced Materials segment recorded restructuring, impairment and plant closingcosts of $2.3 million and nil, respectively. For further discussion ofrestructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

 

***Performance Products***

 

For the three months endedMarch 31, 2006, Performance Products revenues decreased by $30.4 million,or 6%, as compared with the 2005 period, primarily as a result of lower salesvolumes in certain product lines, offset somewhat by higher average sellingprices for all major product lines except ethylene glycol. Overall, salesvolumes declined by 17%, principally due to lower sales of ethylene glycol andcertain surfactants. Average selling prices increased by 13% in response tohigher raw material and energy costs, despite the negative impact on sellingprices of currency fluctuation as the U.S. dollar strengthened against Europeancurrencies.

 

For the three months endedMarch 31, 2006, Performance Products segment EBITDA decreased by$21.3 million, or 32%, as compared with the 2005 period, resultingprimarily from lower earnings in ethylene glycol where market conditionsweakened. Elsewhere, higher raw material and energy prices were recoveredthrough higher selling prices. In addition, during both the three months endedMarch 31, 2006 and 2005, our Performance Products segment recordedrestructuring and plant closing charges of $1.0 million. For furtherdiscussion of restructuring activities, see “Note 5. Restructuring, Impairmentand Plant Closing Costs” to our Condensed Consolidated Financial Statements(Unaudited) included elsewhere in this report.

 

***Pigments***

 

For the three months endedMarch 31, 2006, Pigments revenues decreased by $4.4 million, or 2%, as comparedwith the 2005 period, resulting principally from a 5% decrease in averageselling prices, partially offset by a 4% increase in sales volumes. Averageselling prices decreased primarily in Europe as aresult of the negative effect on selling prices of the strengthening of theU.S. dollar against major European currencies. Sales volumes were higherprimarily due to improved customer demand in Europe and the Asia-Pacificregion.

 

51

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Pigments segment EBITDA forthe three months ended March 31, 2006 decreased by $6.0 million, or 15%, ascompared with the 2005 period, resulting primarily from lower contributionmargins related to decreased average selling prices and higher directcosts. In addition, during thethree months ended March 31, 2006 and 2005, our Pigments segment recordedrestructuring, impairment and plant closing charges of $2.5 million and $2.9million, respectively. For further discussion of restructuring activities, see “Note5. Restructuring, Impairment and Plant Closing Costs” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

 

***Polymers***

 

For the three months endedMarch 31, 2006, Polymers revenues increased by $25.8 million, or 6%, ascompared with the 2005 period, mainly due to an 11% increase in average sellingprices and a 10% increase in sales volumes to outside customers. Averageselling prices were higher primarily due to tighter market conditions and inresponse to an increase in raw material and energy costs. Sales volumes tooutside customers increased as a result of improved demand in our U.S. markets,offset by continued weak demand for our Australian styrenics and expandablepolystyrene products.

 

For the three months endedMarch 31, 2006, Polymers segment EBITDA decreased by $9.7 million, or 22%,as compared to the 2005 period. This decrease in segment EBITDA resulted fromlower contribution margins as raw material and energy costs increased more thanaverage selling prices. During the three months ended March 31, 2006 and 2005,our Polymers segment recorded restructuring, impairment and plant closingcharges of $3.5 million and $1.9 million, respectively. For furtherdiscussion of restructuring activities, see “Note 5. Restructuring, Impairmentand Plant Closing Costs” to our Condensed Consolidated Financial Statements(Unaudited) included elsewhere in this report.

 

***Base Chemicals***

 

For the three months endedMarch 31, 2006, Base Chemicals revenues decreased by $96.4 million, or 8%,as compared with the 2005 period. This decrease was mainly due to an 18%decrease in sales volumes, partially offset by a 12% increase in averageselling prices. The sales volume decrease was driven principally by unplannedoutages at our Jefferson County, Texas production facilities which resultedfrom our inability to obtain sufficient energy from a supplier as a result ofan outage at the supplier’s facility related to the 2005 Gulf Coast storms.Sales volumes also decreased due to lower demand in Europe. Higher averageselling prices resulted primarily in response to higher raw material and energycosts, partially offset by negative impact of currency fluctuation as the U.S.dollar strengthened against European currencies.

 

For the three months endedMarch 31, 2006, Base Chemicals segment EBITDA decreased by $141.5 million,or 88%, as compared with the 2005 period. This decrease in segment EBITDA wasprimarily due to lower contribution margins as raw material and energy costsincreased more than average selling prices, particularly in our U.K.operations. Segment EBITDA was also lower in 2006 due to lower sales volumes,particularly in our U.S. operations. During the three months ended March 31,2006 and 2005, our Base Chemicals segment recorded restructuring charges of$0.6 million and $2.7 million, respectively. For further discussionof restructuring activities, see “Note 5. Restructuring, Impairment and PlantClosing Costs” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

 

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

 

Corporate and other itemsincludes unallocated corporate overhead, foreign exchange gains and losses,loss on the sale of accounts receivable, loss on the early extinguishment ofdebt, other non-operating income and expense and minority interest insubsidiaries’ (income) loss. For the three months ended March 31, 2006, EBITDAfrom corporate and other items improved by $253.2 million to a loss of$47.1 million from a loss of $300.3 million for the 2005 period. Theimprovement in the 2006 period EBITDA resulted primarily from a$233.0 million decrease in losses on early extinguishment of debt and to a$34.0 million reduction in unallocated foreign currency transaction losses,offset in part by higher overhead expenses.

