HUNTSMAN INTERNATIONAL HOLDINGS LLC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number 333-88057

HUNTSMAN INTERNATIONAL HOLDINGS LLC
(Exact name of registrant as specified in its charter)

Delaware 87-0630359
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700

(Address of principal executive offices and telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes /X/ No / /

On August 14, 2002, 1,000 member equity units of Huntsman International Holdings
LLC were outstanding. As of such date, such member equity units were held 60% by
Huntsman Specialty Chemicals Corporation, an affiliate of Huntsman International
Holdings LLC, 30% by Imperial Chemicals Industries PLC and its affiliates and
10% by institutional investors. There is no established trading market for the
membership interests of Huntsman International Holdings LLC.

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HUNTSMAN INTERNATIONAL HOLDINGS LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2002

TABLE OF CONTENTS

Some of the statements contained in this report are forward-looking in
nature. In some cases, you can identify forward-looking statements by
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative of such terms or other comparable terminology, or
by discussions of strategy. You are cautioned that our business and operations
are subject to a variety of risks and uncertainties, and, consequently, our
actual results may differ materially from those projected by any forward-looking
statements. Some of those risks and uncertainties are discussed below in "Item
2--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Forward-Looking Information" and elsewhere
in this report. We make no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN MILLIONS)

See accompanying notes to consolidated financial statements

1

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (DOLLARS IN MILLIONS)

See accompanying notes to consolidated financial statements

2

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED) (DOLLARS IN MILLIONS)

See accompanying notes to consolidated financial statements

3

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN MILLIONS)

See accompanying notes to consolidated financial statements

4

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

BUSINESS

Huntsman International Holdings LLC (the "Company"), through its
subsidiaries, is a global manufacturer and marketer of specialty and commodity
chemicals. The Company is a Delaware limited liability company and is owned 60%
by Huntsman Specialty Chemicals Corporation ("Huntsman Specialty"), 30% by
Imperial Chemicals Industries PLC ("ICI") and its affiliates and 10% by
institutional investors. The Company's direct wholly-owned operating subsidiary
is Huntsman International LLC, a Delaware limited liability company ("Huntsman
International"). For convenience in this report, where the context requires, the
term "Company" includes Huntsman International and its subsidiaries.

The Company operates through four principal operating segments:
Polyurethanes, Pigments, Base Chemicals and Performance Products. During 2002,
the Company realigned its principal operating segments. The most significant
change was the split of the former Specialty Chemicals segment into two
segments: Polyurethanes and Performance Products. The former Tioxide segment was
renamed Pigments, and the former Petrochemicals segment was renamed Base
Chemicals.

INTERIM FINANCIAL STATEMENTS

The accompanying consolidated financial statements of the Company are
unaudited. However, in management's opinion, all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of results of
operations, financial position and cash flows for the periods shown, have been
made. Results for interim periods are not necessarily indicative of those to be
expected for the full year. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
to consolidated financial statements included in the Company's annual report on
form 10-K for the year ended December 31, 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include its
majority-owned subsidiaries. Intercompany transactions and balances are
eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers cash in
checking accounts and cash in short-term highly liquid investments with an
original maturity of three months or less to be cash and cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost determined
using the weighted average cost method.

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PLANT AND EQUIPMENT

Plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives or lease term as follows:

Buildings 20 years
Plant and equipment 3-20 years

Approximately $439.6 million of plant and equipment is depreciated using
the straight-line method on a group basis with depreciation based on a 5%
composite rate. When capital assets representing complete groups of property are
disposed of, the difference between the disposal proceeds and net book value is
recorded to income. When individual assets recorded on the group basis are
disposed of, the difference between historical cost and the disposal proceeds is
recorded to accumulated depreciation. When individual assets not recorded on the
group basis are disposed of, the difference between historical cost and the
disposal proceeds is recorded to income.

INVESTMENT IN UNCONSOLIDATED AFFILIATES

Investments in companies in which the Company exercises significant
influence, generally ownership interests of 20% to 50%, are accounted for using
the equity method.

INTANGIBLE ASSETS

Intangible assets are stated at cost (fair value at the time of
acquisition) and are amortized using the straight-line method over the estimated
useful lives or over the life of the related agreement, ranging from five to
fifteen years.

OTHER ASSETS

Other assets consist primarily of spare parts, capitalized loan fees,
non-qualified employee benefit assets and turnaround costs. Capitalized loan
fees are amortized using the straight-line method over the term of the related
debt, ranging from six to ten years.

Periodic maintenance and repairs applicable to major units of manufacturing
facilities are accounted for on the prepaid basis by deferring the costs of the
turnaround and expensing the costs over the estimated period until the next
turnaround.

CARRYING VALUE OF LONG-TERM ASSETS

The Company evaluates the carrying value of long-term assets based upon
current and anticipated undiscounted cash flows, and recognizes an impairment
when such estimated cash flows will be less than the carrying value of the
asset. Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and fair value.

DERIVATIVES AND HEDGING ACTIVITIES

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES." SFAS No. 133 requires that an entity recognize all
derivative instruments as assets or liabilities in the balance sheet and
measure those instruments at fair value. The accounting for the change in the
fair value depends on the use of the instrument. The adoption of SFAS No. 133
resulted in a cumulative increase in net loss of $1.5 million and a
cumulative increase to accumulated other comprehensive loss of $1.1 million.
See "Note 7-Derivatives and Hedging Activities."

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ENVIRONMENTAL EXPENDITURES

Environmental related restoration and remediation costs are recorded as
liabilities and expensed when the site restoration and environmental remediation
and clean-up obligations are either known or considered probable and the related
costs can be reasonably estimated. Other environmental expenditures that are
principally maintenance or preventive in nature, are recorded when expended and
expensed or capitalized as appropriate.

INCOME TAXES

The Company and its US subsidiaries are organized as limited liability
companies and limited partnerships. These entities are treated as
partnerships for US income tax purposes, and therefore are not subject to US
federal tax on their income. Subsidiaries outside the United States are
generally taxed on the income generated in the local country.

The Company uses the asset and liability method of accounting for income
taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
and tax reporting purposes. The Company does not provide for income taxes or
benefits on the undistributed earnings of its international subsidiaries as
earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.

OTHER LONG-TERM LIABILITIES

Other long-term liabilities include accrued pension and other
post-retirement benefits, environmental reserves, and other liabilities.

FOREIGN CURRENCY TRANSLATION

Generally, the accounts of the Company's subsidiaries outside the United
States consider local currency to be the functional currency. Accordingly,
assets and liabilities are translated at rates prevailing at the balance sheet
date. Revenues, expenses, gains, and losses are translated at a weighted average
rate for the period. Cumulative translation adjustments are recorded to
stockholder's equity as a component of accumulated other comprehensive loss.
Transaction gains (losses) are recorded in the statement of operations and were
$24.5 and $2.2 million for the six months ended June 30, 2002 and 2001,
respectively.

REVENUE RECOGNITION

The Company generates revenue through sales in the open market, raw
material conversion agreements and long-term supply contracts. The Company
recognizes revenue when it is realized or realizable and earned, which is
generally upon shipment of product in fulfillment of a customer order.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

SECURITIZATION OF ACCOUNTS RECEIVABLE

In September 2000, SFAS No. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES," was issued. SFAS No. 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from those that are secured borrowings. The Company adopted SFAS
No. 140 during the year ended December 31, 2001 as required. Adoption of the
accounting requirements of this standard did not have a material impact on the
statement of operations or financial position.

7

The Company securitizes certain trade receivables in connection with a
revolving securitization program. The Company retains the servicing rights which
are a retained interest in the securitized receivables. Losses are recorded on
the sale and depend on the carrying value of the receivables as allocated
between the receivables sold and the retained interests and their relative fair
value at the date of the transfer. Retained interests are subsequently carried
at fair value which is estimated based on the present value of expected cash
flows, calculated using management's best estimates of key assumptions including
credit losses and discount rates commensurate with the risks involved.

RECLASSIFICATIONS

Certain 2001 amounts have been reclassified to conform to the 2002
presentation.

RECENT FINANCIAL ACCOUNTING STANDARDS

On January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." SFAS No. 142 changes the accounting for goodwill and
intangible assets with indefinite lives from an amortization method to an
impairment-only approach. Upon adoption of SFAS No. 142, the Company is required
to reassess the useful lives of all acquired intangibles and perform an
impairment test on goodwill. In the first quarter of 2002, the Company completed
the assessment of useful lives and concluded that no adjustments to the
amortization period of intangible assets were necessary.

The initial adoption of SFAS No. 142 had no impact on the Company's
financial statements for the six months ended June 30, 2002. The pro forma net
income, assuming the change in accounting principle was applied retroactively to
January 1, 2001, would not have changed for the six months ended June 30, 2001
because the Company has no goodwill.

On January 1, 2002, the Company adopted SFAS No. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." This statement establishes
a single accounting model for the impairment or disposal of long-lived
assets. The impact of adopting this pronouncement was not material.

In August 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred by capitalizing it as part of the carrying
amount of the long-lived assets. As required by SFAS No. 143, the Company will
adopt this new accounting standard on January 1, 2003. The Company is currently
evaluating the effects of adopting this pronouncement.

In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally
before an actual liability has been incurred. Adoption of this statement is
required effective January 1, 2003. The Company has not yet completed our
evaluation of the impact of adopting this statement.

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3. INVENTORIES

Inventories as of June 30, 2002 and December 31, 2001 consisted of the
following (dollars in millions):

4. PROPERTY, PLANT, AND EQUIPMENT

The cost and accumulated depreciation of property, plant, and equipment are
as follows (dollars in millions):

5. INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization of intangible assets
as of June 30, 2002 were as follows (dollars in millions):

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Estimated future amortization expense for intangible assets through
December 31, 2006 is as follows (dollars in millions):

6. LONG-TERM DEBT

Long-term debt outstanding as of June 30, 2002 and December 31, 2001 is as
follows (dollars in millions):

SENIOR NOTES OFFERING

On March 18, 2002, Huntsman International sold $300 million aggregate
principal amount of 9.875% Senior Notes due 2009 (the "2002 HI Notes") in a
transaction exempt from the registration requirements of the Securities Act
of 1933. Huntsman International used approximately $58 million of the net
proceeds to repay outstanding indebtedness under the revolving portion of
Huntsman International's senior secured credit facilities (the "HI Credit
Facilities"). The balance of the net proceeds was used to repay amounts due
under the term loan portion of the HI Credit Facilities, eliminating
scheduled term loan amortization requirements in 2002 and substantially
reducing scheduled term loan amortization requirements in 2003.

AMENDMENT OF THE HI CREDIT FACILITIES

On March 15, 2002, Huntsman International entered into an amendment to
the HI Credit Facilities. This amendment, among other things, allowed
Huntsman International to (i) issue the 2002 HI Notes, (ii) apply a portion
of the proceeds of the offering of the 2002 HI Notes to substantially reduce
the amortization payments on the term loan portion of the HI Credit
Facilities due in 2002 and 2003, and (iii) temporarily repay outstanding
principal amounts under the revolving portion of the HI Credit Facilities.
This amendment also adjusted certain financial covenant levels in 2002 and
2003. Additionally, this amendment provides that Huntsman International will
not, and will not permit any of its subsidiaries to, amend, modify or
terminate any provisions of the 2002 HI Notes.