 

52

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

 

Corporate and other itemsincludes unallocated corporate overhead, foreign exchange gains and losses,loss on the sale of accounts receivable, loss on the early extinguishment ofdebt, other non-operating income and expense and minority interest insubsidiaries’ (income) loss. For the three months ended March 31, 2006, EBITDAfrom corporate and other items improved by $92.9 million to a loss of$49.1 million from a loss of $142.0 million for the 2005 period. Theimprovement in the 2006 period EBITDA resulted primarily from a $74.0 milliondecrease in losses on early extinguishment of debt and to a $34.0 millionreduction in unallocated foreign currency transaction losses, offset in part byhigher overhead expenses.

 

**Liquidity and Capital Resources**

 

Thefollowing is a discussion of the liquidity and capital resources of HuntsmanCorporation. Pursuant to GeneralInstructions H(1)(a) and (b) of Form 10-Q, Huntsman International is filingthis report with a reduced disclosure format.

 

**Cash**

 

Net cash provided byoperating activities for the three months ended March 31, 2006 and 2005 was$80.3 million and $240.7 million, respectively. The decrease in cash providedby operations was primarily attributable to a decrease in operating income of$180.6 million as described in “Huntsman Corporation Results of Operations”partially offset by a decrease in cash paid for interest of $23.6 million dueto significantly lower debt levels.

 

Net cash used in investingactivities for the three months ended March 31, 2006 and 2005 was $109.1million and $105.3 million, respectively. During the three months ended March31, 2006 and 2005, we invested $104.1 million and $59.8 million, respectively,in capital expenditures. The increase in 2006 capital expenditures was largelyattributable to increased spending in our LDPE facility under construction atWilton, U.K. During the first quarter of 2006, we spent $49.0 million on theconstruction of our Wilton, U.K. LDPE facility. In 2005, in connection with ourinitial public offering of the 5% mandatory convertible preferred stock on February 16,2005, we prefunded our dividends through the mandatory conversion date ofFebruary 16, 2008 with investments in government securities of$40.9 million.

 

Net cash provided by (usedin) financing activities for the three months ended March 31, 2006 was $37.0million as compared with $(119.9) million in the 2005 period. This increase innet cash provided by financing activities is mainly a result of net repaymentsof debt during the three months ended March 31, 2005 of $1,510.2 millionprimarily as a result of our initial public offering of common stock andmandatory convertible preferred stock in the first quarter of 2005. Inaddition, as a result of our initial public offering, we received $1,491.9million of net proceeds. Also, during the three months ended March 31, 2005, weused $105.3 million to pay premiums associated with repayment of indebtedness.During the three months ended March 31, 2006, we had net borrowings under ourdebt arrangements of $32.4 million resulting primarily from seasonal increasesin working capital.

 

53

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**Changes inFinancial Condition**

 

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

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | ** **              | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2006**           | ** ** | **2005**              | ** ** | **(Decrease)** | ** ** | **Percent Change** | ** ** |
| **Current assets:**                 |       |               |       |                  |       |           |       |                    |       |
| Cash and cash equivalents           |       | $                  | 150.3      |                  | $          | 142.8          |       | $                       | 7.5        |   | 5 | % |
| Accounts and notes receivables, net |       | 1,359.5            |       | 1,482.6               |       | (123.1         | )          | (8                      | )%         |
| Inventories, net                    |       | 1,311.0            |       | 1,309.2               |       | 1.8            |       | —                  |       |
| Prepaid expenses                    |       | 43.4               |       | 46.2                  |       | (2.8           | )          | (6                      | )%         |
| Deferred income taxes               |       | 31.2               |       | 31.2                  |       | —         |       | —                  |       |
| Other current assets                |       | 42.1               |       | 84.0                  |       | (41.9          | )          | (50                     | )%         |
| Current assets held for sale        |       | 79.9               |       | —                |       | 79.9           |       | NM                      |       |
| Total current assets                |       | 3,017.4            |       | 3,096.0               |       | (78.6          | )          | (3                      | )%         |
|                                |       |               |       |                  |       |           |       |                    |       |
| **Current liabilities:**            |       |               |       |                  |       |           |       |                    |       |
| Accounts payable                    |       | 994.0              |       | 1,093.5               |       | (99.5          | )          | (9                      | )%         |
| Accrued liabilities                 |       | 589.8              |       | 747.2                 |       | (157.4         | )          | (21                     | )%         |
| Deferred income taxes               |       | 2.5                |       | 2.4                   |       | 0.1            |       | 4                       | %          |
| Current portion of long-term debt   |       | 43.9               |       | 44.6                  |       | (0.7           | )          | (2                      | )%         |
| Current liabilities held for sale   |       | 39.2               |       | —                |       | 39.2           |       | NM                      |       |
| Total current liabilities           |       | 1,669.4            |       | 1,887.7               |       | (218.3         | )          | (12                     | )%         |
| Working capital                     |       | $                  | 1,348.0    |                  | $          | 1,208.3        |       | $                       | 139.7      |   | 12 | % |

 

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NM—Not Meaningful

 

During the three monthsended March 31, 2006, our working capital increased by $139.7 million as aresult of the net impact of the following significant changes:

 

•                  The increase in cash and cash equivalents of$7.5 million resulted from the matters identified in the ConsolidatedStatements of Cash Flows contained in our Condensed Consolidated FinancialStatements (Unaudited) included elsewhere in this report.

 

•                  The decrease in accounts receivable of $123.1million was due principally to increased outstandings under our A/R SecuritizationProgram of approximately $45.4 million, and the classification of $57.9 millionof accounts receivable as held for sale and improved collections of accountsreceivable.

 

•                  Other current assets decreased by $41.9million related principally to a reduction in current taxes receivable.

 

•                  Changes in current assets and currentliabilities held for sale relate to the pending sale of our U.S. butadiene andMTBE business operated in our Base Chemicals segment. See “Note 4. BusinessCombinations and Disposition” to our Condensed Consolidated FinancialStatements (Unaudited) included elsewhere in this report.

 

•                  Accounts payable decreased by $99.5 milliondue mainly to the classification of $37.1 million of accounts payable asliabilities held for sale and the payment of accounts payable.

 

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•                  Accrued liabilities decreased by $157.4million due primarily to lower income and other taxes payable, payroll, accruedinterest and rebate accruals.

 

**Debt andLiquidity**

 

During 2005, we completed aseries of transactions designed to simplify our consolidated group’s financingand public reporting structure, to reduce our cost of borrowings and tofacilitate other organizational efficiencies. On February 16, 2005, we completedour initial public offering of common and mandatory convertible preferred stockthat resulted in approximately $1.5 billion in net proceeds, substantiallyall of which were used to repay indebtedness. On August 16, 2005, wecompleted the Huntsman LLC Merger and on December 20, 2005 we completedthe 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.

 

***Subsidiary Debt***

 

With the exception of ourguarantee of certain debt of Huntsman Polyurethanes Shanghai Ltd. (“HPS”),our consolidated Chinese splitting joint venture, and certain indebtednessincurred from time to time to finance directors and officers insurance premiumsas discussed in “—Other Debt” below, we have no direct debt or guaranteeobligations. Substantially all of our debt has been incurred by oursubsidiaries, and such debt is non-recourse to us and we have no contractualobligation to fund our subsidiaries respective operations.

 

***Credit Facilities***

 

As of March 31, 2006, theSenior Credit Facilities consisted of (i) a $650 million revolvingfacility (the “Revolving Facility”), (ii) a $1,986.5 million termloan B facility (the “Dollar Term Loan”), and (iii) a €95.3 million(approximately $115.6 million) euro term loan B facility (the “Euro TermLoan,” and collectively with the Dollar Term Loan, the “Term Loans”). As ofMarch 31, 2006, there were $34.0 million of borrowings outstanding underthe Revolving Facility, and we had $35.4 million in U.S. dollarequivalents of letters of credit and bank guarantees issued and outstandingunder the Revolving Facility. As of March 31, 2006, the weighted averageinterest rate on the Senior Credit Facilities was approximately 6.4%, excludingthe impact of interest rate hedges.

 

On April 18, 2006, wecompleted an amendment and expansion of our A/R Securitization Program andadded certain additional U.S. subsidiaries as additional receivablesoriginators under the program. For more information, see “RecentDevelopments—Amendment and Expansion of Accounts Receivable SecuritizationProgram” above and “Off-Balance Sheet Arrangements” below. In connection withthis amendment and expansion, we initially increased our outstandings under thecommercial paper conduit program to $475 million U.S. dollar equivalents. Aportion of the net increase was used to fund the redemption of medium-termnotes issued under the A/R Securitization Program and to repay $50 million U.S.dollar equivalents of term debt outstanding under our Senior Credit Facilities.The agreements governing our Senior Credit Facilities require us to prepay ourTerm Loan with proceeds raised under the A/R Securitization Program in excessof $425 million. Following this repayment of the Term Loans, as of April 18,2006, there is $1,938.8 million and €93.4 million ($113.3 million) outstandingon the Dollar Term Loan and the Euro Term Loan, respectively.