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7. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates and commodity pricing. As a result, the Company enters
into transactions, including derivative instruments, to manage these risks. The
overall risk management philosophy of the Company is to manage the downside
risks of these activities. Primary goals of the Company's risk management
activities include: (1) reducing the impact of fluctuations in variable interest
rates and meeting the requirements of certain credit agreements; (2) reducing
the short-term impact from certain movements in foreign exchange rates on
earnings; (3) reducing the short-term impact of fluctuations in the purchase
price of certain feedstocks; and (4) hedging the net investments position in
euro functional currency entities.

INTEREST RATE HEDGING

Through the Company's borrowing activities, it is exposed to interest rate
risk. Such risk arises due to the structure of the Company's debt portfolio,
including the duration of the portfolio and the mix of fixed and floating
interest rates. Actions taken to reduce interest rate risk include managing the
mix and rate characteristics of various interest bearing liabilities as well as
entering into interest rate swaps, collars and options.

As of June 30, 2002 and 2001, the Company maintained interest rate swaps
and collars with a fair value of approximately $12.4 million and $8.5 million,
respectively, which have been designated as cash flow hedges of variable rate
debt obligations. These amounts are recorded as other current liabilities in the
accompanying balance sheet. The effective portion of unrealized losses of
approximately $1.6 million and $8.1 million were recorded as a component of
other comprehensive loss, with the ineffective portion of approximately $2.7
million recorded as interest income and $0.4 million of interest expense in the
accompanying statements of operations for the six months ended June 30, 2002 and
2001, respectively. The effective portion of the mark-to-market effects is
recorded in other comprehensive loss until the underlying interest payments
affect earnings.

Swaps and collars not designated as hedges are also recorded at fair value
on the balance sheet and resulted in an increase in interest income and a
decrease in other current liabilities of approximately $0.8 million for the six
months ended June 30, 2002 and an increase in interest expense and other current
liabilities of approximately $4.5 million for the six months ended June 30,
2001.

FOREIGN CURRENCY RATE HEDGING

The Company enters into foreign currency derivative instruments to minimize
the short-term impact of movements in foreign currency rates. These contracts
are not designated as hedges for financial reporting purposes and are recorded
at fair value. As of June 30, 2002 and 2001, the fair value of outstanding
contracts was immaterial. During the six months ended June 30, 2002, the Company
recognized $0.3 million in loss from these activities.

COMMODITY PRICE HEDGING

Because feedstocks used by the Company are subject to price volatility, the
Company uses commodity futures and swaps to reduce the risk associated with
certain of these feedstocks. These instruments are designated as cash flow
hedges of future inventory purchases, fair value hedges of inventory currently
held and trading activities. The mark-to-market gains and losses of qualifying
cash flow hedges are recorded as a component of other comprehensive loss until
the underlying transactions are recognized in earnings. The mark-to-market gains
and losses of non-qualifying, excluded and ineffective portions of hedges are
recorded in cost of goods sold in the accompanying statements of operations. For
the six months ended June 30, 2002, the net loss on derivatives qualifying as
cash flow hedges are $0.1 million and are recorded in other comprehensive
income. All such amounts are expected to be reclassed to cost of goods sold in
the next 12 months. The fair value of all commodity derivatives

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included as other current assets was $0.2 million as of June 30, 2002. The fair
value of commodity derivatives included in other current liabilities was $0.1
million as of June 30, 2002.

During the six months ended June 30, 2002, the Company recorded $0.4
million as a decrease in cost of goods sold related to net gains from settled
contracts and the change in fair value (unrealized gains and losses) on the
contracts that are effective economic hedges of commodity price exposures, but
do not meet the SFAS No. 133 definition of hedging instruments. As of June 30,
2002, $0.6 million was included in other current assets and $0.2 in other
current liabilities. For the six months ended June 30, 2001, these activities
were not material.

NET INVESTMENT HEDGING

The Company hedges its net investment position in euro functional currency
entities. To accomplish this, a portion of the Company's debt is euro
denominated and designated as a hedge of net investments. Currency effects of
these hedges produced a net loss of approximately $76.8 million and a net gain
of approximately $64.1 million in other comprehensive loss (foreign currency
translation adjustments) for the six months ended June 30, 2002 and 2001,
respectively. As of June 30, 2002 and 2001, there was a cumulative net loss of
approximately $13.6 and a cumulative net gain of approximately $90.3 million,
respectively.

8. RESTRUCTURING AND PLANT CLOSING COSTS

As of December 31, 2001, the Company had a reserve for restructuring costs
and plant closing costs of $31.3 million recorded in accrued liabilities. The
reserve consisted of $30.5 million for workforce reductions and $0.8 million for
other exit costs. During the six months ended June 30, 2002, the Company made
cash payments of approximately $18.8 million in workforce reductions. At June
30, 2002 there was $12.5 million remaining in accrued liabilities consisting of
$11.7 million for workforce reductions and $0.8 million for other exit costs.

9. COMMITMENTS AND CONTINGENCIES

The Company has various purchase commitments for materials and supplies
entered into in the ordinary course of business. These agreements extend from
three to ten years and the purchase price is generally based on market prices
subject to certain minimum price provisions.

The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, after consideration of
indemnification arrangements, none of such litigation is material to the
Company's financial condition or results of operations.

10. ENVIRONMENTAL MATTERS

The operation of chemical manufacturing plants, the distribution of
chemical products and the related production of by-products and wastes, entail
risk of adverse environmental effects. The Company is subject to extensive
federal, state, local and foreign laws, regulations, rules and ordinances
relating to pollution, the protection of the environment and the generation,
storage, handling, transportation, treatment, disposal and remediation of
hazardous substances and waste materials. In the ordinary course of business,
the Company is subject continually to environmental inspections and monitoring
by governmental enforcement authorities. The Company may incur substantial
costs, including fines, damages and criminal or civil sanctions, or experience
interruptions in its operations for actual or alleged violations arising under
any environmental laws. In addition, production facilities require operating
permits that are subject to renewal, modification and, in some circumstances,
revocation. Violations of permit requirements can also result in restrictions or
prohibitions on plant operations, substantial fines and civil or criminal
sanctions. The Company's operations involve the generation, handling,
transportation, use and disposal of numerous hazardous substances. Changes in
regulations regarding the generation, handling, transportation, use and disposal
of hazardous substances could inhibit or interrupt operations and have a
material adverse effect on business. From time to time, these operations may
result in

12

violations under environmental laws, including spills or other releases of
hazardous substances to the environment. In the event of a significant incident,
the Company could incur material costs to address and remediate the incident. In
addition, following any such incident, the Company may incur higher costs to
implement measures to prevent future incidents. Given the nature of the
Company's business, there can be no assurance that violations of environmental
laws will not result in restrictions imposed on the Company's operating
activities, substantial fines, penalties, damages or other costs. In addition,
potentially significant expenditures could be necessary in order to comply with
existing or future environmental laws.

The Company has established financial reserves relating to environment
restoration and remediation programs, which the Company believes, are sufficient
for known requirements. Liabilities are recorded when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable and can be reasonably estimated. These liabilities are based
upon all available facts, existing technology, past experience, and cost-sharing
arrangements (as to which, the Company consider the viability of other parties).
A total of approximately $15 million has been accrued related to environmental
matters as of June 30, 2002. The Company does not anticipate that any future
costs, in excess of those that have been accrued by the Company, will be
material to the results of operations or financial position as a result of
compliance with current environmental laws and regulations.

In connection with its acquisitions, the Company generally has entered into
agreements that provide it with indemnification for environmental pollution
existing on the date of the applicable acquisition.

A spill at the Company's North Tees facility was discovered on March 27,
2001. The U.K. Environmental Agency ("EA") issued an enforcement notice with
respect to the spill on March 30, 2001, following an investigation into an
alleged leak of a mixture consisting of approximately 60% benzene into the River
Tees, allegedly following a dewatering procedure at the site. The requirements
of that notice were complied with, to the satisfaction of the EA, by the end of
May 2001. The Company contained the spill and conducted a program to reclaim the
material. On August 1, 2002, the Company received a summons issued by the EA
charging the Company with three counts of environmental violations in connection
with the spill: one count of polluting the river and two counts of violating its
environmental authorization. A hearing before a Magistrate has been set for
August 28, 2002. If, as a result of this prosecution, the Company is found
legally responsible for the spill, the Company will face penalties. Although the
Company can give no assurances, based on currently available information and the
Company's understanding of similar investigations and penalties in the past,
management believes that, if the Company is ultimately found to be legally
responsible, the probable penalties would not be material to the Company's
financial position or results of operations.

The Texas Natural Resource Conservation Commission ("TNRCC") has issued
certain notices of violation relating to air emissions and wastewater issues at
the Port Neches facility, and filed an amended administrative petition with
respect to certain of these violations on January 12, 2001. The Company met with
the TNRCC on several occasions in 2001 and early 2002 and has reached a
tentative settlement with the agency on penalties. Under the tentative
settlement, a fine of no more than $100,000 would be allocable to the PO/MTBE
facility. It is possible, however, that the terms of an air permit, which are
still being negotiated as part of the settlement, may cause the Company to incur
costs related to equipment charges serving this plant and others in the vicinity
that could be material.

The Company is aware that there is or may be soil or groundwater
contamination at some of its facilities resulting from past operations. Based on
available information and the indemnification rights (including indemnities
provided by Huntsman Specialty Chemicals Corporation ("Huntsman Specialty") and
ICI for the facilities that each of them transferred to us), the Company
believes that the costs to investigate and remediate known contamination will
not have a material adverse effect on the financial condition, results of
operations, or cash flows; however, the Company cannot give any assurance that
such indemnities will fully cover the costs of investigation and remediation,
that the Company will not be required to contribute to such costs or that such
costs will not be material.

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11. OPERATING SEGMENT INFORMATION

The Company derives its revenues, earnings and cash flows from the
manufacture and sale of a wide variety of specialty and commodity chemical
products. The Company has four reportable operating segments: Polyurethanes,
Pigments, Base Chemicals and Performance Products. During 2002 the Company
realigned its principal operating segments. The most significant change was the
split of the former Specialty Chemicals segment into two segments: Polyurethanes
and Performance Products. The former Tioxide segment was renamed Pigments and
the former Petrochemicals segment was renamed Base Chemicals.

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

SEGMENT PRODUCTS
-------------------- ------------------------------------------------

Polyurethanes MDI, TDI, TPU, polyols, aniline, PO, TBA, and
MTBE

Pigments Titanium dioxide

Base Chemicals Ethylene, propylene, benzene, cyclohexane and
paraxylene

Performance Products Surfactants, ethyleneamines and other
performance chemicals

Sales between segments are generally recognized at external market prices.
For the six months ended June 30, 2002 and 2001, sales to ICI and its affiliates
accounted for approximately 6% and 7%, respectively, of consolidated revenues.

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The net sales, segment income and EBITDA for each of the Company's
reportable operating segments are as follows (dollars in millions):

(1) Segment income is defined as operating income excluding unallocated
corporate overhead.

(2) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization and taxes.

(3) Unallocated administrative and other items includes unallocated corporate
overhead, loss on the sale of accounts receivable and other non-operating
income (expense).