 

***Secured Notes***

 

On August 16, 2005, inconnection with the Huntsman LLC Merger, Huntsman International entered intosupplemental indentures under which it assumed the obligations of Huntsman LLCunder its outstanding 11.625% senior secured notes due 2010 (the “2010 SecuredNotes”). As of March 31, 2006, Huntsman International had outstanding$296.0 million aggregate principal amount ($293.7 million book valueand $455.4 million original aggregate principal amount) of the 2010Secured Notes, which are redeemable after October 15, 2007 at 105.813% ofthe principal 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.

 

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***Senior Notes***

 

As of March 31, 2006,Huntsman International had outstanding $450.0 million aggregate principalamount ($454.4 million book value) 9.875% senior notes due 2009 that wereissued at a premium (the “2009 Senior Notes”). The 2009 Senior Notes areunsecured obligations. Interest on the 2009 Senior Notes is payablesemiannually in March and September and these notes are redeemable afterMarch 1, 2006 at 104.937% of the original aggregate principal amountthereof, declining ratably to par on and after March 1, 2008.

 

As of March 31, 2006,Huntsman International had outstanding $198.0 million ($300 millionoriginal aggregate principal amount) of 11.5% senior unsecured fixed rate notesdue 2012 (the “2012 Senior Fixed Rate Notes”) and $100.0 million seniorunsecured floating rate notes due 2011 (the “2011 Senior Floating Rate Notes”).Interest on the 2012 Senior Fixed Rate Notes is payable semiannually in Januaryand July of each year. Interest on the 2011 Senior Floating Rate Notes is atLIBOR plus 7.25% (11.85% as of March 31, 2006) and is payable quarterly inJanuary, April, July and October 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. The 2011Senior Floating Rate Notes are redeemable after July 15, 2006 at 104.0% ofthe principal amount thereof, declining ratably to par on and afterJuly 15, 2008.

 

***Subordinated Notes***

 

As of March 31, 2006,Huntsman International had outstanding $175 million 7.375% seniorsubordinated notes due 2015 and €135 million ($163.8 million) 7.5%senior subordinated notes due 2015 (collectively, the “2015 Subordinated Notes”).The 2015 Subordinated Notes are redeemable on or after January 1, 2010 at103.688% and 103.750%, respectively, of the principal amount thereof, decliningratably to par on and after January 1, 2013. Under the terms of aregistration rights agreement among Huntsman International, the subsidiary guarantorsand the initial purchasers of the 2015 Subordinated Notes, we were required tocomplete an exchange offer for the 2015 Subordinated Notes on or beforeSeptember 11, 2005. Under the terms of the registration rights agreement,because we did not complete the exchange offer by this date, we are required topay additional interest on the 2015 Subordinated Notes at a rate of 0.25% peryear for the first 90-day period following this date, and this rate increasesby an additional 0.25% for each subsequent 90-day period, up to a maximum of1.0%. As of March 31, 2006, we were paying an additional 0.75% on the 2015Subordinated Notes. On April 4, 2006, Huntsman International filed aRegistration Statement on Form S-4 with the Securities and Exchange Commissionwith respect to the exchange offer. We believe that Huntsman International willcomplete the exchange offer within the next several months.

 

As of March 31, 2006,Huntsman International also had outstanding $366.1 million ($600 millionoriginal aggregate principal amount) and €372.0 million($451.2 million) (€450 million original aggregate principal amount)10.125% senior subordinated notes due 2009 (the “2009 Subordinated Notes” and,together with the 2015 Subordinated Notes, the “Subordinated Notes”). As ofMarch 31, 2006, the 2009 Subordinated Notes have an unamortized premium of$3.7 million and are redeemable at 103.375% of the principal amountthereof, which declines to 101.688% on July 1, 2006 and to par on andafter July 1, 2007.

 

As of March 31, 2006,Huntsman International had outstanding a combined total of $541.1 millionand €507.0 million ($615.0 million) Subordinated Notes, plus$3.7 million of unamortized premium. Interest on the Subordinated Notes ispayable semiannually in January and July of each year.

 

***Other Debt***

 

We maintain a$25.0 million multicurrency overdraft facility used for the workingcapital needs for our European subsidiaries (the “European Overdraft Facility”).As of March 31, 2006 there were $12.1 million of borrowings outstanding underthe European Overdraft Facility.