12. RECENT EVENTS

SENIOR NOTES OFFERING

On March 18, 2002, Huntsman International sold $300 million aggregate
principal amount of its 9.875% Senior Notes due 2009 (the "2002 HI Notes") in
a transaction exempt from the registration requirements of the Securities Act
of 1933. Huntsman International used approximately $58 million of the net
proceeds to repay outstanding indebtedness under the revolving portion of
Huntsman International's senior secured credit facilities (the "HI Credit
Facilities"). The balance of the net proceeds was used to repay amounts due
under the term

15

loan portion of the HI Credit Facilities, eliminating scheduled term loan
amortization requirements in 2002 and substantially reducing scheduled term loan
amortization requirements in 2003.

On May 31, 2002, pursuant to its obligations under the Registration Rights
Agreement, dated March 21, 2002, with the initial purchasers of the 2002 HI
Notes, Huntsman International filed a registration statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to publicly register the 2002 HI Notes which will then be exchanged for
the outstanding privately issued 2002 HI Notes. On June 12, 2002 the Division of
Corporation Finance of the SEC informed Huntsman International that it would not
review the Registration Statement and that Huntsman International could request
effectiveness of the Registration Statement at any time. Huntsman International
expects to file a pre-effective amendment to the Registration Statement
following the filing of its quarterly report on Form 10-Q and will request that
the SEC declare the Registration Statement effective at that time. Huntsman
International will commence the exchange offer in respect of the 2002 HI Notes
following the effectiveness of the Registration Statement.

ACQUISITION OF MINORITY INTEREST IN TIOXIDE SOUTHERN AFRICA (PTY.) LTD.

In June 2002, we acquired the 40% minority interest in Tioxide Southern
Africa (Pty.) Ltd. that was held by AECI Limited. The purchase price for this
interest was approximately $9 million. Tioxide Southern Africa (Pty.) Ltd. is
now an indirect, wholly-owned subsidiary of our Company.

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

The Company is currently attempting to expand its accounts receivable
securitization program by including the receivables of several additional
subsidiaries. The expansion of the program requires amendments to the agreements
governing the program. Although there can be no assurance that the Company will
be successful in obtaining the necessary amendments, the Company hopes to
complete the amendments during the third quarter 2002. If the amendment is
approved, the Company anticipates that the special purpose entity used in the
program could issue up to approximately $100 million in additional commercial
paper. For more information, see "--Liquidity and Capital
Resources--Securitization of Accounts Receivable" below.

PLEDGE OF THE MEMBERSHIP INTERESTS OF THE COMPANY

On November 2, 2000, ICI, Huntsman Specialty, Huntsman International and
the Company entered into agreements pursuant to which ICI had an option to
transfer to Huntsman Specialty or its permitted designated buyers ICI's 30%
membership interest in the Company (the "ICI 30% Interest"). Pursuant to these
agreements, on October 30, 2001, ICI exercised its put right requiring Huntsman
Specialty or its nominee to purchase the ICI 30% Interest. On December 20, 2001,
ICI and Huntsman Specialty amended ICI's put option arrangement under these
agreements to, among other things, provide that the purchase of the ICI 30%
Interest would occur on July 1, 2003, or earlier under certain circumstances,
and to provide for certain discounts to the purchase price for the ICI 30%
Interest. The amended option agreement also requires Huntsman Specialty to cause
the Company to pay up to $112 million of dividends to its members, subject to
certain conditions. These conditions include the receipt of consent from
Huntsman International's senior secured lenders and Huntsman International's
ability to make restricted payments under the indentures governing its
outstanding senior notes and senior subordinated notes (collectively, the "HI
Notes"), as well as the outstanding high yield notes of the Company (the "HIH
Notes"). At June 30, 2002, the terms of the indentures governing the HIH Notes
do not permit the Company to make restricted payments.

In addition, in order to secure its obligation to pay the purchase price
for the ICI 30% Interest, Huntsman Specialty granted ICI a lien on 30% of the
Company's outstanding membership interests. As discussed below in "--Certain
Events Affecting Huntsman Corporation and Huntsman Polymers Corporation,"
Huntsman Specialty's agreements with ICI may effectively be modified in
important respects as a result of an agreement between Matlin Patterson
Global Opportunities Partners, L.P. ("GOP") (formerly known as CSFB Global
Opportunities Partners, L.P.) and ICI. This

16

agreement provides GOP with an option to acquire the ICI 30% Interest on or
before May 15, 2003. In connection with the proposed restructuring of Huntsman
Corporation's debt described below, GOP has agreed to contribute its rights
under this agreement to a new holding entity to be formed by GOP, the Huntsman
family and others ("Huntsman Holdings"). Huntsman Holdings would also hold,
directly or indirectly, all the common stock and substantially all the preferred
stock of Huntsman Corporation. If Huntsman Holdings does not exercise its option
and if Huntsman Specialty does not satisfy its obligation to ICI with respect to
ICI's put right, ICI could foreclose on Huntsman Specialty's pledge. Such a
foreclosure by ICI could result in a "change of control" under the indentures
governing the HI Notes and the HIH Notes and under the HI Credit Facilities. A
"change of control" would constitute a default under the HI Credit Facilities.
It would also entitle both the holders of the HI Notes and the holders of the
HIH Notes to exercise their rights to require the respective company to
repurchase these notes from them. Under such circumstances there can be no
assurance that the Company or Huntsman International would have sufficient funds
to purchase all the notes.

CERTAIN EVENTS AFFECTING HUNTSMAN CORPORATION AND HUNTSMAN POLYMERS CORPORATION

Huntsman Corporation, which together with its affiliates indirectly
holds 60% of the Company's membership interests, failed to make the interest
payments on its senior subordinated notes due on January 1, 2002 and on July
1, 2002. Huntsman Polymers Corporation, a wholly-owned subsidiary of Huntsman
Corporation ("Huntsman Polymers"), failed to make the interest payments on
its senior notes due on December 1, 2001 and June 1, 2002. In addition,
during 2001, Huntsman Corporation was not in compliance with certain
financial covenants contained in its credit facilities. As a result, Huntsman
Corporation entered into discussions with its bank lenders regarding a
comprehensive restructuring of its debt.

Effective as of December 20, 2001, Huntsman Corporation and its bank
lenders entered into forbearance, waiver and amendment agreements
(collectively, as amended, the "Amendment Agreement"). Under the Amendment
Agreement, substantially all the existing defaults and some future defaults
were waived and the bank lenders agreed to forbear exercising certain rights
and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance
Period has been extended until October 15, 2002. In addition, in connection
with extending the Forbearance Period, Huntsman Corporation's bank lenders
have agreed to postpone an amortization payment due under one of its bank
credit facilities to October 15, 2002.

In June, 2002, ICI announced that it had reached an agreement with GOP
regarding the sale to BNAC, Inc., a subsidiary of GOP ("BNAC"), of

- the senior subordinated reset discount notes due 2009 of Huntsman
International Holdings (the "B Notes") that were originally issued to
ICI, and

- the subsidiary of ICI that holds the ICI 30% Interest.

Pursuant to this agreement, GOP and BNAC have paid $160 million of a total
purchase price of $440 million. GOP and BNAC's remaining purchase price under
their option arrangement for the ICI 30% Interest is due on May 15, 2003. The
failure of GOP and BNAC to make at least a partial payment of the purchase
price in respect of the option arrangement by May 15, 2003 could result in the
forfeiture of the B Notes to ICI. Moreover, Huntsman Holdings could lose all of
the $160 million payment previously made by GOP and BNAC to ICI if it does not
exercise the option or timely pay the option consideration.

GOP and CPH have collectively purchased, in the aggregate, approximately
88% of the outstanding Huntsman Corporation and Huntsman Polymers' bonds. In
June 2002, Huntsman Corporation reached agreements with GOP and CPH to
restructure its debt.

On July 15, 2002, Huntsman Corporation solicited the consent of its
existing bank lenders, seeking, among other things, their consent to a plan to
restructure Huntsman Corporation's debt (the "Proposed Restructuring"), without
the intervention of a bankruptcy court, that would involve the following:

- Members of the Huntsman family who own equity interests in Huntsman
Corporation and any of its subsidiaries, together with certain
affiliated entities that own such equity interests (collectively,
the "Huntsman Family"), would contribute all their

17

equity interests in Huntsman Corporation and its subsidiaries to
a new entity ("Huntsman Holdings") in exchange for equity interests
in Huntsman Holdings.

- As of June 30, 2002, GOP and Consolidated Press Holdings Limited
("CPH") held, in the aggregate, $746 million principal and accrued
interest of Huntsman Corporation's and Huntsman Polymers' bonds.
Subject to certain conditions, GOP and CPH have agreed to convert
these bonds, directly or indirectly, into shares of Huntsman
Corporation. These bonds would then be canceled. The Huntsman
Corporation shares received would be exchanged, directly or
indirectly, for equity interests in Huntsman Holdings.

- GOP would exchange its shares of BNAC, which holds the B Notes, the
option to acquire the ICI 30% Interest and cash, for equity interests
in Huntsman Holdings.

- Amendments to Huntsman Corporation's current bank credit facilities
which would be comprised of the following:

- A term loan facility maturing in 2007 which would be secured by a
second lien on substantially all the assets of Huntsman
Corporation and its domestic restricted subsidiaries; and

- A $275 million priority revolving credit facility maturing in
2006 (the "Priority Facility"). Subject to certain conditions,
Deutsche Bank Securities Inc. and Deutsche Bank Trust Company
Americas have agreed to underwrite the Priority Facility. The
Priority Facility would replace Huntsman Corporation's existing
$150 million supplemental accounts receivable facility and fund
certain payments at closing and would be available for general
corporate purposes. The Priority Facility would be limited by a
borrowing base consisting of eligible accounts receivable and
inventory and would have a first lien on substantially all the
assets of Huntsman Corporation and its domestic restricted
subsidiaries.

- The reinstatement of the approximately $59 million in principal amount
of Huntsman Corporation's bonds and approximately $37 million in
principal amount of Huntsman Polymers' bonds not held by GOP and CPH.
The non-payment of interest defaults on these bonds would be cured by
paying approximately $5 million of interest that has accrued on
Huntsman Polymers' bonds to be reinstated since December 2001 and
approximately $5 million of interest that has accrued on Huntsman
Corporation's bonds to be reinstated since January 2002.

- Pursuant to previously adopted amendments to the indentures governing
the Huntsman Corporation and Huntsman Polymers bonds, which will
become effective upon completion of the Proposed Restructuring, most
of the restrictive covenants in these indentures would be eliminated.

Huntsman Corporation is in the process of seeking to complete the
Proposed Restructuring on an out-of-court basis before October 15, 2002.
This will require the consent of all of Huntsman Corporation's bank lenders
(the "100% Consent"). Huntsman Corporation has received significant support
from its bank lenders for the out-of-court restructuring. Huntsman
Corporation is confident that it will complete the restructuring on an
out-of-court basis but there can be no assurance that Huntsman Corporation
will obtain the 100% Consent and be able to complete the Proposed
Rrestructuring on an out-of-court basis. If Huntsman Corporation is unable to
secure the 100% Consent, Huntsman Corporation may seek to achieve the
Proposed Restructuring by filing a prepackaged plan of reorganization in a
Chapter 11 proceeding under the United States Bankruptcy Code. Huntsman
Corporation must satisfy certain statutory requirements in order for its
prepackaged plan of reorganization to be confirmed. Huntsman Corporation
believes that, as of August 14, 2002, it has sufficient votes from its bank
lenders to permit it to seek confirmation of a prepackaged plan of
reorganization on or before October 15, 2002 should it not obtain the 100%
Consent. However, there can be no assurance that the prepackaged plan of
reorganization would be confirmed. Pursuant to its agreement with GOP,
Huntsman Corporation could be required to file Chapter 11 Cases on or after
October 15, 2002 if it has not received the 100% Consent to the Proposed
Restructuring and it has obtained irrevocable votes in favor of the
prepackaged plan of reorganization from at least two-thirds in principal
amount and a majority of its bank lenders. Huntsman believes that, as of
August 14, 2002, it has obtained these votes.