 

HPS, one of our Chinese MDIjoint ventures and our consolidated affiliate, has obtained secured loans forthe construction of MDI production facilities near Shanghai, China. This debtconsists of various committed loans in the aggregate amount of approximately$121 million. As of March 31, 2006, HPS had $20.5 million outstandingin

 

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U.S.dollar borrowings and 202.0 million in RMB borrowings ($25.2 million)under these facilities. The interest rate on these facilities is LIBOR plus0.48% for U.S. dollar borrowings and 90% of the Peoples Bank of China rate forRMB borrowings. As of March 31, 2006, the interest rate was approximately 5.0%for U.S. dollar borrowings and 5.5% for RMB borrowings. The loans are securedby substantially all the assets of HPS and will be repaid in 16 semiannualinstallments beginning no later than June 30, 2007. The financing isnon-recourse to Huntsman International but is guaranteed during theconstruction phase by affiliates of HPS, including us. We have guaranteed 70%of any amount due and unpaid by HPS under the loans described above (except forthe VAT facility, which is not guaranteed). Our guarantees remain in effectuntil HPS has commenced production of at least 70% of capacity for at least30 days and achieved a debt service cost ratio of at least 1.5:1. OurChinese MDI joint ventures are unrestricted subsidiaries under the SeniorCredit Facilities and under the indentures governing our outstanding notes. HPSis expected to begin operations at the beginning of the third quarter of 2006.

 

Our Australian subsidiariesmaintain credit facilities that had an aggregate outstanding balance ofA$87.8 million ($62.4 million) as of March 31, 2006. These facilitiesare non-recourse to us and bear interest at the Australian index rate plus amargin of 2.9%. As of March 31, 2006, the interest rate for these facilitieswas 8.6%.

 

We finance certain of ourinsurance premiums. As of March 31, 2006, we had $10.5 million ininsurance premium financing, all of which is due in the next twelve months.

 

**Compliance with Covenants**

 

Our management believes thatwe are in compliance with the covenants contained in the agreements governingthe Senior Credit Facilities, the A/R Securitization Program and the indenturesgoverning our notes.

 

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

 

We depend upon our creditfacilities and other debt instruments to provide liquidity for our operationsand working capital needs. As of March 31, 2006, we had approximately $755.9million of combined cash and combined unused borrowing capacity, consisting of$150.3 million in cash, $580.6 million in availability under our RevolvingFacility, $2.9 million attributable to our European Overdraft Facility andapproximately $22.1 million in availability under our A/R SecuritizationProgram.

 

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

 

**Capital Expenditures**

 

Excluding capitalexpenditures that will be required related to the fire damage at our Port Arthur,Texas olefins facility (see “Recent Developments—Fire Damage at our PortArthur, Texas Olefins Facility” above), we expect to spend approximately $575million on capital projects in 2006, including approximately $200 million incapital expenditures on our LDPE facility at Wilton, UK. For more informationconcerning our expected 2006 capital expenditures, see “Management’s Discussionand Analysis of Financial Condition and Results of Operations” for the yearended December 31, 2005 included in our 2005 Annual Report on Form 10-K.We expect to finance our capital expenditure commitments through a combinationof our cash flow from operations and financing arrangements.

 

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Capital expenditures for thethree months ended March 31, 2006 were $104.1 million as compared with $59.8million in the 2005 period. The increase in capital expenditures in the 2006period was largely attributable to increased capital expenditures at ourWilton, U.K. LDPE project which had $49 million in capital spending duringthe first quarter of 2006. During the three months ended March 31, 2006, wefunded approximately $15 million as equity in HPS and HPS incurred $5.9million of capital expenditures. During the three months ended March 31, 2006,we invested, as equity, approximately $14 million in Shanghai IsocyanateInvestment BV (“SLIC”), our manufacturing joint venture with BASF AG and threeChinese chemical companies. These first quarter 2006 equity investments in HPSand SLIC represent our final scheduled equity contributions to these jointventures. HPS and SLIC are expected to begin operations at the beginning of thethird quarter of 2006.

 

**Off-Balance Sheet Arrangements**

 

***Receivables Securitization***

 

For a discussion of ourreceivables securitization, see “Note 8. Securitization of Accounts Receivable” to our CondensedConsolidated Financial Statements (Unaudited) included elsewhere in thisreport.

 

***Financing of Chinese MDI Facilities***

 

In January 2003,Huntsman International entered into two related joint venture agreements tobuild MDI production facilities near Shanghai, China. SLIC, our manufacturingjoint venture with BASF AG and three Chinese chemical companies, will buildthree plants to manufacture MNB, aniline and crude MDI. We effectively own 35%of SLIC and it is an unconsolidated affiliate. HPS, our splitting joint venturewith Shanghai Chlor-Alkali Chemical Company, Ltd, will build a plant tomanufacture pure MDI, polymeric MDI and MDI variants. We own 70% of HPS and itis a consolidated affiliate.

 

On September 19, 2003,the joint ventures obtained secured financing for the construction of theproduction facilities. Details concerning HPS’s financing are described in “—Debtand Liquidity—Other Debt” above. SLIC obtained various committed loans in theaggregate amount of approximately $229 million in U.S. dollar equivalents.As of March 31, 2006, there were $82.0 million outstanding in U.S. dollarborrowings and 500.0 million in outstanding RMB ($62.4 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.

 

**Restructuring,Impairment and Plant Closing Costs**

 

For a discussion ofrestructuring, impairment and plant closing costs, see “Note 5. Restructuring,Impairment and Plant Closing Costs” to our Condensed Consolidated FinancialStatements (Unaudited) included elsewhere in this report.