Unless Huntsman Corporation completes the Proposed Restructuring or
otherwise restructures its debt before October 15, 2002, Huntsman
Corporation's lenders could pursue certain remedies against it, including
foreclosure on a pledge of Huntsman Corporation's 80.1% equity interest in
Huntsman

18

Specialty Chemicals Holdings Corporation ("HSCHC"). HSCHC owns 100% of Huntsman
Specialty, which in turn owns 60% of the equity interests of the Company.
Foreclosure on the HSCHC equity would result in a "change of control" within the
meaning of the indentures governing the HI Notes, the HIH Notes and the HI
Credit Facilities. In addition, although the Proposed Restructuring is intended
to avoid this result, it could result in a "change of control" within the
meaning of the indentures governing the HI Notes and the HIH Notes and under the
HI Credit Facilities.

As noted in "--Pledge of Membership Interests of the Company" above, a
"change of control" would constitute a default under the HI Credit Facilities.
It would also entitle both the holders of the HI Notes and the holders of the
HIH Notes to exercise their rights to require the respective company to
repurchase these notes from them. Under such circumstances there can be no
assurance that the Company or Huntsman International would have sufficient funds
to purchase all the notes. Further, there can be no assurance that Huntsman
Corporation will successfully complete the transactions which will be necessary
to avoid a "change of control" within the meaning of the indentures governing
the HI Notes and the HIH Notes and under the HI Credit Facilities.

Neither the Company nor Huntsman International has guaranteed or provided
any other credit support to Huntsman Corporation under its credit facilities or
notes. No events of default under Huntsman Corporation's credit facilities or
its notes, nor the exercise of any remedy by the lenders thereunder will cause
any cross-defaults or cross-accelerations under the indentures governing the HI
Notes or the HIH Notes or under the HI Credit Facilities, except insofar as
foreclosure on Huntsman Corporation's pledge of its interest in HSCHC would
result in a "change of control" as described above.

19

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

GENERAL

Huntsman International Holdings LLC and its subsidiaries (collectively, the
"Company," "our," "us" or "we") derive our revenues, earnings and cash flow from
the manufacture and sale of a wide variety of specialty and commodity chemical
products. These products are manufactured at facilities located in the Americas,
Europe, Africa and Asia and are sold throughout the world. We manage our
businesses in four operating segments: Polyurethanes (our polyurethanes and PO
business); Base Chemicals (our olefins and aromatics business in the United
Kingdom); Pigments (our titanium dioxide business); and Performance Products
(our surfactants, ethyleneamines and other performance chemicals business).
During 2002, we realigned our principal operating segments. The most significant
change was the split of the former Specialty Chemicals segment into two
segments: Polyurethanes and Performance Products. The former Tioxide segment was
renamed Pigments, and the former Petrochemicals segment was renamed Base
Chemicals.

The profitability of our four principal operating segments is impacted to
varying degrees by economic conditions, prices of raw materials, customers'
inventory levels, global supply and demand pressures as well as other seasonal
and, to a limited extent, cyclical factors. Generally, the global market for our
polyurethanes and performance products has grown at rates in excess of global
GDP growth, while the demand for our petrochemical and pigments products has
historically grown at rates that are approximately equal to global GDP growth.

RECENT EVENTS

SENIOR NOTES OFFERING

On March 18, 2002, Huntsman International sold $300 million aggregate
principal amount of its 9.875% Senior Notes due 2009 (the "2002 HI Notes") in a
transaction exempt from the registration requirements of the Securities Act of
1933. Huntsman International used approximately $58 million of the net proceeds
to repay outstanding indebtedness under the revolving portion of Huntsman
International's senior secured credit facilities (the "HI Credit Facilities").
The balance of the net proceeds was used to repay amounts due under the term
loan portion of the HI Credit Facilities, eliminating scheduled term loan
amortization requirements in 2002 and substantially reducing scheduled term loan
amortization requirements in 2003.

On May 31, 2002, pursuant to its obligations under the Registration Rights
Agreement, dated March 21, 2002, with the initial purchasers of the 2002 HI
Notes, Huntsman International filed a registration statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to publicly register the 2002 HI Notes which will then be exchanged for
the outstanding privately issued 2002 HI Notes. On June 12, 2002 the Division of
Corporation Finance of the SEC informed Huntsman International that it would not
review the Registration Statement and that Huntsman International could request
effectiveness of the Registration Statement at any time. Huntsman International
expects to file a pre-effective amendment to the Registration Statement
following the filing of its quarterly report on Form 10-Q and will request that
the SEC declare the Registration Statement effective at that time. Huntsman
International will commence the exchange offer in respect of the 2002 HI Notes
following the effectiveness of the Registration Statement.

ACQUISITION OF MINORITY INTEREST IN TIOXIDE SOUTHERN AFRICA (PTY.) LTD.

In June 2002, we acquired the 40% minority interest in Tioxide Southern
Africa (Pty.) Ltd. that was held by AECI Limited. The purchase price for this
interest was approximately $9 million. Tioxide Southern Africa (Pty.) Ltd. is
now an indirect, wholly-owned subsidiary of our Company.

20

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

We are currently attempting to expand our accounts receivable
securitization program by including the receivables of several additional
subsidiaries. The expansion of the program requires amendments to the agreements
governing the program. Although there can be no assurance that we will be
successful in obtaining the necessary amendments, we hope to complete the
amendments during the third quarter 2002. If the amendment is approved, we
anticipate that the special purpose entity used in the program could issue up to
approximately $100 million in additional commercial paper. For more information,
see "--Liquidity and Capital Resources--Securitization of Receivables" below.

PLEDGE OF THE MEMBERSHIP INTERESTS OF OUR COMPANY

On November 2, 2000, Imperial Chemical Industries PLC ("ICI"), Huntsman
Specialty Chemicals Corporation ("Huntsman Specialty"), Huntsman International
and our Company entered into agreements pursuant to which ICI had an option to
transfer to Huntsman Specialty or its permitted designated buyers ICI's 30%
membership interest in our Company (the "ICI 30% Interest"). Pursuant to these
agreements, on October 30, 2001, ICI exercised its put right requiring Huntsman
Specialty or its nominee to purchase the ICI 30% Interest. On December 20, 2001,
ICI and Huntsman Specialty amended ICI's put option arrangement under these
agreements to, among other things, provide that the purchase of the ICI 30%
Interest would occur on July 1, 2003, or earlier under certain circumstances,
and to provide for certain discounts to the purchase price for the ICI 30%
Interest. The amended option agreement also requires Huntsman Specialty to cause
our Company to pay up to $112 million of dividends to its members, subject to
certain conditions. These conditions include the receipt of consent from
Huntsman International's senior secured lenders and Huntsman International's
ability to make restricted payments under the indentures governing its
outstanding senior notes and senior subordinated notes (collectively, the "HI
Notes"), as well as our outstanding high yield notes (the "HIH Notes"). At June
30, 2002, the terms of the indentures governing the HIH Notes do not permit our
Company to make restricted payments.

In addition, in order to secure its obligation to pay the purchase price
for the ICI 30% Interest, Huntsman Specialty granted ICI a lien on 30% of the
outstanding membership interests in our Company. As discussed below in
"--Certain Events Affecting Huntsman Corporation and Huntsman Polymers
Corporation," Huntsman Specialty's agreements with ICI may effectively be
modified in important respects as a result of an agreement between Matlin
Patterson Global Opportunities Partners, L.P. ("GOP") (formerly known as CSFB
Global Opportunities Partners, L.P.) and ICI. This agreement provides GOP with
an option to acquire the ICI 30% Interest on or before May 15, 2003. In
connection with the proposed restructuring of Huntsman Corporation's debt
described below, GOP has agreed to contribute its rights under this agreement to
a new holding entity to be formed by GOP, the Huntsman family and others
("Huntsman Holdings"). Huntsman Holdings would also hold, directly or
indirectly, all the common stock and substantially all the preferred stock of
Huntsman Corporation. If Huntsman Holdings does not exercise its option and if
Huntsman Specialty does not satisfy its obligation to ICI with respect to ICI's
put right, ICI could foreclose on Huntsman Specialty's pledge. Such a
foreclosure by ICI could result in a "change of control" under the indentures
governing the HI Notes and the HIH Notes and under the HI Credit Facilities. A
"change of control" would constitute a default under the HI Credit Facilities.
It would also entitle both the holders of the HI Notes and the holders of the
HIH Notes to exercise their rights to require the respective company to
repurchase these notes from them. Under such circumstances there can be no
assurance that our Company or Huntsman International would have sufficient funds
to purchase all the notes.

CERTAIN EVENTS AFFECTING HUNTSMAN CORPORATION AND HUNTSMAN POLYMERS CORPORATION

Huntsman Corporation, which together with its affiliates indirectly
holds 60% of our membership interests, failed to make the interest payments
on its senior subordinated notes due on January 1, 2002 and on July 1, 2002.
Huntsman Polymers Corporation, a wholly-owned subsidiary of Huntsman
Corporation ("Huntsman Polymers"), failed to make the interest payments on
its senior notes due on December 1, 2001 and June 1, 2002. In addition, during
2001, Huntsman Corporation was not in compliance with certain financial
covenants contained in

21

its credit facilities. As a result, Huntsman Corporation entered into
discussions with its bank lenders regarding a comprehensive restructuring of
its debt.

Effective as of December 20, 2001, Huntsman Corporation and its bank
lenders entered into forbearance, waiver and amendment agreements
(collectively, as amended, the "Amendment Agreement"). Under the Amendment
Agreement, substantially all the existing defaults and some future defaults
were waived and the bank lenders agreed to forbear exercising certain rights
and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance
Period has been extended until October 15, 2002. In addition, in connection
with extending the Forbearance Period, Huntsman Corporation's bank lenders
have agreed to postpone an amortization payment due under one of its bank
credit facilities to October 15, 2002.

In June, 2002, ICI announced that it had reached an agreement with GOP
regarding the sale to BNAC, Inc., a subsidiary of GOP ("BNAC"), of

- our senior subordinated reset discount notes due 2009 (the "B Notes")
that were originally issued to ICI, and

- the subsidiary of ICI that holds the ICI 30% Interest.

Pursuant to this agreement, GOP and BNAC have paid $160 million of a total
purchase price of $440 million. GOP and BNAC's remaining purchase price under
their option arrangement for the ICI 30% Interest is due on May 15, 2003. The
failure of GOP and BNAC to make at least a partial payment of the purchase
price in respect of the option arrangement by May 15, 2003 could result in the
forfeiture of the B Notes to ICI. Moreover, Huntsman Holdings could lose all of
the $160 million payment previously made by GOP and BNAC to ICI if it does not
exercise the option or timely pay the option consideration.