 

**Environmental,Health and Safety Matters**

 

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

 

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**RecentlyIssued Accounting Pronouncements**

 

For a discussion of recentlyissued accounting pronouncements, see “Note 2. Recently Issued AccountingPronouncements” to our Condensed Consolidated Financial Statements (Unaudited)included elsewhere in this report.

 

**CriticalAccounting Policies**

 

There have been no changesin the first quarter of 2006 with respect to our critical accounting policiesas presented in Management’s Discussion and Analysis of Financial Condition andResults of Operations for the year ended December 31, 2005 included in our 2005Annual Report on Form 10-K.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

We are exposed to marketrisk, including changes in currency exchange rates, interest rates and certaincommodity prices. To manage the volatility relating to these exposures, fromtime to time, we enter into various derivative transactions. We hold and issuederivative financial instruments for economic hedging purposes only.

 

Our cash flows and earningsare subject to fluctuations due to exchange rate variation. Our sales pricesare typically denominated in euros or U.S. dollars. From time to time, we mayenter into foreign currency derivative instruments to minimize the short-termimpact of movements in foreign currency rates. Where practicable, we generallynet multicurrency cash balances among our subsidiaries to help reduce exposureto foreign currency exchange rates. Certain other exposures may be managed fromtime to time through financial market transactions, principally through thepurchase of spot or forward foreign exchange contracts (generally withmaturities of nine months or less). We do not hedge our currency exposures in amanner that would eliminate the effect of changes in exchange rates on our cashflows and earnings. Our A/R Securitization Program in certain circumstancesrequires that we enter into forward foreign currency hedges intended to hedgecurrency exposures.

 

In connection with ourpending acquisition of the global textile effects business of Ciba SpecialtyChemicals Inc., the purchase price of which is denominated in Swiss Francs, onMarch 16, 2006, we entered into two foreign currency derivative instruments tolimit a portion of our currency exposure resulting from the acquisition of thetextile effects business. See “Note 4. Business Combinations and Dispositions,”to our Condensed Consolidated Financial Statements (Unaudited) includedelsewhere in this report. One of the derivatives is an option to purchase CHF65million at a strike price of 1.2915. This option expires on July 14, 2006 andwe paid approximately $1.4 million for this option. The other derivative is ano cost option to purchase CHF65 million at a strike price of 1.2673. However,this option has a “knock-in” strike price of 1.3500, meaning that if at anytime prior to its July 14, 2006 expiration the Swiss Franc trades at or above1.35000, then the option must be exercised at the strike price of 1.2673.Neither of these two options are designated as hedges for financial reportingpurposes. As of March 31, 2006, the fair value of these options combined was$1.5 million.

 

A significant portion of ourdebt is denominated in euros. We also finance certain of our non-U.S.subsidiaries with intercompany loans that are, in some cases, denominated incurrencies other than the entities’ functional currency. We manage the netforeign currency exposure created by this debt through various means, includingcross-currency swaps, the designation of certain intercompany loans aspermanent loans because they are not expected to be repaid in the foreseeablefuture (“Permanent Loans”) and the designation of debt and swaps as hedges.

 

Foreign currency transactiongains and losses on intercompany loans that are not designated as PermanentLoans are recorded in earnings. Foreign currency transaction gains and losseson intercompany loans that designated Permanent Loans are recorded in othercomprehensive income. From time to time, we review such designation ofintercompany loans.

 

From time to time, we reviewour non-U.S. dollar denominated debt and swaps to determine the appropriateamounts designated as hedges. As of March 31, 2006, we have designated approximately€330.3 million of

 

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Euro-denominateddebt and €132.4 million of cross-currency rate swaps as a hedge of our netinvestments. As of March 31, 2006 we had approximately €1,159.9 million in neteuro assets.

 

For further discussion ofour derivative instruments and hedging activities, see “Note 7. Derivatives andHedging Activities” to our Condensed Consolidated Financial Statements(Unaudited) included elsewhere in this report.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Our management, with theparticipation of our chief executive officer and chief financial officer, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934 (the “Exchange Act”)) as of March 31, 2006. Based on this evaluation,our chief executive officer and chief financial officer have concluded that, asof March 31, 2006, our disclosure controls and procedures were effective, inthat they ensure that information required to be disclosed by us in the reportsthat we file or submit under the Exchange Act is (1) recorded, processed,summarized and reported within the time periods specified in the Commission’srules and forms, and (2) accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

No changes to our internalcontrol over financial reporting occurred during the three months ended March31, 2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act). During 2005 weengaged Ernst & Young LLP to assist our management in itsdocumentation and evaluation of our internal controls. The SEC’s rules underSection 404 of the Sarbanes-Oxley Act of 2002 become applicable to usbeginning this year with our Annual Report on Form 10-K to be filed in thefirst quarter of 2007. We cannot give any assurance, however, that our internalcontrols over financial reporting will be effective when Section 404becomes applicable to us. Ineffective internal controls over financialreporting could cause investors to lose confidence in our reported financialinformation and could result in a lower trading price for our securities.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

For a discussion of legalproceedings, see “Note 12. Commitments and Contingencies—Legal Matters” and “Note13. Environmental, Health and Safety Matters—Remediation Liabilities” to ourCondensed Consolidated Financial Statements (Unaudited) included elsewhere inthis report and incorporated herein by reference.