GOP and CPH have collectively purchased, in the aggregate, approximately 88%
of the outstanding Huntsman Corporation and Huntsman Polymers bonds. In June
2002, Huntsman Corporation reached agreements with GOP and CPH to restructure
its debt.

On July 15, 2002, Huntsman Corporation solicited the consent of its
existing bank lenders seeking, among other things, their consent to a plan to
restructure Huntsman Corporation's debt (the "Proposed Restructuring"), without
the intervention of a bankruptcy court, that would involve the following:

- Members of the Huntsman family who own equity interests in Huntsman
Corporation and any of its subsidiaries, together with certain
affiliated entities that own such equity interests, (collectively,
the "Huntsman Family") would contribute all their equity interests
in Huntsman Corporation and its subsidiaries to Huntsman Holdings in
exchange for equity interests in Huntsman Holdings.

- As of June 30, 2002, GOP and Consolidated Press Holdings Limited
("CPH") held, in the aggregate, $746 million principal and accrued
interest of Huntsman Corporation's and Huntsman Polymers' bonds.
Subject to certain conditions, GOP and CPH have agreed to convert
these bonds, directly or indirectly, into shares of Huntsman
Corporation. These bonds would then be canceled. The Huntsman
Corporation shares received would be exchanged, directly or
indirectly, for equity interests in Huntsman Holdings.

- GOP would exchange its shares of BNAC, which holds the B Notes, the
option to acquire the ICI 30% Interest and cash, for equity interests
in Huntsman Holdings.

- Amendments to Huntsman Corporation's current bank credit facilities
which would be comprised of the following:

- A term loan facility maturing in 2007 which would be secured by a
second lien on substantially all the assets of Huntsman
Corporation and its domestic restricted subsidiaries; and

22

- A $275 million priority revolving credit facility maturing in
2006 (the "Priority Facility"). Subject to certain conditions,
Deutsche Bank Securities Inc. and Deutsche Bank Trust Company
Americas have agreed to underwrite the Priority Facility. The
Priority Facility would replace Huntsman Corporation's existing
$150 million supplemental accounts receivable facility, and fund
certain payments at closing and would be available for general
corporate purposes. The Priority Facility would be limited by a
borrowing base consisting of eligible accounts receivable and
inventory and would have a first lien on substantially all the
assets of Huntsman Corporation and its domestic restricted
subsidiaries.

- The reinstatement of the approximately $59 million in principal amount
of Huntsman Corporation's and approximately $37 million in principal
amount of Huntsman Polymers' bonds not held by GOP and CPH. The
non-payment of interest defaults on these bonds would be cured by
paying approximately $5 million of interest that has accrued on
Huntsman Polymers' bonds to be reinstated since December 2001 and
approximately $5 million of interest that has accrued on Huntsman
Corporation's bonds to be reinstated since January 2002.

- Pursuant to previously adopted amendments to the indentures governing
the Huntsman Corporation and Huntsman Polymers bonds which will
become effective upon completion of the Proposed Restructuring, most
of the restrictive covenants in these indentures would be eliminated.

Huntsman Corporation is in the process of seeking to complete the
Proposed Restructuring on an out-of-court basis before October 15, 2002. This
will require the consent of all of Huntsman Corporation's bank lenders (the
"100% Consent"). Huntsman Corporation has received significant support from
its bank lenders for the out-of-court restructuring. Huntsman Corporation is
confident that it will complete the restructuring on an out-of-court basis
but there can be no assurance that Huntsman Corporation will obtain the 100%
Consent and be able to complete the Proposed Restructuring on an out-of-court
basis. If Huntsman Corporation is unable to secure the 100% Consent, Huntsman
Corporation may seek to achieve the Proposed Restructuring by filing a
prepackaged plan of reorganization in a Chapter 11 proceeding under the
United States Bankruptcy Code ("Chapter 11 Cases"). Huntsman Corporation must
satisfy certain statutory requirements in order for its prepackaged plan of
reorganization to be confirmed. Huntsman Corporation believes that, as of
August 14, 2002, it has sufficient votes from its bank lenders to permit it
to seek confirmation of a prepackaged plan of reorganization on or before
October 15, 2002 should it not obtain the 100% Consent. However, there can be
no assurance that the prepackaged plan of reorganization would be confirmed.
Pursuant to its agreement with GOP, Huntsman Corporation could be required to
file Chapter 11 Cases on or after October 15, 2002 if it has not received the
100% Consent to the Proposed Restructuring and it has obtained irrevocable
votes in favor of the prepackaged plan of reorganization from at least
two-thirds in principal amount and a majority of its bank lenders. Huntsman
believes that, as of August 14, 2002, it has obtained these votes.

Unless Huntsman Corporation completes the Proposed Restructuring or
otherwise restructures its debt before October 15, 2002, Huntsman Corporation's
lenders could pursue certain remedies against it, including foreclosure on a
pledge of Huntsman Corporation's 80.1% equity interest in Huntsman Specialty
Chemicals Holdings Corporation ("HSCHC"). HSCHC owns 100% of Huntsman Specialty,
which in turn owns 60% of the equity interests of our Company. Foreclosure on
the HSCHC equity would result in a "change of control" within the meaning of
the indentures governing the HI Notes, the HIH Notes and the HI Credit
Facilities. In addition, although the Proposed Restructuring is intended to
avoid this result, it could result in a "change of control" within the meaning
of the indentures governing the HI Notes and the HIH Notes and under the HI
Credit Facilities.

As noted in "--Pledge of Membership Interests in Our Company" above, a
"change of control" would constitute a default under the HI Credit Facilities.
It would also entitle both the holders of the HI Notes and the holders of the
HIH Notes to exercise their rights to require the respective company to
repurchase these notes from them. Under such circumstances there can be no
assurance that our Company or Huntsman International would have sufficient funds
to purchase all the notes. Further, there can be no assurance that Huntsman
Corporation will successfully complete the transactions which will be necessary
to avoid a "change of control" within the meaning of the indentures governing
the HI Notes and the HIH Notes and under the HI Credit Facilities.

Neither our Company nor Huntsman International has guaranteed or provided
any other credit support to Huntsman Corporation under its credit facilities or
notes. No events of default under Huntsman Corporation's credit facilities or
its notes, nor the exercise of any remedy by the lenders thereunder will cause
any cross-defaults or cross-accelerations under the indentures governing the HI
Notes or the HIH

23

Notes or under the HI Credit Facilities, except insofar as foreclosure on
Huntsman Corporation's pledge of its interest in HSCHC would result in a "change
of control" as described above.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2001 (UNAUDITED) (DOLLARS IN MILLIONS)

(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes. EBITDA is included in
this report because it is a basis on which we assess our financial
performance and debt service capabilities, and because certain covenants in
our borrowing arrangements are tied to similar measures. However, EBITDA
should not be considered in isolation or viewed as a substitute for cash
flow from operations, net income or other measures of performance as
defined by accounting principles generally accepted in the United States
("US GAAP") or as a measure of a company's profitability or liquidity. We
understand that while EBITDA is frequently used by security analysts,
lenders and others in their evaluation of companies, EBITDA as used herein
is not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.

(2) For purposes of the covenants in the HI Credit Facilities, loss on sale of
accounts receivable related to the securitization program is excluded from
the computation of EBITDA.

24

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

For the three months ended June 30, 2002, we had net income of $7.3 million
on revenues of $1,175.0 million, compared to net income of $0.5 million on
revenues of $1,284.1 million for the same period in 2001. The increase of $6.8
million in net income was the result of the following items:

- Revenues for the three months ended June 30, 2002 decreased by $109.1
million, or 8%, to $1,175.0 million from $1,284.1 million during the
same period in 2001. This decrease in revenue resulted from lower
sales in the Polyurethanes, Base Chemicals and Performance Products
segments which were partially offset by increased sales in the
Pigments segment. Sales in the Performance Products segment benefited
from the acquisition of the ethyleneamines business in February 2001
and the surfactants business in April 2001.

- Gross profit for the three months ended June 30, 2002 decreased by
$13.0, or 8%, to $157.6 million from $170.6 million in the same period
in 2001. This decrease was mainly the result of lower average selling
prices in the Pigments segment and lower sales volumes in the Base
Chemicals segment as described below. These decreases were partially
offset by higher gross profit in the Polyurethanes and Performance
Products segments.

- Selling, administrative and research and development ("SG&A") costs
for the three months ended June 30, 2002 decreased by $12.9 million,
or 15%, mainly due to foreign currency exchange gains in 2002 as
opposed to foreign currency losses in 2001.

- Net interest expense for the three months ended June 30, 2002
increased by $3.1 million, or 4%, to $78.4 million from $75.3 million
for the same period in 2001. The increase was primarily due to
additional debt and was partially offset by lower market interest
rates in the 2002 period.

- Income tax expense decreased by $1.5 million to $0.2 million for the
three months ended June 30, 2002 as compared to $1.7 million for the
same period in 2001. Higher taxes were due primarily to a change in
the mix of income (loss) earned in the United States versus
international locations.

The following table sets forth the sales and income for each of our
operating segments. Segment income is operating income excluding unallocated
corporate overhead.

25

(1) Administrative and other includes unallocated corporate overhead, loss on
the sale of accounts receivable, other non-operating income (expense) and
unallocated depreciation and amortization.

POLYURETHANES

Polyurethanes revenues for the three months ended June 30, 2002 decreased
by $23.8 million, or 4%, to $523.0 million from $546.8 million for the same
period in 2001. The lower revenues were primarily due to a $25.9 million
decrease in MTBE revenue as compared to the same period in 2001. MTBE sales
volumes were relatively unchanged from the prior year, however, average selling
prices decreased by 27% due to lower gasoline prices. MDI sales volumes
increased by 6% with the Americas and Europe increasing by 14% and 1%,
respectively, while volumes in Asia decreased by 3% as compared to 2001. The
increased MDI sales volume was partially offset by a 3% decrease in selling
prices. Polyol sales increased by 11%, due to a 12% increase in volumes,
partially offset by a decrease in average selling prices. PO sales increased by
3% due to a 3% increase in sales volumes while the average selling price
remained relatively steady. Revenues in Europe benefited from the positive
exchange impact of the euro strengthening against the dollar.

Polyurethanes segment income for the three months ended June 30, 2002
increased by $23.1 million, or 42%, to $78.1 million from $55.0 million for the
same period in 2001. Higher segment income resulted mainly from higher gross
profit on MDI, which resulted from decreases in the cost of natural gas and
other raw materials. These lower raw materials costs also created a significant
benefit in PO and MTBE direct costs. Gross profit on MDI and polyols increased
by 25% and 19%, respectively. Polyols gross profit benefited from higher sales
volumes which more than offset lower average selling prices. Gross profit in
PO/MTBE increased by 8% due to decreases in the cost of major raw materials
which more than offset lower MTBE selling prices. SG&A costs for second quarter
2002 decreased by 6% as compared to second quarter 2001 mainly due to cost
reduction efforts. The reduction in SG&A costs, however, was partially offset by
foreign currency losses in 2002 as opposed to gains in 2001.