 

**ITEM 1A. RISK FACTORS**

** **

For information regarding risk factors, see “PartI. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year endedDecember 31, 2005 and as follows:

 

***Existing or future litigation or legislative initiatives restrictingthe use of MTBE in gasoline may subject us or our products to environmentalliability, materially reduce our sales and/or materially increase our costs.***

 

We produce MTBE, anoxygenate that is blended with gasoline to reduce vehicle air emissions and toenhance the octane rating of gasoline. Because MTBE has contaminated some watersupplies, its use has become controversial in the U.S. and elsewhere and hasbeen curtailed and may be eliminated in the future by legislation or regulatoryaction. For example, about 25 states have adopted rules that prohibit orrestrict the use of MTBE in gasoline sold in those states. Those states accountfor a substantial portion of the “pre-ban” U.S. MTBE market. In addition, theEnergy Policy Act of 2005 is now having an adverse impact on our MTBE businessin the U.S., since it mandates increased use of renewable fuels and eliminates,as of May 6, 2006, the oxygenate requirement for reformulated gasolineestablished by the 1990 Clean Air Act Amendments. Although the full extent ofthe potential impact of the new law is still unclear, most gasoline refinersand distributors in the U.S. appear to have stopped using MTBE. A significantloss in demand for our MTBE in the U.S. could result in a material loss inrevenues or material costs or expenditures.

 

In 2005, sales of MTBEcomprised approximately 5% of our total revenues, and we marketed approximately95% of our MTBE to customers located in the U.S. for use as a gasolineadditive. Most of our 2005 sales of MTBE to U.S. customers were made pursuantto long-term agreements. During 2006 (and concluding by the first quarter of2007), our long-term MTBE sales agreements in the U.S. will terminate. Weanticipate that our 2006 sales of MTBE in the U.S. will decrease substantiallyas compared to 2005 levels. We have entered into sales agreements to sell asignificant percentage of our MTBE into the Latin American market, and wecurrently believe that we could also sell MTBE relatively efficiently in Europeand Asia. Nevertheless, as a result of varying market prices and transportationcosts, sales of MTBE in markets outside the U.S. may produce lower margins thanthe sale of MTBE in the U.S. We may also elect to use all or a portion of ourprecursor TBA to produce saleable products other than MTBE. If we opt toproduce products other than MTBE, necessary modifications to our facilitieswill require us to make significant capital expenditures and the sale of suchother products may produce a lower level of cash flow than the sale of MTBE.

 

A number of lawsuits havebeen filed, primarily against gasoline manufacturers, marketers anddistributors, by persons seeking to recover damages allegedly arising from thepresence of MTBE in groundwater. While we have not been named as a defendant inany litigation concerning the environmental effects of MTBE, we cannot provideassurances that we will not be involved in any such litigation or that suchlitigation will not have a material adverse effect on our business, financialcondition, results of operations or cash flows.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

**IssuerPurchases of Equity Securities**

 

Thefollowing table presents shares of restricted stock granted under our stockincentive plan that we withheld upon vesting to satisfy our tax withholdingobligations during the first quarter of 2006. We have no publicly announcedplans or programs to repurchase our common stock.

 
| **Period** | ** ** | **Total Number  of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number  (or Approximate Dollar  Value) of Shares that May   Yet Be Purchased Under   the Plans or Programs** | ** ** |
|------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January    |       | —                                       |       | —                                           |       | —                                                                                                                           |       | —                                                                                                                                                                                  |       |
| February   |       | 65,665                                       |       | $                                                | 20.70      |                                                                                                                             | —     |                                                                                                                                                                                    | —     |   |
| March      |       | —                                       |       | —                                           |       | —                                                                                                                           |       | —                                                                                                                                                                                  |       |
| Total      |       | 65,665                                       |       | $                                                | 20.70      |                                                                                                                             | —     |                                                                                                                                                                                    | —     |   |

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

We held our annual meetingof stockholders on May 4, 2006. The first item of business was theelection of three Class II directors. The votes were tabulated as follows:187,311,237 votes were cast for Peter R. Huntsman and 7,821,564 votes werewithheld; 184,791,971 votes were cast for Wayne A. Reaud and 10,340,830 voteswere withheld; and 187,322,146 votes were cast for Alvin V. Shoemaker and 7,810,655votes were withheld. The second item of business was a proposal to ratify theselection of Deloitte & Touche LLP as our independent registeredpublic accounting firm for the year ending December 31, 2006. The voteswere tabulated as follows: 194,865,275 were cast for, 258,732 were castagainst, and 8,794 abstained.