PIGMENTS

Pigments revenues for the three months ended June 30, 2002 increased by
$4.1 million, or 2%, to $234.5 million from $230.4 million for the same period
in 2001. Average selling prices decreased by 10%, as compared to the same period
of 2001, due to an unfavorable industry supply-demand balance over the past
year. Average selling prices increased near the end of the quarter as price
increases went into effect. Sales volumes increased by 12% in the second quarter
of 2002 as compared to the same period last year due to increased sales in the
United States, Europe and Asia. Sales in the United States, Europe and Asia were
up 17%, 11% and 14%, respectively.

Pigments segment income for the second quarter 2002 decreased by $29.9
million to $2.5 million from $32.4 million for the second quarter 2001. The
decrease in segment earnings was mainly due to lower gross profit resulting from
lower selling prices as compared to the prior year. SG&A costs increased by $3.7
million as a result of costs associated with the implementation of our SAP
software system and foreign exchange losses in 2002 versus gains in 2001.

BASE CHEMICALS

Base Chemicals revenues for the three months ended June 30, 2002 decreased
by $79.9 million, or 23%, to $274.1 million from $354.0 million for the same
period in 2001. Lower revenues were mainly due to lower selling prices and the
turnaround at our olefins plant which lasted 47 days. Average selling prices
fell for most products, with reductions averaging 10%. These reductions were
consistent with lower feedstock prices. Sales volumes of ethylene and propylene
fell by 13% and 27%, respectively. Sales volumes of paraxylene and cyclohexane
increased by 39% and 36%, respectively, while sales volumes of benzene fell by
6% due to increased internal demand to source cyclohexane production.

Base Chemicals segment income for the three months ended June 30, 2002
decreased by $17.2 million, to a loss of $19.2 million, from a loss of $2.0
million for the same period in 2001. Gross profit fell by $20.3

26

million to a loss of $18.3 million. Underlying margins were higher in this
period than in 2001 in both the olefins and aromatics markets but the volume
reduction in olefins and the cost of purchasing product to cover the turnaround
negated the impact of the stronger underlying margins. The turnaround had
negative impact of approximately $9.0 million on gross profit. SG&A and other
costs in second quarter 2002 decreased by $1.4 million from second quarter 2001,
mainly due to foreign currency exchange gains resulting from the strengthening
of the pound versus the dollar.

PERFORMANCE PRODUCTS

Performance Products revenues for the three months ended June 30, 2002
decreased by $6.0 million, or 3%, to $171.8 million from $177.8 million for the
same period in 2001. Surfactants revenues increased by 5% due to increased
volumes while selling prices remained steady. Ethyleneamines revenues decreased
by 12% due to a 12% decrease in average selling prices. Volumes remained similar
quarter to quarter. Revenues from other performance chemicals remained
relatively unchanged as volumes increased 10% and selling prices decreased by
6%.

Performance Products segment income for the three months ended June 30,
2002 increased by $2.5 million, to $9.7 million, from $7.2 million for the same
period in 2001. Surfactants gross profit increased by 18%, mainly due to lower
raw material costs. Ethyleneamines gross profit increased by 49%, mainly due to
lower raw materials costs. SG&A for Performance Products increased by $3.5
million, due to the stronger euro and higher management costs as new
regional/global organizations were implemented.

UNALLOCATED ITEMS

Unallocated items includes unallocated corporate overhead, loss on the
sale of accounts receivable, other non-operating income (expense unallocated
depreciation and amortization interest and taxes. Administrative and other
expenses decreased by $29.9 million mainly due to $29.2 million of foreign
currency exchange gains in the three months ended June 30, 2002. The exchange
gains resulted from the strengthening of the pound and the euro versus the
dollar. SG&A expenses remained relatively flat. Net interest expense for the
three months ended June 30, 2002 increased by $3.1 million or 4% to $78.4
million from $75.3 million for the same period in 2001. The increase was
primarily due to additional debt, but was partially offset by lower market
interest rates in the 2002 period. Income tax expense decreased by $1.5
million to $0.2 million for the three months ended June 30, 2002 as compared
to $1.7 million for the same period in 2001. Higher taxes were due primarily
to a change in the mix of income (loss) earned in the United States versus
international locations.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

For the six months ended June 30, 2002, we had a net loss of $24.1 million
on revenues of $2,172.9 million, compared to a net loss of $3.9 million on
revenues of $2,435.7 million for the same period in 2001. The decrease of $20.2
million in net income was the result of the following items:

- - Revenues for the six months ended June 30, 2002 decreased by $262.8
million, or 11%, to $2,172.9 million from $2,435.7 million during the same
period in 2001. This decrease in revenue resulted from lower sales in the
Polyurethanes, Pigments and Base Chemicals segments which were partially
offset by increased sales in the Performance Products segment. Sales in the
Performance Products segment benefited from the acquisition of the
ethyleneamines business in February 2001 and the surfactants business in
April 2001.

- - Gross profit for the six months ended June 30, 2002 decreased by $53.5, or
16%, to $283.1 million from $336.6 million in the same period in 2001. This
decrease was mainly the result of lower average selling prices in our
Pigment and Base Chemicals segments as described below. These decreases
were partially offset by higher gross profit in the Polyurethanes and
Performance Products segments.

27

- - SG&A costs for the six months ended June 30, 2002 decreased by $8.6
million, or 5%, mainly due to foreign currency exchange gains in 2002 as
opposed to foreign currency losses in 2001

- - Net interest expense for the six months ended June 30, 2002 decreased by
$2.4 million, or 2%, to $150.7 million from $153.1 million for the same
period in 2001. The decrease was primarily due to lower market interest
rates in the 2002 period and a favorable impact from adjusting interest
rate instruments to fair value in accordance with SFAS No. 133.

- - Income tax benefit by $19.8 million to a $20.2 million tax benefit for
the six months ended June 30, 2002 as compared to a $0.4 million tax
benefit for the same period in 2001. The increased tax benefit was due
primarily to decreased earnings for the period and a change in the mix
of income (loss) earned in the United States versus international
locations.

The following table sets forth the sales and income for each of our
operating segments. Segment income is operating income excluding unallocated
corporate overhead.

(1) Administrative and other includes unallocated corporate overhead, loss on
the sale of accounts receivable, other non-operating income (expense) and
unallocated depreciation and amortization.

POLYURETHANES

Polyurethanes revenues for the six months ended June 30, 2002 decreased by
$102.9 million, or 9%, to $1,011.4 million from $1,114.3 million for the same
period in 2001. MDI sales volumes increased by 1% with volumes in Asia
decreasing by 13% while volumes in the Americas increased by 3% and Europe
volumes remained stable, as compared to the 2001 period. Volumes in Asia were
lower primarily due to reduced sales under co-producer arrangements. MDI selling
prices decreased by 4% with prices down in all regions. Polyol sales increased
by 8%, due to a 10% increase in volumes, partially offset by a decrease in
average selling prices. PO sales decreased by 5% due to a 5% increase in sales
volumes offset by a 7% decrease in sales prices. MTBE sales decreased by 28%
from the same period in 2001. MTBE sales volumes were relatively unchanged from
the prior year; however, MTBE sales declined due to a 27% decrease in average
selling prices primarily as a result of lower gasoline prices.

Polyurethanes segment income for the six months ended June 30, 2002
increased by $46.4 million, or 54%, to $132.2 million from $85.8 million for the
same period in 2001. Increased segment income resulted mainly from increased
gross profit on MDI, PO and MTBE, all of which benefited from decreases in the

28

cost of natural gas and other raw materials. Gross profit on MDI and polyols
increased by 11% and 1%, respectively. Polyols gross profit benefited from
higher sales volumes which more than offset lower average selling prices. Gross
profit in PO/MTBE increased by 60% due to decreases in the cost of major raw
materials which more than offset lower selling prices. SG&A costs for the first
six months of 2002 decreased by 9% as the result of cost reduction efforts, but
this decrease was partially offset by foreign currency losses in 2002 as opposed
to gains in 2001.

PIGMENTS

Pigments revenues for the six months ended June 30, 2002 decreased by $21.7
million, or 5%, to $436.7 million from $458.4 million for the same period in
2001. Average selling prices decreased by 13% as compared to the same period of
2001 due to an unfavorable industry supply-demand balance over the past year.
Average selling prices increased near the end of the period as price increases
went into effect. Sales volumes increased by 10% in the first six months of 2002
as compared to the same period last year due to increased sales in the United
States, Europe and Asia. Sales in the United States, Europe and Asia were up
16%, 5% and 17%, respectively.

Pigments segment income for the six months ended June 30, 2002 decreased by
$70.0 million to $2.7 million from $72.7 million for the first and second
quarters 2001. The decrease in segment earnings was mainly due to lower gross
profit resulting from lower selling prices as compared to the prior year. SG&A
costs increased by $5.5 million as a result of costs associated with the
implementation of our SAP software system and foreign exchange losses in 2002
versus gains in 2001.

BASE CHEMICALS

Base Chemicals revenues for the six months ended June 30, 2002 decreased by
$233.9 million, or 32%, to $487.7 million from $721.6 million for the same
period in 2001. Lower revenues were mainly due to lower selling prices and the
turnaround during the second quarter of 2002 at our olefins plant which lasted
47 days. Average selling prices fell significantly for most products, with
reductions averaging 20%. These reductions were consistent with lower feedstock
prices. Sales volumes of ethylene and propylene fell by 10% and 14%,
respectively. Sales volumes of paraxylene, cyclohexane and benzene increased by
14%, 18% and 1%, respectively.

Base Chemicals segment income for the six months ended June 30, 2002
decreased by $54.6 million to a loss of $38.0 million from a profit of $16.6
million for the same period in 2001. Gross profit fell by $53.7 million to a
loss of $28.4 million from a profit of $25.3 million. Underlying margins were
lower in 2002 as compared to the same period of 2001 for both the olefins and
aromatics markets. The effect of this was compounded by volume reductions in
olefins and the cost of purchasing product to cover the turnaround. Feedstock
price volatility in the first quarter of 2002, which was not recovered through
price increases, also put downward pressure on gross profit. SG&A costs for the
first six months of 2002 remained relatively unchanged as compared to the first
six months of 2001.

PERFORMANCE PRODUCTS

Performance Products revenues for the six months ended June 30, 2002
increased by $92.3 million, or 48%, to $283.5 million from $191.2 million for
the same period in 2001. Surfactants revenues increased by 103% versus the same
period in 2001. This is due to the surfactants business which we acquired in
April 2001. Non-comparable revenues in 2002 are $90.7 million. Excluding these
sales, revenues for surfactants increased by 5% period over period.
Ethyleneamines revenues decreased by 5%, as a 20% decrease in selling prices was
offset by a significant increase in volumes which was the result of
non-comparable sales attributable to the ethlyeneamines business we acquired in
February 2001. Revenues from other performance chemicals decreased by 13% as
volumes decreased 17% and average selling prices increased by 5%.

Performance Products segment income for the six months ended June 30, 2002
increased by $4.9 million, to $14.5 million, from $9.6 million for the same
period in 2001. Higher segment income is mainly

29

due to non-comparable data as the surfactants business was acquired in April
2001 and the ethyleneamines business was acquired in February 2001. Both
businesses benefited from lower raw materials costs in 2002 versus 2001.

UNALLOCATED ITEMS

Unallocated items includes unallocated corporate overhead, loss on the
sale of accounts receivable, other non-operating income (expense, unallocated
depreciation and amortization interest and taxes. Administrative and other
expenses decreased for the six months ended June 30, 2002 as compared to the
same period in 2001, primarily due to $24.8 million of foreign currency
exchange gains in the six months ended June 30, 2002. The exchange gains
resulted from the strengthening of the pound and the euro versus the dollar.
SG&A expenses remained relatively flat. Net interest expense for the six
months ended June 30, 2002 decreased by $2.4 million, or 2%, to $150.7
million from $153.1 million for the same period in 2001. The decrease was
primarily due to lower market interest rates in the 2002 period and a
favorable impact from adjusting interest rate instruments to fair value in
accordance with SFAS No. 133. Income tax benefit increased by $19.8 million
to a benefit of $20.2 million for the six months ended June 30, 2002 as
compared to a benefit of $8.4 million for the same period in 2001. The
increased tax benefit was due primarily to a change in the mix of income
(loss) earned in the United States versus international locations.

LIQUIDITY AND CAPITAL RESOURCES

CASH

Net cash provided by operating activities for the six months ended June 30,
2002 was $74.8 million, as compared to $98.3 million for the same period in
2001. The decrease in cash provided was attributable to lower operating income
offset by a lower net investment in net working capital in the 2002 period.

Net cash used in investing activities for the six months ended June 30,
2002 was $103.2 million as compared to $319.3 million for the same period in
2001. The decrease in cash used was attributable to expenditures on acquisitions
during the 2001 period and lower capital spending in 2002 period.

Net cash provided by financing activities for the six months ended June 30,
2002 was $0.3 million, as compared to $234.0 million for the same period in
2002. In March 2002, Huntsman International issued the 2002 HI Notes, the
proceeds of which were used to pay down $290.4 million of the HI Credit
Facilities and to pay $9.6 million of debt issuance costs. Huntsman
International used approximately $58 million of the net proceeds to repay
outstanding indebtedness under the revolving portion of the HI Credit
Facilities. The balance of the net proceeds was used to repay amounts due under
the term loan portion of the HI Credit Facilities, eliminating scheduled term
loan amortization requirements in 2002 and substantially reducing scheduled term
loan amortization requirements in 2003. During the 2001 period, Huntsman
International issued EURO 250 million senior subordinated notes, the proceeds
of which were used, together with cash flows from operations and borrowings
under the HI Credit Facilities, to fund acquisitions, capital expenditures and a
portion of net working capital investment.

DEBT

As of June 30, 2002, we had $67.0 million of outstanding borrowings under
the $400 million revolving portion of the HI Credit Facilities and had $66.3
million in cash balances. We also maintain $60 million of short-term,
discretionary overdraft facilities, of which $15.7 million was available on June
30, 2002. We have agreed with our overdraft provider that, effective July 31,
2002, our overdraft facility will be reduced to $30 million in anticipation of
the possible expansion of our accounts receivable securitization program. See
"--Securitization of Receivables" below. During this interim period, we expect
that the revolving facility of the HI Credit Facilities will be sufficient to
fund short-term cash needs.

As of June 30, 2002, we had outstanding variable rate borrowings of
approximately $1.2 billion and EURO 132.2 million. For the six months ended
June 30, 2002, the weighted average interest rates of these

30

borrowings were 6.0% and 8.2%, respectively. These rates do not consider the
effects of interest rate hedging activities.

We have guaranteed, on a senior basis, Huntsman International's obligations
under the senior secured credit facilities. We have also pledged 100% of
Huntsman International's membership interests as collateral under our guaranty
of Huntsman International's obligations under the senior secured credit
facilities.

Under our Senior Discount Notes and our Senior Subordinated Reset Discount
Notes, we do not pay interest or principal until maturity on December 31, 2009.
The indebtedness of Huntsman International that restricts payments to us will
mature prior to the maturity of our indebtedness. We anticipate that we will
have the funds to pay the principal and interest of our notes at maturity from
Huntsman International's distributions or refinancing of our indebtedness.
However, we can make no assurances that the foregoing will occur.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of December 31, 2002, our obligations under long-term debt (after giving
effect to the amendment, dated March 15, 2002, to the HI Credit Facilities),
lease agreements, and other contractual commitments are summarized below
(dollars in millions):

We have a revolving loan facility of up to $400 million which matures on
June 30, 2005 with no scheduled commitment reductions. We also have a $60
million short-term, discretionary overdraft facility. We have various purchase
commitments for materials and supplies entered into in the ordinary course of
business. Those commitments extend up to ten years and the purchase price is
generally based on market prices subject to certain minimum price provisions.

RESTRUCTURING AND PLANT CLOSING COSTS

At December 31, 2001, we had a reserve for restructuring costs and plant
closing costs of $31.3 million recorded in accrued liabilities. The reserve
consisted of $30.5 million for workforce reductions and $0.8 million for other
exit costs. During the six months ended June 30, 2002 we made cash payments of
approximately $18.8 million in workforce reductions. At June 30, 2002 there was
$12.5 million remaining in accrued liabilities consisting of $11.7 million for
workforce reductions and $0.8 million for other exit costs.

SECURITIZATION OF ACCOUNTS RECEIVABLE

In order to reduce our cost of financing, on December 21, 2000, we entered
into a securitization program arranged by JP Morgan under which certain trade
receivables were and will be transferred to a qualified special purpose off
balance sheet entity through December 2005. This entity is not an affiliate of
our Company. The acquisition of these receivables by the entity was financed
through the issuance of commercial paper. We received $175 million in initial
proceeds from the securitization transaction which were used to reduce our
outstanding indebtedness.

In June 2001, the special purpose entity issued approximately $165 million
in medium term notes due in 2006, replacing the majority of the $175 million
commercial paper issued previously. In addition to

31

the medium term notes, the special purpose entity can issue up to $100 million
in commercial paper to fund the purchase of receivables. As of June 30, 2002,
the special purpose entity had total assets (consisting of cash and accounts
receivable) of approximately $299 million, $174 million of medium term notes,
and $25 million of commercial paper outstanding. The weighted average interest
rates on the medium term notes and commercial paper was 3.0% and 1.9%,
respectively, as of June 30, 2002.

We are currently in the process of negotiating an expansion of our accounts
receivable securitization facility. Although there can be no assurance that we
will be successful in amending the facility, we hope to complete an amendment
prior to the end of the third quarter of 2002 that would allow us to add
additional originators. Such an amendment would permit us to issue up to
approximately $100 million in additional commercial paper. The HI Credit
Facilities require a mandatory prepayment on the senior secured debt to the
extent that proceeds from the securitization facility exceed $280 million. As
noted previously, the special purpose entity had $174 million outstanding of
medium term notes and $25 million outstanding in commercial paper as of June 30,
2002.

During the six months ended June 30, 2002, we sold approximately $606
million in receivables and received $630 million in proceeds. We recorded $0.1
million as a loss on receivables for the six months ended June 30, 2002.

CAPITAL EXPENDITURES

Capital expenditures for the six months ended June 30, 2002 were $94.8
million, a decrease of $18.6 million as compared to the same period in 2001. The
decrease was primarily attributable to higher spending levels in 2001 associated
with the expansion of our titanium dioxide plants. We expect to spend
approximately $200 to $250 million during 2002 on capital projects.

In connection with our agreements with our Rubicon and Louisiana Pigment
joint ventures, we are obligated to fund our proportionate share of capital
expenditures. During the six months ended June 30, 2002 and 2001, we invested
$1.6 million and $1.3 million, respectively. During the six months ended June
30, 2002 and 2001, we received $2.2 and $4.9 million, respectively, from
Louisiana Pigment.

ENVIRONMENTAL MATTERS

GENERAL

Our capital expenditures relating to environmental matters for the six
months ended June 30, 2002 and 2001 were approximately $14.2 and $15.4 million,
respectively. Capital costs relating to environmental matters in 2002 are
expected to total approximately $38 million. Capital expenditures are planned to
comply with national legislation implementing the European Union ("EU")
Directive on Integrated Pollution Prevention and Control. Under this directive,
the majority of our plants will, over the next few years, be required to obtain
governmental authorizations, which will regulate air and water discharges, waste
management and other matters relating to the impact of operations on the
environment. Under this directive, we will also be required to conduct site
assessments to evaluate environmental conditions. Although implementing
legislation in most EU member states is not yet in effect, it is likely that
additional expenditures may be necessary in some cases to meet the requirements
of authorizations under this directive. In particular, we believe that related
expenditures to upgrade our wastewater treatment facilities at several sites may
be necessary and associated costs could be material. Wastewater treatment
upgrades unrelated to this initiative also are planned at certain facilities. In
addition, we may incur material expenditures, beyond currently anticipated
expenditures, in complying with EU directives, particularly the Directive on
Hazardous Waste Incineration and the Seveso II Directive, which governs major
accident hazards. It is also possible that additional expenditures to reduce air
emissions at two of our U.K. facilities may be material. Capital expenditures
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing of the promulgation of specific
standards which impose requirements on our operations. As a result, capital
expenditures beyond those currently anticipated may be required under applicable
environmental laws.

32

POTENTIAL LIABILITIES

The operation of chemical manufacturing plants, the distribution of
chemical products and the related production of by-products and wastes, entail
risk of adverse environmental effects. We are subject to extensive federal,
state, local and foreign laws, regulations, rules and ordinances relating to
pollution, the protection of the environment and the generation, storage,
handling, transportation, treatment, disposal and remediation of hazardous
substances and waste materials. In the ordinary course of business, we are
subject continually to environmental inspections and monitoring by governmental
enforcement authorities. We may incur substantial costs, including fines,
damages and criminal or civil sanctions, or experience interruptions in its
operations for actual or alleged violations arising under any environmental
laws. In addition, production facilities require operating permits that are
subject to renewal, modification and, in some circumstances, revocation.
Violations of permit requirements can also result in restrictions or
prohibitions on plant operations, substantial fines and civil or criminal
sanctions. Our operations involve the generation, handling, transportation, use
and disposal of numerous hazardous substances. Changes in regulations regarding
the generation, handling, transportation, use and disposal of hazardous
substances could inhibit or interrupt operations and have a material adverse
effect on business. From time to time, these operations may result in violations
under environmental laws, including spills or other releases of hazardous
substances to the environment. In the event of a significant incident, we could
incur material costs to address and remediate the incident. In addition,
following any such incident, we may incur higher costs to implement measures to
prevent future incidents. Given the nature of our business, there can be no
assurance that violations of environmental laws will not result in restrictions
imposed on our operating activities, substantial fines, penalties, damages or
other costs. In addition, potentially significant expenditures could be
necessary in order to comply with existing or future environmental laws.

We have established financial reserves relating to environmental
restoration and remediation programs, which we believe, are sufficient for known
requirements. Liabilities are recorded when site restoration and environmental
remediation and clean-up obligations are either known or considered probable and
can be reasonably estimated. These liabilities are based upon all available
facts, existing technology, past experience, and cost-sharing arrangements (as
to which, we consider the viability of other parties). A total of approximately
$15 million has been accrued related to environmental matters as of June 30,
2002. We do not anticipate that any future costs, in excess of those that have
been accrued, will be material to the results of operations or financial
position as a result of compliance with current environmental laws and
regulations.

In connection with our acquisitions, we generally have entered into
agreements that provide us with indemnification for environmental pollution
existing on the date of the applicable acquisition.