 

**ITEM 5. OTHER INFORMATION**

 

**Entry intoa Material Definitive Agreement**

 

Pursuantto our aircraft usepolicy, on May 4, 2006, the compensation committee of the board of directors ofour Company approved, for 2006, up to $400,000 of personal use of companyaircraft without cost by our chairman of the board and unlimited personal useof company aircraft without cost by our chief executive officer.

 

On May 4, 2006, the board ofdirectors of our Company approved one-time awards of additional cashcompensation for each outside director, as follows: $100,000 for Alvin V.Shoemaker and $50,000 for each of Nolan D. Archibald, Marsha J. Evans, H.William Lichtenberger, Richard Michaelson and Wayne A. Reaud. The additionalcompensation was awarded in recognition of Mr. Shoemaker’s service as chairman,and the other outside directors’ service as members, of a special committee of theboard of directors that was formed to review and evaluate certain proposedbusiness combination transactions. The special committee was dissolved inFebruary 2006.

 

**ITEM 6. EXHIBITS**

 
| 2.1    |   | Asset Purchase  Agreement by and among Huntsman Petrochemical Corporation, Huntsman Fuels,  L.P. and Texas Petrochemicals, L.P. dated as of April 5, 2006  (incorporated by reference to Exhibit 2.1 of our current report on Form 8-K  filed on April 5, 2006).                                                                                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1   |   | Second Amended and  Restated Pooling Agreement, among Huntsman Receivables Finance LLC, Huntsman  (Europe) BVBA and J.P.Morgan Bank (Ireland), as trustee, dated as of April  18, 2006.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2   |   | Amended and Restated  2000-1 Supplement to Second Amended and Restated Pooling Agreement, among  Huntsman Receivables Finance LLC, Huntsman (Europe) BVBA, Jupiter  Securitization Corporation, the several financial institutions party thereto  as funding agents, the Series 2000-1 Conduit Purchasers party thereto, the  several financial institutions party thereto as Series 2000-1 APA Banks,  J.P.Morgan Securities Ltd., JPMorgan Chase Bank, N.A., and J.P.Morgan  (Ireland) plc, as trustee, dated as of April 18, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Amended and Restated  Contribution Agreement, between Huntsman International LLC and Huntsman  Receivables Finance LLC, dated as of April 18, 2006.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Second Amended and  Restated Servicing Agreement, among Huntsman Receivables Finance LLC,  Huntsman (Europe) BVBA, the various affiliates of Huntsman International LLC  party thereto as local servicers, J.P.Morgan Bank (Ireland), as Trustee,  PricewaterhouseCoopers LLP, and Huntsman International LLC, dated as of April  18, 2006.                                                                                                                                                                                           |

 

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| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|   |   |                                                                                                      |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
|   |   |                                                                                                      |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrants have duly caused thisreport to be signed on their behalf by the undersigned thereunto dulyauthorized.

 

Dated: May 9, 2006

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

 

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**EXHIBIT INDEX**

 
|  2.1 |   | Asset Purchase Agreement by and among Huntsman  Petrochemical Corporation, Huntsman Fuels, L.P. and Texas Petrochemicals,  L.P. dated as of April 5, 2006 (incorporated by reference to Exhibit 2.1  of our current report on Form 8-K filed on April 5, 2006).                                                                                                                                                                                                                                                                  |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1      |   | Second  Amended and Restated Pooling Agreement, among Huntsman Receivables Finance  LLC, Huntsman (Europe) BVBA and J.P.Morgan Bank (Ireland), as trustee, dated  as of April 18, 2006.                                                                                                                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2      |   | Amended  and Restated 2000-1 Supplement to Second Amended and Restated Pooling  Agreement, among Huntsman Receivables Finance LLC, Huntsman (Europe) BVBA,  Jupiter Securitization Corporation, the several financial institutions party  thereto as funding agents, the Series 2000-1 Conduit Purchasers party  thereto, the several financial institutions party thereto as Series 2000-1  APA Banks, J.P.Morgan Securities Ltd., JPMorgan Chase Bank, N.A., and J.P.Morgan  (Ireland) plc, as trustee, dated as of April 18, 2006. |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3      |   | Amended  and Restated Contribution Agreement, between Huntsman International LLC and  Huntsman Receivables Finance LLC, dated as of April 18, 2006.                                                                                                                                                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4      |   | Second  Amended and Restated Servicing Agreement, among Huntsman Receivables Finance  LLC, Huntsman (Europe) BVBA, the various affiliates of Huntsman International  LLC party thereto as local servicers, J.P.Morgan Bank (Ireland), as Trustee,  PricewaterhouseCoopers LLP, and Huntsman International LLC, dated as of April  18, 2006.                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1      |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2      |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1      |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.2      |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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