A spill at our North Tees facility was discovered on March 27, 2001. The
U.K. Environmental Agency ("EA") issued an enforcement notice with respect to
the spill on March 30, 2001, following an investigation into an alleged leak of
a mixture consisting of approximately 60% benzene into the River Tees, allegedly
following a dewatering procedure at the site. The requirements of that notice
were complied with, to the satisfaction of the EA, by the end of May 2001. We
contained the spill and conducted a program to reclaim the material. On August
1, 2002, we received a summons issued by the EA charging us with three counts of
environmental violations in connection with the spill: one count of polluting
the river and two counts of violating our environmental authorization. A hearing
before a Magistrate has been set for August 28, 2002. If, as a result of this
prosecution, we are found legally responsible for the spill, we will face
penalties. Although we can give no assurances, based on currently available
information and our understanding of similar investigations and penalties in the
past, management believes that, if our Company is ultimately found to be legally
responsible, the probable penalties would not be material to our financial
position or results of operations.

The Texas Natural Resource Conservation Commission ("TNRCC") has issued
certain notices of violation relating to air emissions and wastewater issues at
the Port Neches facility, and filed an amended administrative petition with
respect to certain of these violations on January 12, 2001. We met with the
TNRCC on several occasions in 2001 and early 2002 and has reached a tentative
settlement with the

33

agency on penalties. Under the tentative settlement, a fine of no more than
$100,000 would be allocable to the PO/MTBE facility. It is possible, however,
that the terms of an air permit, which are still being negotiated as part of the
settlement, may cause us to incur costs related to equipment charges serving
this plant and others in the vicinity that could be material.

We are aware that there is or may be soil or groundwater contamination at
some of our facilities resulting from past operations. Based on available
information and the indemnification rights (including indemnities provided by
Huntsman Specialty and ICI for the facilities that each of them transferred to
us), we believe that the costs to investigate and remediate known contamination
will not have a material adverse effect on our financial condition, results of
operations or cash flows; however, we cannot give any assurance that such
indemnities will fully cover the costs of investigation and remediation, that we
will not be required to contribute to such costs or that such costs will not be
material.

MTBE DEVELOPMENTS

In a California case decided on April 16, 2002, three oil companies were
found by a jury to be responsible for polluting South Lake Tahoe groundwater
with the gasoline additive MTBE, a product which is produced by a number of
companies, including our Company. In one finding in that case, MTBE was deemed
to be defective under California law because its potential effects on water
quality had been withheld. Damages have not yet been assessed in that case.
Findings of this kind could encourage similar claims or findings and may result
in an adverse effect on the market for MTBE in the United States and elsewhere.
We are not a defendant in any pending MTBE case, and our management believes
that we would have strong defenses in the event such a case were brought against
us. However, there can be no certainty as to the outcome of any such litigation.

Also in April 2002, the United States Senate passed a bill that would ban
in four years the use of MTBE in gasoline in the United States. To date, no
similar legislation has been passed by the House of Representatives. The Senate
bill in its present form is controversial, both on matters related to MTBE and
with respect to other energy policies. It is scheduled for House-Senate
conference later this year. Whether this bill in its present or a similar form
will become law is unknown at this time.

RECENT FINANCIAL ACCOUNTING STANDARDS

In August 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred by capitalizing it as part of the carrying
amount of the long-lived assets. As required by SFAS No. 143, the Company will
adopt this new accounting standard on January 1, 2003. The Company is currently
evaluating the effects of adopting this pronouncement.

In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL Activities. SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of this Statement is required
effective January 1, 2003. We have not yet completed our evaluation of the
impact of adopting this statement.

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CHANGES IN FINANCIAL CONDITION

The following information summarizes our working capital position as of
June 30, 2002 and December 31, 2001 (dollars in millions):

As of June 30, 2002, our working capital increased by $20.7 million as a
result of the net impact of the following significant changes:

- Decrease in cash balances of $17.6 million is due to the reasons
specified in "--Liquidity and Capital Resources--Cash" above;

- Increase in accounts receivables of $102.2 million is due primarily to
strengthening of the euro and increasing sales near the end of the
second quarter;

- Decrease in inventories of $42.0 million is mainly due to a decrease
in raw material prices and improved supply chain management;

- Increase in accounts payable of $59.2 million is mainly due to
increasing purchasing activity related to increasing sales near the
end of the second quarter;

- Decrease in accrued liabilities of $25.2 million results from a
reduction in our payroll, severance, capital, raw materials and
services.

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

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

35

All forward-looking statements, including without limitation, management's
examination of historical operating trends, are based upon our current
expectations and various assumptions. Our expectations, beliefs and projections
are expressed in good faith and we believe there is a reasonable basis for them,
but, there can be no assurance that management's expectations, beliefs and
projections will result or be achieved. All forward-looking statements apply
only as of the date made. We undertake no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances after the
date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in or
contemplated by this report. The following are among the factors that could
cause actual results to differ materially from the forward-looking statements.
There may be other factors, including those discussed elsewhere in this report,
that may cause our actual results to differ materially from the forward-looking
statements. Any forward-looking statements should be considered in light of the
risk factors specified in our 2001 annual report on Form 10-K, some of which are
summarized below.

- Demand for some of our products is cyclical and we may experience
prolonged depressed market conditions for our products.

- We have substantial debt that we may be unable to service and that
restricts our activities, which could adversely affect our ability to
meet our obligations.

- Certain events affecting Huntsman Corporation could result in a
"change of control" under the HI Notes, the HIH Notes or the HI Credit
Facilities.

- The restructuring of Huntsman Corporation could adversely affect our
relationships with Huntsman Corporation and its subsidiaries; in such
an event we may not be able to replace on favorable terms our
contracts with them or the services and facilities that they provide
to us, if at all.

- If our subsidiaries do not make sufficient distributions to us, then
we will not be able to make required payments on our debt.

- The significant price volatility of many of our raw materials may
result in increased costs.

- The industries in which we compete are highly competitive and we may
not be able to compete effectively with our competitors that are
larger and have greater resources.

- If we are unable to integrate successfully the businesses that we
acquire, then our ability to meet our debt service obligations may be
impaired.

- Our ability to repay our debt may be adversely affected if our joint
venture partners do not perform their obligations or we have
disagreements with them.

- Pending or future litigation or legislative initiatives related to
MTBE may subject us to products or environmental liability or
materially adversely affect our sales.

- If our key suppliers are unable to provide the raw materials necessary
in our production, then we may not be able to obtain raw materials
from other sources on favorable terms, if at all.

- If we are unable to maintain our relationships with Huntsman
Corporation and ICI, then we may not be able to replace on favorable
terms our contracts with them or the services and facilities that they
provide, if at all.

- We are subject to many environmental and safety regulations that may
result in unanticipated costs or liabilities.

36

- Huntsman Corporation and ICI may have conflicts of interest with us,
and these conflicts could adversely affect our business.

- Our business may be adversely affected by international operations and
fluctuations in currency exchange rates.

- Our business is dependent on our intellectual property. If our patents
are declared invalid or our trade secrets become known to our
competitors, our ability to compete may be adversely affected.

- Terrorist attacks, such as the attacks in New York and Washington,
D.C. on September 11, 2001, and other attacks or acts of war may
adversely affect the markets in which we operate, our operations and
our profitability.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including changes in interest rates,
currency exchange rates and certain commodity prices. Our exposure to foreign
currency market risk is limited since our sales prices are typically denominated
in euros or US dollars. To the extent we have material foreign currency exposure
on known transactions, hedges are put in place monthly to mitigate such market
risk. Our exposure to changing commodity prices is also limited (on an annual
basis) since the majority of raw materials are acquired at posted or market
related prices, and sales prices for finished products are generally at market
related prices which are set on a quarterly basis in line with industry
practice. To manage the volatility relating to these exposures, we enter into
various derivative transactions. We hold and issue derivative financial
instruments for economic hedging purposes only.

Our cash flows and earnings are subject to fluctuations due to exchange
rate variation. Short-term exposures to changing foreign currency exchange rates
at certain foreign subsidiaries are managed through financial market
transactions, principally through the purchase of forward foreign exchange
contracts (with maturities of six months or less) with various financial
institutions, to reflect the currency denomination of our cash flows. We do not
hedge our currency exposures in a manner that would entirely eliminate the
effect of changes in exchange rates on our cash flows and earnings. As of June
30, 2002, we had outstanding forward foreign exchange contracts with third party
banks of approximately $5.3 million. Predominantly, our hedging activity is to
sell forward the majority of our surplus non-dollar receivables for United
States dollars.

Under the terms of the HI Credit Facilities, we are required to hedge a
significant portion of our floating rate debt. As of June 30, 2002, we had
entered into approximately $476 million notional amount of interest rate swap,
cap and collar transactions, which have remaining terms ranging from
approximately six months to twenty-seven months. The majority of these
transactions hedge against movements in US dollar interest rates. The US dollar
swap transactions obligate us to pay fixed amounts ranging from approximately
5.75% to approximately 7.0%. The US dollar collar transactions carry floors
ranging from 5.0% to 6.25% and caps ranging from 6.75% to 7.25%. We have also
entered into a euro-denominated swap transaction that obligates us to pay a
fixed rate of approximately 4.3%. We do not hedge our interest rate exposure in
a manner that would entirely eliminate the effects of changes in market interest
rates on our cash flow and earnings. Assuming a 1.0% (100 basis point) increase
in US dollar interest rates, the effect on the annual interest expense would be
an increase of approximately $12.5 million. This increase would be reduced by
approximately $2.3 million, on an annualized basis, as a result of the effects
of the interest rate swap, cap and collar transactions described above.

In order to reduce our overall raw material costs, we enter into various
commodity contracts to hedge our purchase of commodity products. We do not hedge
our commodity exposure in a manner that would entirely eliminate the effects of
changes in commodity prices on our cash flows and earnings. At June 30, 2002, we
had forward purchase and sales contracts for 20,000 tonnes each (naphtha and
other hydrocarbons), respectively, which do not qualify for hedge accounting.
Assuming a 10% increase or a 10% decrease in the price per tonnes of naphtha,
the change would not result in any material gains or losses because the forward
purchase and sales volumes are the same.

37

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Representation and Indemnity Agreement between Huntsman
International Holdings LLC and CSFB Global Opportunities
Partners, L.P. and BNAC, Inc., dated June 14, 2002

10.2 Letter Agreement between Huntsman International Holdings LLC
and CSFB Global Opportunities Partners, L.P. and BNAC, Inc.,
dated June 14, 2002

99.1 Certification of Chief Executive Officer

99.2 Certification of Chief Financial Officer

(b) Reports Submitted on Form 8-K:

There were no reports submitted on Form 8-K during the second quarter
of 2002.

38

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HUNTSMAN INTERNATIONAL HOLDINGS LLC

/s/ J. Kimo Esplin
--------------------------------------
J. Kimo Esplin
Executive Vice President and
Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)

Date: August 14, 2002

39

Exhibit Index

10.1 Representation and Indemnity Agreement between Huntsman International
Holdings LLC and CSFB Global Opportunities Partners, L.P. and BNAC,
Inc., dated June 14, 2002

10.2 Letter Agreement between Huntsman International Holdings LLC and CSFB
Global Opportunities Partners, L.P. and BNAC, Inc., dated June 14, 2002

99.1 Certification of Chief Executive Officer

99.2 Certification of Chief Financial Officer